Coherent's sales are booming. Who is funding the expansion?

Coherent's optical technology business is growing fast enough that management expects annual sales growth above 60% on a comparable portfolio basis. Expanding to meet that demand is taking much more cash than the business currently generates.

The company spent $775.5 million on property, plant and equipment in its September quarter, while operating activities used $92.7 million of cash. New borrowing and maturing investments helped finance the expansion, alongside advance payments from customers.

Research by Ticker Byline shows that cash and short-term investments together fell by about $234 million during the quarter, even though cash and cash equivalents rose by $391 million. We combined the two balance-sheet lines to see how the resources available to fund growth changed.

Our Coherent company profile tracks the growth targets, financing, financial results and completed divestitures.

Demand is turning into profit

Coherent makes lasers, optical components and systems that move information using light. Demand is rising as AI data centers need faster connections with lower energy use.

Quarterly sales rose 50% to $2.37 billion. Its datacenter and communications business generated $1.95 billion of that total. Adjusted operating profit increased 78% to $550.3 million, with adjusted earnings rising to $2.09 a share from $1.16.

The sales figure was within the $2.2 billion to $2.4 billion range Coherent gave in August. Adjusted earnings were slightly above its $1.85 to $2.05 forecast. The bigger development is what management expects from the expansion now underway.

For fiscal 2027, ending June 30, it expects revenue growth above 60% on a pro forma basis that excludes the previously sold aerospace and defense and Munich businesses from the comparison. It also set a target of achieving its first quarter with adjusted gross margin above 45% before the end of calendar 2028, compared with 40.6% in the latest quarter.

The factories need money before they deliver sales

Inventory absorbed $737.1 million of quarterly operating cash as Coherent prepared for higher production. Customer advances helped: the contract-liability line contributed $269.3 million of cash. Even with that contribution, operating cash flow was negative.

Capital spending was more than seven times the year-earlier $103.9 million. Combined with the operating cash outflow, it used about $868 million before financing and other investing cash flows.

Coherent received $773.4 million from other credit facilities and $625 million from maturing short-term investments. Cash and cash equivalents consequently increased to $1.55 billion. But short-term investments fell to $200 million from $825 million, explaining why the combined balance declined.

Borrowing also increased the debt load to $4.00 billion at balance-sheet carrying value, from $3.22 billion at the end of June. The new facilities sit at foreign subsidiaries and mature in 2029.

The next test is making the added capacity pay

Management said internal manufacturing capacity for indium phosphide, a material used in optical chips, doubled from a year earlier one quarter ahead of plan. It expects to more than double that capacity again by the end of calendar 2027.

For the December quarter, Coherent expects sales of $2.55 billion to $2.75 billion and adjusted earnings of $2.28 to $2.48 a share. It also expects its first $3 billion revenue quarter by the end of fiscal 2027.

Those targets make the financing understandable: the company is spending now to serve demand it expects to grow further. The financial question is how quickly the larger factories and inventory translate into cash from customers, so expansion can rely more on the business's own cash generation.