Coherent (COHR) Q4 2025 earnings review
AI Boom Fuels Record Year, but Industrial Weakness Mutes Outlook
Coherent delivered a strong Q4, capping a record-breaking fiscal year with revenue up 23% and non-GAAP EPS nearly tripling. The growth was driven almost entirely by the AI super-cycle, with the Networking segment surging 39% YoY. However, this strength was offset by persistent weakness in the industrial-focused Materials (-15% YoY) and Lasers (-2% YoY) segments. Guidance for Q1 FY26 is flat sequentially at the midpoint, signaling that the industrial drag is neutralizing the powerful AI tailwind for now. The company is taking decisive action, announcing a $400 million sale of its Aerospace & Defense business to sharpen focus and accelerate debt reduction.
🐂 Bull Case
The Networking segment, powered by AI data center demand, is firing on all cylinders. The company is ramping 800G transceivers and has started shipping next-generation 1.6T transceivers and Optical Circuit Switches (OCS), securing its role in the next wave of AI infrastructure.
Management is actively pruning the portfolio by divesting the non-core Aerospace & Defense business. This move will streamline operations, allow focus on high-growth areas, and accelerate paying down debt, which should be accretive to EPS.
The communications business, a component of the Networking segment, saw accelerating growth of 42% YoY, driven by data center interconnect (DCI). This signals a healthy recovery in a market that had previously been a headwind.
🐻 Bear Case
The industrial-facing segments are a significant drag on performance, with Materials revenue down 15% YoY. Management remains cautious on the near-term outlook, which is the primary reason for the flat sequential revenue guidance.
While YoY growth remains strong, sequential revenue growth has decelerated for three consecutive quarters, from 6.4% in Q2 to 2.1% in Q4, with guidance for 0% in Q1'26. The company is reliant on new product cycles to re-accelerate.
⚖️ Verdict: 🟢
Bullish. The sheer force of the AI-driven demand in the Networking segment is the dominant factor in Coherent's story. Management's decisive actions to divest non-core assets and focus on this high-growth engine are the right moves. While the industrial weakness creates a near-term drag on headline growth, the long-term value creation is clearly tied to winning in AI and communications, where Coherent is demonstrating strong execution and technology leadership.
Key Themes
Networking Segment Surges on AI and Telecom Demand
The Networking segment is the company's undisputed growth engine, with revenue up 39% YoY to $945M. This was driven by two powerful trends: continued explosive demand for AI data centers and an accelerating recovery in the communications market. The data center portion grew 38% YoY, fueled by the 800G transceiver ramp and initial 1.6T shipments. The communications portion accelerated to 42% YoY growth, driven by data center interconnect (DCI) applications.
Industrial Markets Remain a Significant Headwind
In stark contrast to the Networking boom, Coherent's industrial-focused businesses are struggling. The Materials segment saw revenue decline 15% YoY, while the Lasers segment was down 2% YoY. Management expressed a 'cautious view' for the near term, citing macroeconomic uncertainty. This weakness is the primary reason for the flat sequential guidance for Q1 FY26, as it fully offsets the expected growth from the data center and communications markets.
Decisive Portfolio Pruning Sharpens Focus
Management is executing on its plan to streamline the company by divesting non-core assets. The announced sale of the Aerospace and Defense (A&D) business for $400 million is a major step. The proceeds are earmarked for debt paydown, and management stated the sale will be accretive to EPS. This follows earlier actions to exit the silicon carbide device business, signaling a clear strategy to concentrate capital and attention on the highest-return opportunities like AI datacom.
Supply Chain and US Manufacturing Positioned as a Moat
Coherent is leveraging its manufacturing scale and vertical integration as a key competitive advantage. The company has tripled its internal Indium Phosphide capacity YoY and is beginning production at the world's first 6-inch Indium Phosphide line in Texas. This resiliency is attracting strategic partners, highlighted by a new multiyear agreement with Apple for next-generation VCSELs to be made in the U.S. Management believes this U.S. footprint provides a competitive advantage in the current tariff environment.
Sequential Revenue Growth Decelerates to Zero
While YoY growth is impressive, the sequential momentum has stalled. Revenue growth slowed from 4.4% in Q3 to 2.1% in Q4, and the midpoint of Q1 FY26 guidance implies 0% sequential growth. This highlights the company's current dependency on the AI data center market and shows that until the industrial segments recover or new products like 1.6T and OCS ramp meaningfully, overall growth may be capped.
Next-Generation Products Enter the Market
Coherent has officially begun monetizing its next wave of technology. The company recorded initial revenue from both its 1.6T transceivers and its new Optical Circuit Switch (OCS) platform in Q4. While contributions are minimal today, these products represent major future growth drivers and TAM expansion opportunities. Management expects revenue from both to ramp through the calendar year and become more meaningful in 2026.
Other KPIs
Strengthening the balance sheet is a key priority. The company used strong operating cash flow to pay down $437 million of debt in FY25, reducing its leverage ratio to 2.0x from 2.5x. The incoming $400 million from the A&D business sale will be used to further accelerate deleveraging.
Stable. Margin performance remains solid, up 220 basis points from 35.9% a year ago. For the full year, non-GAAP gross margin expanded 358 basis points to 37.9%. This reflects benefits from higher volumes and cost-reduction initiatives, which are helping the company progress towards its long-term target of over 40%.
Healthy cash generation provides financial flexibility. The company's operations are producing substantial cash, enabling it to fund strategic investments in capacity, such as the 6-inch InP fab, while simultaneously making significant debt repayments.
Guidance
Decelerating. The midpoint of $1.53B implies flat (0%) sequential growth and 13.5% YoY growth. This represents a deceleration from the 16.4% YoY growth seen in Q4. The outlook reflects the ongoing dynamic of strong AI-related growth being offset by weakness in industrial end markets.
Stable. The midpoint of 38.5% is slightly up from Q4's 38.1%, indicating that operational improvements and favorable mix from the growing Networking business are helping to hold margins firm, keeping the company on its path toward the long-term 40%+ target.
Stable. The midpoint of $1.03 is up slightly from $1.00 in Q4 and represents strong 39% YoY growth. Profitability continues to improve on a yearly basis, driven by higher margins and operating leverage.
Key Questions
Path to Re-acceleration
Your Q1 guidance implies flat sequential revenue as industrial weakness offsets AI strength. What specific signs of stabilization or recovery do you need to see in the industrial markets before overall corporate growth can re-accelerate?
Gross Margin Bridge
You guided Q1 gross margin to a midpoint of 38.5%, stable QoQ. With the highly profitable datacom business growing and the lower-margin A&D business being divested, what are the primary headwinds preventing a more significant sequential step-up toward your 40%+ target?
1.6T and OCS Contribution
You've announced first revenue for 1.6T and OCS. Can you provide more color on the customer ramp profile? Are these initial shipments for qualification or volume deployments, and how should we model their contribution to growth in the second half of fiscal 2026?