Coherent (COHR) Q4 2025: Data Center and Comms Surge 51%, Portfolio Streamlined for Margin Expansion
Coherent capped a record 2025 with data center and communications revenue up 51%, propelled by AI infrastructure demand and new product ramps. The company is aggressively scaling indium phosphide and U.S. manufacturing to meet customer needs, while divesting non-core assets to sharpen its focus and accelerate deleveraging. Guidance signals continued sequential growth in core optical segments, despite near-term caution in industrial markets.
Summary
- AI Infrastructure Demand Drives Outperformance: Data center and communications segments posted rapid growth, fueled by hyperscaler investments and new transceiver ramps.
- Portfolio Realignment Sharpens Focus: Divestiture of aerospace and defense business streamlines operations and accelerates debt reduction.
- U.S. Manufacturing Emerges as Strategic Moat: Expanded Sherman, Texas facility and Apple partnership underscore supply chain resilience and competitive positioning.
Performance Analysis
Coherent delivered a breakout year, with full-year revenue reaching $5.81 billion, up 23% year-over-year, and gross margin expansion of 358 basis points, driven primarily by AI data center and communications market strength. The data center segment was the standout, growing 61% for the year and 38% in Q4, reflecting robust demand for high-speed optical transceivers and the start of 1.6T product shipments. Communications, which includes both traditional telecom and data center interconnect (DCI), posted 23% annual growth and 42% year-over-year in Q4, with ZR/ZR+ coherent transceivers ramping rapidly.
Industrial-related revenue declined 2% for the year, weighed down by a drop in silicon carbide demand, though industrial laser products and recurring services showed above-market growth. Operating leverage improved, with non-GAAP operating margin up 472 basis points to 17.8%, aided by pricing optimization, cost reductions, and increased service revenue mix. The company paid down $437 million in debt, nearly doubling the prior year’s repayments, and expects further deleveraging from the $400 million aerospace and defense divestiture.
- Data Center and Comms Propel Growth: These two segments now comprise the majority of revenue and profit, with continued sequential growth expected.
- Margin Expansion Initiatives Gain Traction: Yield improvements, manufacturing efficiency, and pricing drove gross margin gains, despite FX headwinds.
- Industrial Segment Mixed: Industrial lasers and services outperformed, but silicon carbide exposure was a drag; stabilization expected in fiscal 2026.
Coherent’s top-line acceleration and improved profitability reflect tight alignment between strategic focus and operational execution, but near-term caution remains in cyclical industrial markets and FX sensitivity.
Executive Commentary
"Our fiscal 2025 was an outstanding year for Coherent as full year revenue increased by approximately 23% year over year to a record $5.81 billion, driven by strong growth in our data center and communications business. Our revenue growth combined with gross margin expansion of 358 basis points led to an approximately 3x increase in our non-GAAP EPS over the prior year."
Jim Anderson, Chief Executive Officer
"We drove strong double-digit revenue growth, significant gross margin expansion, and improved profitability. We increased our cash from operations, enabling us to significantly pay down our outstanding debt and further strengthen our balance sheet."
Sherry Luther, Chief Financial Officer
Strategic Positioning
1. AI Data Center and Communications as Growth Engines
Coherent’s core growth is now tightly centered on AI-driven data center and communications infrastructure, with hyperscaler CapEx and network upgrades fueling demand for high-speed optical transceivers (800G, 1.6T, and soon 3.2T). The company’s roadmap, including the initial ramp of 1.6T and development of 3.2T, positions it to capture wallet share as cloud and AI workloads scale.
2. U.S. Manufacturing and Supply Chain Resilience
Coherent’s Sherman, Texas facility is a linchpin in its supply chain strategy, debuting the world’s first 6-inch indium phosphide line for EML and CW lasers. This internal capacity expansion provides cost and volume advantages, supports the Apple Vixel partnership, and insulates against geopolitical and tariff risks. Management emphasized customer preference for U.S.-based production, citing it as a key differentiator.
3. Portfolio Optimization and Capital Allocation
The $400 million sale of the aerospace and defense business marks a decisive shift toward higher-growth, higher-margin markets, freeing capital for debt reduction and reinvestment in core photonics. The exit reduces exposure to lower-margin, less strategically aligned activities, streamlining the portfolio and sharpening R&D focus.
4. Technology Leadership and Product Roadmap
Coherent’s technology depth in photonics—spanning EML, CW lasers, and optical circuit switches (OCS)—is a pillar of its competitive edge. The non-mechanical, liquid crystal-based OCS product opens a $2 billion addressable market, offering reliability advantages over MEMS-based competitors. Early customer engagement and pipeline strength suggest meaningful revenue contribution in calendar 2026 and beyond.
5. Recurring Revenue and Margin Tailwinds
Growth in recurring services for industrial lasers is outpacing product sales, expanding the installed base and providing a gross margin tailwind. This shift toward service-centric revenue supports margin durability and reduces cyclicality, particularly as industrial capital spending remains volatile.
Key Considerations
Coherent’s 2025 results highlight a business in transition—sharpening its focus on high-growth optical markets while leveraging supply chain and technology strengths. The company’s operational discipline and capital allocation are setting the foundation for sustained margin and earnings expansion.
Key Considerations:
- AI and Cloud CapEx as Primary Demand Drivers: Hyperscaler infrastructure build-out is the core engine for revenue growth in both data center and DCI segments.
- Indium Phosphide Scale-Up: Internal ramp of 6-inch wafer production is expected to lower costs, boost output, and enhance supply chain control, supporting both transceiver and laser product lines.
- Apple Partnership Validates U.S. Manufacturing Strategy: Multi-year Vixel supply agreement supports utilization and revenue visibility at Sherman, Texas, with initial revenue contribution in 2H 2026.
- Portfolio Streamlining Accelerates Deleveraging: Aerospace and defense divestiture will reduce debt, improve margins, and focus management on core growth areas.
- Industrial Exposure Remains a Watchpoint: Macro and tariff uncertainty temper near-term outlook, though recurring services provide some buffer.
Risks
Coherent’s near-term risk profile is shaped by industrial market softness, foreign exchange volatility, and competitive pricing from Chinese transceiver vendors. Execution risk exists in scaling new product ramps (1.6T, OCS), and the transition to higher-speed optical standards may create demand lumpiness. Portfolio divestitures reduce diversification, increasing sensitivity to demand cycles in core segments. Management’s confidence in gross margin expansion is contingent on continued yield improvements and stable FX.
Forward Outlook
For Q1 2026, Coherent guided to:
- Revenue of $1.46 billion to $1.6 billion, excluding $20 million from the divested aerospace and defense business.
- Non-GAAP gross margin between 37.5% and 39.5%.
- Operating expenses of $290 million to $310 million (non-GAAP).
- EPS of $0.93 to $1.13 (non-GAAP).
For full-year 2026, management reiterated its commitment to the long-term target model (>42% gross margin) and expects:
- Sequential growth in data center and communications segments.
- Stabilization in silicon carbide and continued industrial services growth.
Management highlighted ongoing investment in capacity, technology, and U.S. manufacturing as key enablers for meeting strong customer demand and achieving financial targets.
Takeaways
Coherent’s 2025 results confirm the company’s pivot toward AI-driven optical markets, with margin expansion and deleveraging underway. Investors should monitor execution on new product ramps, the pace of industrial recovery, and the realization of benefits from the Apple partnership and portfolio streamlining.
- Margin Expansion Trajectory: Sustained gross margin improvement is a function of mix shift, cost reductions, and increasing service revenue, with FX as a residual risk.
- Strategic Realignment Progress: The company is simplifying its portfolio and sharpening its technology and manufacturing focus, positioning for long-term value creation.
- Growth Visibility Hinges on AI and Cloud CapEx: Continued hyperscaler investment and product roadmap execution are critical for maintaining top-line and share gains.
Conclusion
Coherent exits 2025 with strong momentum in its core optical markets, a simplified portfolio, and a clear path to further margin expansion. Execution on new product ramps and continued leverage of its U.S. manufacturing base will be pivotal in sustaining growth and mitigating macro risks.
Industry Read-Through
Coherent’s results and commentary reinforce the centrality of optical technologies in the AI and cloud infrastructure build-out, with demand for high-speed transceivers and resilient supply chains set to shape industry dynamics. The company’s U.S. manufacturing investments and ability to secure multi-year partnerships like Apple’s suggest a premium on supply chain localization and technology integration, themes likely to ripple across the photonics and semiconductor ecosystem. Competitors with less vertical integration or geographic diversity may face margin and supply challenges as hyperscaler requirements evolve.