Coherent Corp. (COHR) experienced a 6% decline in after-hours trading on Wednesday, even after reporting fiscal third-quarter results that surpassed Wall Street expectations. The photonics supplier posted revenue of $1.81 billion, a 20.5% year-over-year increase, and adjusted earnings per share of $1.41. However, investor sentiment turned cautious as the company's adjusted operating income of $366 million fell short of the $372.7 million consensus, and free cash flow came in negative at $536.9 million.
AI Infrastructure Drives Growth
Coherent has transformed from its legacy laser and engineered materials business into a key player in AI data center infrastructure. Revenue from its Datacenter & Communications segment surged to $1.36 billion, up from $968.7 million a year ago, reflecting robust demand for high-speed optical interconnects essential for AI workloads. The Industrial segment, however, declined to $444 million from $529.2 million.
CEO Jim Anderson noted that demand in datacenter and communications is "exceptionally strong," and the company is investing heavily to expand capacity. Capital expenditures for the first nine months of fiscal 2026 reached $547.2 million, nearly double the $309.5 million spent in the prior-year period, as Coherent ramps up production to meet AI-driven orders.
Margin and Cash Flow Concerns
Despite strong top-line growth, margin pressures and cash burn weighed on the stock. GAAP gross margin improved to 37.7%, while non-GAAP gross margin hit 39.6%. Adjusted operating income missed estimates, and free cash flow turned deeply negative due to heavy capex and working capital needs. CFO Sherri Luther highlighted "robust visibility into demand" but acknowledged the strain on cash flows.
Analysts at Stifel maintained a Buy rating on Coherent, raising their price target to $412 from $275, but noted that the company must translate its AI optics surge into sustainable cash generation. Stifel ranks Coherent as its top pick in optical networking, ahead of Ciena (CIEN) and Lumentum (LITE).
Outlook and Risks
Coherent guided for fiscal Q4 revenue between $1.91 billion and $2.05 billion, with adjusted EPS in the range of $1.52 to $1.72. The midpoint of the revenue outlook is 3.4% above consensus, and the EPS midpoint tops the $1.54 analyst estimate. However, the company flagged risks including end-market demand swings, customer purchasing shifts, tariffs, product launch timing, and competition.
The after-hours selloff suggests that while Coherent delivered on key investor demands—faster sales growth, stronger margins, and a raised outlook—the market is now focused on the next challenge: converting AI-driven revenue into positive free cash flow while sustaining margin improvements. The stock's recent run-up had already priced in strong results, leaving little room for disappointment on cash flow and operating income.
