Coherent Corp. (COHR) Earnings Call Transcript & Summary

Greetings, and welcome to the Coherent Fourth Quarter and Fiscal Year 2026 Earnings Call. It is now my pleasure to introduce your host, Mr. Paul Silverstein, Senior Vice President of Investor Relations for Coherent. Please go ahead.

Thank you, operator, and good afternoon, everyone. With me today are Jim Anderson, Coherent's CEO; and Sherri Luther, Coherent's CFO. During today's call, we will provide a financial and business review of the fourth quarter of fiscal 2026 and the business outlook for the first quarter of fiscal 2027. Our earnings press release can be ending in the Investor Relations section of our company website at coherent.com. I would like to remind everyone that during our conference call we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. These are subject to a number of significant risks and uncertainties, and our actual results may differ materially. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release, our most recent Forms 10-K and 10-Q and the reports that we may file on Form 8-K with the Securities and Exchange Commission. All our statements are made as of today, August 12, 2026, based on information currently available to us. Except as required by law, we assume no obligation to update any such statements. During this call, we will discuss non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release and investor presentation that can be found on the Investor Relations section of our website at coherent.com. Let me now turn the call over to our CEO, Jim Anderson.

Thank you, Paul, and thank you, everyone, for joining today's call. Fiscal 2026 was an outstanding year for Coherent. On a pro forma basis, revenue increased 28% to a record $7 billion. Our revenue growth, combined with gross margin expansion and continued operating leverage drove non-GAAP EPS growth of approximately 59%, more than twice the rate of revenue growth. We also finished the year with significant momentum. In Q4, our pro forma revenue growth rate accelerated significantly with revenue increasing 14% sequentially and 42% year-over-year, while non-GAAP EPS increased 74% year-over-year. Our accelerated growth rate reflects the exceptional demand environment and our continued rapid expansion of production capacity. While we're very pleased with our fiscal 2026 performance, we are even more excited about the year ahead. We expect our growth to accelerate significantly in fiscal '27. Having achieved our first $2 billion revenue quarter, we now expect to achieve our first quarter with over $3 billion of revenue by the end of fiscal '27. Coherent is a global leader in photonic technology. Our broad photonic technology platform is foundational to the performance and scalability of AI data centers. AI runs on compute, but it scales on optical connectivity. Coherent is at the center of an extraordinary expansion in optical networking infrastructure driven by the rapid growth of AI, the transition from copper to optical connectivity and the increasing need for bandwidth and energy efficiency across increasingly large and complex data center architectures. Our confidence in fiscal '27 is based on 3 factors: First, customer demand continues to grow, as demonstrated by another quarter of record bookings. Second, our supply of critical components is increasing, including the planned doubling of our internal indium phosphide output year-over-year by the end of the current quarter. Third, multiple new revenue streams are expected to ramp over the coming quarters, including optical circuit switching, co-packaged optics, multi-rail systems in advanced materials for data center, thermal and power management. Along with strong revenue growth, we expect continued gross margin expansion and operating leverage, enabling us to grow EPS significantly faster than revenue. We expect fiscal '27 to be another outstanding year for Coherent. Our Datacenter & Communications segment continues to be the primary driver of our growth and accounted for 79% of total company revenue in fiscal Q4. Segment revenue increased 40% for full year fiscal '26. In Q4, our Segment revenue growth rate accelerated significantly with revenue increasing 19% sequentially and 59% year-over-year. Demand continues to strengthen, driving another quarter of record bookings and extending our visibility further into the future. Our order coverage through calendar '27 is exceptional. Customer orders now extend into calendar '28, customer LTAs extend through the end of the decade. We continue to see no signs of attenuation in customer demand. Our broad photonic technology portfolio, manufacturing scale and significant U.S. production footprint are increasingly differentiating Coherent with customers and translating into deeper, longer-term partnerships and revenue opportunities. In our data center business, revenue increased 41% for full year fiscal '26. In Q4, our data center revenue growth rate accelerated significantly, with revenue increasing 24% sequentially and [ 66% ] year-over-year. This marked our third consecutive quarter of double-digit sequential growth, and we expect strong sequential growth again in the current quarter. Demand in our data center business remains exceptionally strong and broad-based across multiple customers and product categories. Within transceivers, we expect growth to be driven by both 800-gig and 1.6T. We expect 800-gig revenue to continue growing year-over-year in calendar '26, while 1.6T transceivers ramp rapidly through the balance of calendar '26 and into calendar '27 as adoption broadens across customers. Beyond transceivers, OCS revenue increased sequentially in Q4, we expect continued growth over the coming quarters as we expand production capacity. We also expect CPO began contributing to revenue growth in fiscal Q2, consistent with our planned production ramp. Our 6-inch indium phosphide capacity expansion is a key driver of revenue growth and margin expansion. We remain on track to double our internal indium phosphide output capacity year-over-year by the end of the current quarter, one quarter ahead of our original plan. This ramp contributed meaningfully to our data center revenue growth in Q4, and we expect it to remain an important growth driver in Q1. Looking further ahead, we remain on track to more than double our internal indium phosphide capacity again by the end of calendar '27. We've secured the substrates and other critical inputs required to support this ramp. Given the strength of customer demand, we are planning additional capacity beyond 2027. Our capacity expansion is being driven by the transition to 6-inch indium phosphide production. Our 6-inch lines in Texas and Sweden are producing EMLs, CW lasers and photodiodes with yields that continue to exceed our 3-inch lines. We remain on track to begin 6-inch production in Zurich during the first half of calendar '27, further extending what we believe is a meaningful manufacturing advantage. Our Texas facility has also begun ramping our ultra-high-power CW laser for CPO solutions, including those covered by our NVIDIA partnership with revenue expected to begin ramping in fiscal Q2. Turning to OCS. Revenue increased in Q4 as we continue to ramp production. Given strong customer demand across our 320x320 platform and other system sizes, we expect OCS revenue to grow significantly through fiscal '27. We continue to estimate that OCS represents more than $4 billion of addressable market opportunity across data center interconnect, scale-out and scale-up networks. As we expand production across 2 manufacturing locations, we expect OCS to become an increasingly meaningful contributor to revenue growth and margin expansion. CPO, NPO and other forms of integrated optics represent a tremendous growth opportunity for Coherent. These technologies enable the transition from copper to optical connectivity represent more than $15 billion of incremental addressable market opportunity over the coming years. At the ECOC industry event in September, we plan to unveil coherent PhotonLink or new platform for integrated optics. PhotonLink spans the complete optical signal chain from light generation and beam shaping, retransmission, detection and conversion back to an electric signal for the XPU or switch chip. Platform supports CPO, NPO and other forms of optical integration. PhotonLink leverages the breadth of Coherent's photonic technology portfolio and manufacturing capabilities to enable next-generation data center architectures that use optical links to achieve new levels of bandwidth, performance and energy efficiency. We have deep engagements with multiple customers across both CPO and NPO applications, which we believe offer comparable content opportunities for Coherent. We expect initial revenue from PhotonLink related products to begin in our December quarter. We will share additional details about Photon Link at our launch event on September 21. Turning to our communications business. Customer demand remained exceptionally strong in Q4. Communications revenue increased approximately 54% for full year fiscal '26. Q4 revenue increased 11% sequentially, 56% year-over-year, driven by continued strength across data center interconnects, scale-across and traditional telecom applications. We expect another quarter of strong sequential growth in Q1. Demand remains broad-based across our portfolio with particular strength in DCI solutions including ZR and ZR+ transceivers as well as pump lasers and complex high-end optical subsystems. Multi-rail is an important new growth opportunity in our communications business addressing scale-across AI networking as workloads increasingly span multiple data centers and require greater bandwidth between locations. We estimate a more than $2 billion addressable market by calendar 2030, continue to expect initial revenue to ramp in the first half of calendar '27. Preparation for the expected revenue ramp, we recently delivered samples to multiple customers. We believe Coherent is well positioned with a broad technology portfolio, differentiated density and power efficiency, strong customer engagement. We expect multi-rail to become a meaningful contributor to revenue growth and margin expansion over time. Turning to our Industrial segment. Revenue was roughly flat on a pro forma basis in both fiscal '26 and Q4. In Q4, semiconductor capital equipment and display capital equipment both grew sequentially and year-over-year, offset by continued weakness across broader industrial markets. We expect growth to resume over the coming quarters, led by semiconductor capital equipment, where bookings continue to strengthen. Over the longer term, we see meaningful growth opportunities across several emerging applications. One example is data center XPU cooling, where our proprietary Thermadite material can improve thermal performance and enable higher XPU performance, which can translate into greater AI token generation per XPU. We are engaged with multiple strategic customers and have delivered samples of our Thermadite cooling solutions. We expect revenue to begin ramping in the second half of calendar '27, representing a meaningful expansion of our long-term market opportunity. We also see longer-term opportunities in fusion energy, quantum technologies and micro LED display capital equipment. Overall, we believe industrial is positioned to return to growth and become an increasingly important source of revenue diversification over time. In summary, we entered fiscal '27 with exceptional customer demand, record visibility, expanding production capacity and multiple new growth platforms beginning to ramp. We believe Coherent is uniquely positioned to capitalize on the multi-year expansion of AI data center infrastructure, supported by the breadth of our photonic technology portfolio, our manufacturing scale and our significant U.S. production footprint. I want to thank the entire Coherent team for their outstanding execution and innovation throughout fiscal '26. I'll now turn the call over to Sherri.

Thank you, Jim. Fiscal 2026 was an exceptional year for Coherent. We delivered record revenue of $7.12 billion, expanded gross margin by over 150 basis points, increased operating margin by nearly 300 basis points and grew non-GAAP earnings per share by 59%, significantly faster than revenue growth. We also strengthened our balance sheet, reducing debt leverage to 0.7x from 2x at the end of FY '25, while continuing to invest in capacity as well as our product road map to support the growing AI data center and communications demand. Let me now provide a summary of our results. Fourth quarter revenue was a record $2.05 billion, up 13% sequentially and 34% year-over-year, driven by growth in AI data center and communications demand. On a pro forma basis, revenue increased 14% sequentially and 42% year-over-year excluding revenue from the Aerospace and Defense business and the Munich, Germany product division, which were sold in Q1 and Q3, respectively. Full year 2026 revenue was $7.12 billion up 23% from 2025 and up 28% on a pro forma basis. AI data center and communication strength was the key driver of our full year 2026 revenue growth. Fiscal 2026 was the first year in Coherent's history to exceed $7 billion in revenue. Our Q4 non-GAAP gross margin was 40.2% a 66 basis point improvement compared to the prior quarter and a 215 basis point improvement compared to the year ago quarter. Our full year 2026 non-GAAP gross margin was 39.4% up 152 basis points from 2025. Gross margin performance continued to improve both sequentially and year-over-year as a result of the initiatives we have been executing throughout fiscal 2026. We saw benefits from our gross margin expansion strategy, primarily within data center and communications segment. These improvements were driven by lower product input costs, improved manufacturing yields and efficiencies including continued progress on our 6-inch indium phosphide platform as well as benefits from our pricing optimization efforts. We expect gross margin to continue to improve over the coming quarters as pricing optimization and cost structure improvements, such as increasing capacity from our 6-inch indium phosphide platform continued to take effect. Fourth quarter non-GAAP operating expense was $377 million compared to $348 million in the prior quarter and $307 million in the year ago quarter. Non-GAAP operating expense as a percentage of revenue decreased 18.4% in Q4 from 19.3% in Q3 and 20.1% in the year ago quarter. As we continue to focus on driving better leverage and operating efficiencies. Full year 2026 non-GAAP operating expense increased $1.35 billion from $1.17 billion in FY '25, primarily driven by increased investments in our product portfolio. As a percent of revenue, operating expenses decreased to 19% in 2026 from 20.1% in 2025. R&D expense as a percentage of revenue increased to 10.2% in Q4 from 9.9% in the prior quarter and 9.8% in the year ago quarter. For the full year, R&D expense as a percentage of revenue increased to 9.7% compared to 9.5% in FY '25. The sequential and year-over-year increases were driven primarily by investments within the data center and communications segment product portfolio. R&D investments remain focused in areas where we see the strongest long-term growth opportunities including transceivers, CPO, OCS systems and thermal management solutions. We continue to prioritize investments that address customer demand while generating attractive returns and supporting future growth. SG&A expense declined to 8.2% of revenue in Q4 compared to 9.4% in the prior quarter and 10.3% in the year ago quarter. For the full year, SG&A expense decreased 9.2% of revenue from 10.5% in FY '25, reflecting continued progress in driving efficiencies and generating greater operating leverage. During fiscal 2026, we made significant progress simplifying our operating model and driving greater operational efficiency. The expansion of our regional shared services structure has reduced costs, improved process consistency and improved leverage across our global operations. The benefits realized during the year exceeded our original expectations, and we expect these benefits to continue to increase throughout fiscal year 2027. Our fourth quarter non-GAAP operating margin increased to 21.8% compared to 20.3% in the prior quarter and 18% in the year-ago quarter. Our full year 2026 non-GAAP operating margin increased to 20.5% from 17.8% in FY '25. The increases for both Q4 and FY '26 were driven by strong revenue growth, continued gross margin expansion and improved operating leverage. Fourth quarter non-GAAP earnings per diluted share was $1.74, up 23% from the third quarter and up 74% from the year ago quarter. FY '26 non-GAAP earnings per share was $5.61, up 59% from FY '25. Earnings growth continued to outpace revenue growth in both the quarter and the full year, driven by strong revenue performance, gross margin expansion and improved operating leverage. Our FY '26 year-end cash balance of $2.59 billion compares to $3.05 billion at the end of the prior quarter and $1.63 billion at the end of FY '25. Consistent with our capital allocation priorities, we continued investing in opportunities that we believe will drive long-term growth and profitability. These investments were primarily focused on expanding data center and communications capacity and advancing our product development road maps. During FY '26, we made $513 million in debt payments exiting the year with a debt leverage ratio of 0.7x compared to 2x at the end of FY '25. Our capital expenditures increased to $556 million, up from $290 million last quarter and $131 million in the year ago period. This acceleration directly supports future growth across our data center and communications business. These strategic investments are expected to yield excellent financial returns. For example, the investments we are making in the data center business have a roughly 18-month payback period. Our conviction in these high-return investments is backed by excellent visibility from our customers with a robust pipeline of strong purchase orders and long-term agreements. This CapEx is primarily directed towards advanced tooling and state-of-the-art manufacturing equipment that accelerates our volume manufacturing capabilities and optimizes production yields. Furthermore, as a vertically integrated manufacturer, this capacity offers significant fungibility as our infrastructure can be dynamically repurposed, support multiple product lines. Given the exceptional demand profile and clear ROI visibility, we expect capital expenditures to increase sequentially again in Q1. These results reflect strong customer demand, disciplined operational execution, continued progress on our gross margin expansion initiatives and investments in the products and technologies that we believe will drive future growth. I will now turn to our guidance for the first quarter of fiscal 2027. We expect revenue to be between $2.2 billion and $2.4 billion. We expect non-GAAP gross margin to be between 39.5% and 41.5%. We expect total operating expenses of between $400 million and $420 million on a non-GAAP basis. We expect the tax rate for the quarter to be between 18% and 20% on a non-GAAP basis. We expect EPS of between $1.85 and $2.05 on a non-GAAP basis. We are entering fiscal 2027 with strong momentum reported by record backlog, excellent visibility into customer demand and a significantly stronger financial position. We remain focused on expanding capacity, improving profitability and allocating capital in a disciplined manner as we support future growth and drive long-term shareholder value. That concludes my formal comments. Operator, please open the call for Q&A.

[Operator Instructions] Our first question is from Joe Cardoso with JPMorgan.

Maybe for my first, it sounds like you continue to make good progress on the 6-inch ramp and even hinting at further expansion beyond 2027. Can you provide us an update on the ramp? And specifically, how we should be thinking about how it translates into revenue and gross margins? And then I have a follow-up.

Yes. Thanks, Joe, for the question. Yes, I would say, I'm quite pleased with the progress on our 6-inch indium phosphide ramp. I think the team is doing just an outstanding job of ramping that production. As I mentioned in the prepared remarks, we're on track to double the output capacity of indium phosphide production this quarter, that's one quarter earlier than our original plan. And then by the end of next calendar year, we expect to more than double it again. So we're on a pretty fast pace of expansion and executing well to that and actually a little ahead of our plan. So really pleased with that. And maybe a helpful data point just to kind of measure our progress along the way is if I look at our June quarter, and I look at, well, how many lasers -- indium phosphide lasers did we produce in our June quarter on a year-over-year basis. We produced about 80% more indium phosphide lasers in our June quarter than we did the prior year. So 80% year-over-year growth. And those are the lasers that go specifically into our 800-gig transceivers and our 1.6T transceivers. And so that sort of 80% growth year-over-year, I see that as a really good measure of progress towards continuing to expand our indium phosphide capacity. And then I think you asked, how does that relate to revenue? That 80% growth in lasers in the June quarter, we used those -- those basically go into transceiver shipments in the current quarter. And so we would expect our data center growth, for instance, this quarter, on a year-over-year basis to exceed 80% trade. We've certainly got the lasers this quarter to make that happen. And so that's kind of how you can think about how it impacts the data center transceiver revenue growth. And just a couple other comments on the progress. One of the things I continue to be pleased by is our yields. Our yields continue to be better than our 3-inch production, so yields of 6-inch better than 3-inch. And that's across all 3 devices that we have in production that CW, EML and photodiodes. And so all 3 showing better yields in 3-inch. And another milestone that I mentioned in prepared remarks, we've now -- we're starting production and ramping production of our ultra-high-power CW lasers that go into CPO applications. We'll see revenue from those. We expect in our December quarter. It's our Texas and Sweden plants that are ramping right now. So we're ramping in 2 locations, 6-inch, and we'll bring a third 6-inch location online, we expect in the first half of calendar '27. So yes, I would say the progress quite pleased with it. So thanks. And then it sounded like, Joe, you had a follow-up question.

Yes, the -- and the second one -- and very useful color there. Then the second one is -- and maybe you started touching on this, but the CPO revenue starting in the December quarter. Just curious, can you shed any light or additional color around the opportunity both near and long term. Just particularly given the recent noise surrounding it from a market perspective around concerns around delays and maybe the forward pull of NPO. Just curious in terms of if there's any other color you can share there, just given kind of all that noise surrounding it.

Yes, sure. Thanks, Joe. Yes. First of all, we've seen absolutely no pushout of CPO demand. In fact, it's been the opposite. We've seen demand increase and demand request from customers demand getting pulled in. And so we've only seen the opposite. And then that's on CPO specifically. And then the other thing that we've seen, especially over the last 3 to 6 months is a significant ramp-up in the engagement with customers on not just CPO, but now NPO. So I would say we have multiple very important engagements across many customers around either CPO or NPO. And so the -- yes, the intensity has really gone up over the last 3 to 6 months. And so we're really pleased to see that. And just as a reminder, when we talk about integrated optics, whether it's CPO or NPO or any other form of it, we have a very wide portfolio that we can bring to our customers it's not just one ingredient, but a really wide range of products. It's -- of course, it's the laser. We have very strong laser capabilities. But the laser, the laser -- the external laser module, the optical components that go into that external laser module, like isolators. We manufacture polarization-maintaining fiber. This is the type of fiber that you would use to connect the laser module to the device or the device back to the front panel. We've got -- we can do the full assembly of the entire fiber attached kit, we do the SiPho PICs, et cetera. So we're able to bring to our customers a full range of integrated optics capability. And we see NPO or CPO to us, it's just a different form factor. The amount of content that we would have in an NPO application versus a CPO is very comparable, very similar. And so we're just -- we're driving whatever the customer prefers in terms of their type of application, CPO or NPO. We're there to support them. And then the other thing that we're going to be launching in September that I mentioned is a new platform -- technology platform called PhotonLink. And what we were seeing with customers around CPO and NPO is customers not wanting to just buy a point individual ingredients like a laser or an isolator, but really wanting help bringing the full solution. And so what PhotonLink is it our complete integrated platform for basically being the one-stop shop for integrated optics platform. And so it spans all the way from light generation to beam shaping and transmission to detection and conversion back to the electrical signal. So we'll talk more about it at our product launch event in September, but we think that's based on the initial customer reaction, great solution for customers that want more of a complete solution. So we're pretty excited about that as well.

Our next question is from Simon Leopold with Raymond James.

Great. The first thing I wanted to ask you about, and I know that it's not a done deal, but there's been press coverage on potential import restrictions for optical transceivers. And I think I have 2 parts to this question. The first aspect is, what does it mean to Coherent specifically? And part of this would -- I think it applies to the Jobs Act, creating U.S. jobs. So could you in practice move transceiver manufacturing? Would you or could you move that to the U.S.? And then I've got a follow-up.

Yes. Thanks, Simon. So that reported speculative at this point. But certainly, we would benefit from something like that. As the main -- the largest U.S. supplier of transceivers, something like that would certainly be beneficial. Although, we always want to compete for our customers' business based on our technology and based on our manufacturing. And we think we've got the broadest, deepest photonic technology in the industry and the most extensive manufacturing footprint. And one of the things that we're really proud about on our manufacturing is, of course, we're a global manufacturer with locations all over the world, which gives us resiliency and of course, we're also vertically integrated. We built a number of the very important components ourselves. But Simon, as you mentioned, we have an outstanding footprint in the U.S. We have over 20 production facilities in the U.S. And that, I think, is really a strategic advantage for us. Just one example is that Sherman, Texas facility. We're making very critical components in Sherman, Texas for not just transceivers, but for CPO and NPO applications. And there's other facilities throughout the U.S. where we make other critical components like fiber optic cable, like growing the garnet that goes in the isolators for transceivers. So to the extent that we need to -- we're already investing in U.S. manufacturing, but to the extent we need to increase that U.S. manufacturing, we would certainly be open to doing that. We've got -- we were founded over 50 years ago as a U.S. manufacturing company. And so we have a great footprint, and we could certainly build off of that.

And then just the follow-up is, I think it was -- you gave us a target for 4Q '27, June '27 of revenue exceeding $3 billion. I think that's well above current consensus. I'd like to get a better sense then of what you're thinking about your gross margin. I know in the past, you've talked about a target of 42.5%. I'm wondering if you could update us given sort of the shifts in growth and the mix, how you're thinking about the gross margin trajectory?

Yes. I'll pass that one off to Sherri to comment on gross margin. But the quick version is that we've made, I think, great progress over the past quarters, and we're certainly super focused on continuing to make progress moving forward. But Sherri, do you want to add color to that?

Sure, sure, Jim. Thanks, Simon. So first of all, I'd like to say I'm extremely pleased with the progress we've made in improving gross margin. We increased gross margin 66 basis points sequentially and 250 basis points year-over-year. In fact, in 8 out of the past 9 quarters, we have increased our gross margin. So that's not just a trend. That's showing that we are actively driving gross margin improvement. And the accumulation of improvement that we've driven in those 8 quarters is over 660 basis points of improvement. So clearly, an area that we're actively driving and focused on. Now the target that we gave at our Investor Day, Simon, it was greater than 42%. And at the midpoint of our Q1 guide, which is at 40.5%, that is -- certainly, we're still early. We have a little bit of ways to go. I do view that we are early in our strategy for gross margin expansion. But we are extremely focused on getting to greater than 42%. And let me tell you why I'm confident. The bulk of the 6-inch indium phosphide product ramp is still ahead of us. That's still to come. New product ramps for 1.6T OCS system, CPO, multi-rail systems, thermal management solutions, all of those new products, those ramps are all still to come. They're all ahead of us. And of course, we will continue to drive cost reductions, pricing optimization improvements, the bulk of those improvements driven to date are in these areas, and we have clear plans to drive what I view as a very significant opportunity ahead. So once we get to our target of greater than 42%, we will no doubt raise the target.

Our next question is from George Notter with Wolfe Research.

I guess I was just curious about where you are in terms of your transceiver mix right now. Obviously, there's an initiative to in-source as much of those laser datacom chips as you can. I'm just curious, like how much of your mix is now in-sourced in terms of the laser datacom chip. And then also, I know there was a plan to kind of exceed your own internal needs and supply EMLs externally. I'm just curious like what the road map looks like for selling EMLs commercially in the market.

Yes. Thanks, George. I think on the last point, given the demand that we see in our data center business with transceivers, I don't see any time in the near future where we would be selling indium phosphide lasers externally. Our data center transceiver demand is absorbing every bit of capacity that we have and then some. So I don't see any near-term ability to do that. Maybe further out. But today, we use a mix of internal -- internally produced and externally sourced. I still believe that over the long term, we'll have some portion of our datacom transceivers that will be supported by external sources. I think that's -- there's a number of strategic reasons why that's good for the transceiver business. But certainly, I think as we expand our internal production, which is growing very quickly, I talked about the 80% year-over-year growth that we saw in laser production in our June quarter, and that will grow from here given the ramp in indium phosphide. I would expect over time for a greater percentage of our transceivers to be serviced with internal indium phosphide.

Great. And then just as a quick follow-on. I'm curious about where you are on VCSELs. It seems like there's a lot of new enthusiasm around VCSELs in scale-up applications. Obviously, you guys are working on a 200-gig VCSEL. I'm just curious about where that is and how you see that opportunity for Coherent?

Yes. I think that's a great tool in our chest, right, it is in our tool chest is the 200-gig VCSEL. We continue to make good progress on that. I do think that the 200 gig VCSEL will see adoption in integrated optics applications in -- like MPO type of applications. And so we are actively working with customers on VCSEL-related MPO or integrated optics application. So that's certainly an important tool. And yes, we think that will be deployed.

Our next question is from Ryan Koontz with Needham & Company.

I want to ask about your capacity constraints here. I wonder if you could look at kind of your input capacity constraints as well as your own internal production capacity constraints. And how should investors think about those? And where you're investing now, but where are your sharpest pain points now to grow the business over the next 12 months?

Yes. Thanks, Ryan. I wouldn't say that indium phosphide capacity continues to be our primary constraint. That's why we are so focused on ramping that 6-inch production that -- we're not constrained for instance, if you look at transceivers, we're not constrained in the assembly and test capacity right now. We have that capacity available. We're really just constrained by the ramp of the indium phosphide production. And so as we continue to ramp that indium phosphide output, we expect that to continue to help drive revenue growth for our transceivers. So it's really as simple as that. That's the primary constraint.

Helpful. And maybe as you think about the telecom side of the world and multi-rail and pump lasers and all that's involved there. How do you think about that monetization opportunity in terms of various parts or systems you might sell into that market?

Yes. Thanks, Ryan. In that market, we actually sell at multiple different levels. So we do sell components into that market. We sell what I would call subsystems. So these would be amplifiers, line cards and in some cases, we'll sell kind of full systems. And so we sell at multiple levels. And I would say the growth there is incredibly strong. In communications, this kind of scale across DCI falls within our Communications business. We saw in our June quarter, a 56% year-over-year growth in that segment. I think that segment moving forward, we're going to continue to see faster growth just as we've seen in the sort of data center applications. And that's across just multiple different products, whether it's our ZR, ZR+ transceivers, whether it's some of the components like the pump lasers or the products that go into the pump lasers. And then as I mentioned in the prepared remarks, soon we'll start to see revenue from multi-rail systems. So our technology for multi-rail systems is in the hands of customers now. We've sampled that and we expect revenue to start to flow from multi-rail in the first half of calendar '27. So yes, there's just a wide range of products there. And I would say the demand just continues to go up for anything DCI or scale across related.

Our next question is from Blayne Curtis with Jefferies.