Coherent expands margins 163 bps as AI demand drives operating leverage

Coherent reported a 163-basis-point expansion in adjusted operating margin during Q3 fiscal 2026, driven by AI demand for optical networking products.

Higher factory utilization and improved supply chain efficiencies drove the margin gain as production volumes increased, the company said. Fixed manufacturing costs were spread across more units, allowing incremental revenue to flow through to earnings at a faster rate.

Adjusted net income rose nearly 56% from a year earlier. The Datacenter & Communications segment, which generated 75% of Q3 revenue, grew 41% year over year. Coherent invested about $290 million in capital expenditures during the quarter, more than double the prior-year period, to support rising demand.

The company's backlog now extends into calendar 2028, with long-term supply agreements through 2030. NVIDIA's $2 billion strategic investment boosted Coherent's cash balance to about $3 billion from $1.5 billion in the prior quarter. Management repaid $162 million of debt, reducing the leverage ratio to 0.5 times from 1.7 times.

Coherent shares have rallied 247% over the past year but pulled back 11% in the past month. The stock trades at about 37.6 times forward earnings, nearly double the industry average of 21.5 times.

The Zacks Consensus Estimate projects fiscal 2026 revenue of $7.1 billion, implying 21.5% year-over-year growth, with fiscal 2027 revenue expected to rise another 37.7%. The consensus estimate for fiscal 2026 earnings per share is $5.47, representing 55% growth, with a further 52.5% increase expected in fiscal 2027.

Among peers, Lumentum Holdings and IPG Photonics operate in the same optical components market, though Coherent's AI infrastructure exposure, record backlog and strengthened balance sheet differentiate its growth profile. The company's multi-year customer commitments and long-term supply agreements provide greater earnings visibility than typical hardware manufacturers.

NVIDIA's investment serves as a strategic endorsement of Coherent's technology and its role in the AI infrastructure ecosystem. The strengthened balance sheet gives management greater financial flexibility to invest in capacity expansion and pursue growth opportunities without relying on additional debt.

The margin expansion shows that Coherent's manufacturing network is becoming more efficient as AI-driven demand strengthens. The improved operating leverage, combined with a stronger balance sheet and record backlog, supports the case that Coherent is transitioning from a cyclical hardware supplier to a more predictable growth company tied to AI infrastructure spending. Investors will watch the next quarterly report for continued margin improvement and updated guidance on capacity expansion.

This article is for informational purposes only and does not constitute investment advice.