Source: Motley Fool transcript (updated May 6, 2026) + Yahoo Finance/Quartr transcript.
James Anderson (CEO): Coherent is a global leader in photonic technology, which is foundational to the performance and scalability of AI data centers and critical to many important industrial applications. We are at the center of an extraordinary expansion in optical networking infrastructure driven by the rapid growth of AI and the increasing need for bandwidth and energy efficiency. As a result, we delivered another quarter of strong financial performance, with accelerating growth, expanding margins, and improving profitability.
Importantly, we are seeing continued strengthening in demand across our business. This quarter, we experienced another step-function increase in our order book, driving our backlog to a record level. Customer demand remains exceptionally strong with no signs of attenuation, and our visibility continues to extend further into the future with orders now reaching into calendar 2028 and customer LTAs extending to the end of the decade.
Turning to our Q3 operating results, revenue increased 9% sequentially and 27% year over year on a pro forma basis, representing an acceleration in our year-over-year growth rate versus the prior quarter. Non-GAAP gross margin expanded both sequentially and year over year, and the combination of revenue growth, margin expansion, and operating leverage drove non-GAAP EPS growth of 55% year over year.
Our Data Center and Communications segment continues to be the primary driver of our growth and accounted for 75% of total company revenue in Q3. Growth in this segment accelerated again this quarter, with revenue increasing more than 40% year over year. In our data center business, revenue increased 13% sequentially and 37% year over year.
Within transceivers, we expect growth to be driven by both 800G and 1.6T. Given the exceptionally strong demand environment and the industry-wide constraint in indium phosphide, capacity expansion remains one of our highest priorities. We continue to make excellent progress on our 6-inch indium phosphide ramp. We remain on track to achieve our goal of doubling internal indium phosphide output capacity by the end of this calendar year. Based on current execution, we now expect to reach that milestone one quarter earlier than originally planned. We also expect to more than double our internal indium phosphide capacity again by the end of calendar 2027.
We expect OCS revenue to grow this quarter as we ramp production capacity to meet demand. We have increased our view of the OCS market opportunity to over $4 billion. We also continue to make strong progress in co-packaged optics. We believe CPO represents more than $15 billion of incremental addressable market opportunity. In March, we announced a strategic partnership with NVIDIA focused on multiple CPO-related products and solutions, including NVIDIA's $2 billion equity investment in Coherent and a multiyear supply agreement extending through the end of the decade. We expect initial scale-out CPO revenue to begin ramping in the second half of this calendar year, with scale-up CPO revenue expected to begin ramping in the second half of calendar 2027.
Turning to our communications business, revenue growth accelerated significantly in Q3, with revenue increasing 16% sequentially and 60% year over year, driven by strong demand across data center interconnect, scale-across, and traditional telecom applications. One additional growth driver we are particularly excited about is multi-rail, which we expect initial revenue to begin ramping in 2027.
Sherri Luther (CFO): Third quarter revenue was a record $1.8 billion, up 7% sequentially from the second quarter and up 21% year over year, driven by growth in AI Data Center and Communications demand. On a pro forma basis, revenue increased 9% sequentially and 27% year over year. Our Q3 non-GAAP gross margin was 39.6%, a 57 basis point improvement compared to the prior quarter and a 105 basis point improvement year over year. Third quarter non-GAAP operating margin increased to 20.3%. Third quarter non-GAAP earnings per diluted share was $1.41, up 9% from the second quarter and up 55% from the year-ago quarter.
Our cash balance increased to $3 billion from $1.5 billion in the prior quarter, primarily due to the $2 billion equity investment from NVIDIA. Capital expenditures increased to $290 million compared to $154 million in the prior quarter, focused on expanding internal capacity.
For the fourth quarter, we expect revenue to be between $1.91 billion and $2.05 billion, non-GAAP gross margin between 39% and 41%, total operating expenses between $360 million and $380 million on a non-GAAP basis, and EPS between $1.52 and $1.72 on a non-GAAP basis.