Coherent Corp. (NASDAQ: COHR) delivered a Q4 that felt like a statement. Revenue of $2.05 billion surged 34% year-over-year, topping consensus by roughly $60 million. Non-GAAP diluted EPS of $1.74 came in nearly 8% above the Street's $1.62 estimate. The headline numbers are strong, but the composition tells the real story. The Datacenter & Communications segment alone generated $1.615 billion, up 59% from a year ago, and now accounts for 79% of total revenue. This is a business mix shift happening in real time.
The Industrial segment, by contrast, continued its slow bleed, falling to $430.5 million from $511.1 million a year ago, a 16% decline. The company's narrative is clear: AI datacenter architectures are moving from copper to optical connectivity, and Coherent is the primary beneficiary. The data supports that claim, but the Industrial drag is worth watching as a potential headwind to margin if it accelerates further.
Non-GAAP gross margin expanded 215 basis points to 40.2%, driven by scale in the higher-margin Datacenter & Communications business and a 205bp reduction in non-GAAP SG&A as a percentage of revenue. Operating leverage is real here. Non-GAAP operating income rose 62% to $446 million, and operating margin hit 21.8%, up from 18% a year ago. That is a 380bp expansion in a single year, coming from both gross margin improvement and cost discipline.
GAAP results tell a different but complementary story. GAAP gross margin improved 277bps to 38.5%, and GAAP EPS swung to $1.19 from a loss of $(0.83) a year ago. The gap between GAAP and non-GAAP remains wide, driven by $70 million in amortization of acquired intangibles, $54 million in stock-based compensation, and a $44 million impairment of assets held-for-sale. These are not new items for Coherent, but they are persistent and large enough that investors should focus on the non-GAAP figures as the better proxy for operating performance.
Guidance for Q1 FY2027 is where the story gets more interesting. Revenue of $2.2 billion to $2.4 billion implies sequential growth of 7.5% to 17% from Q4's $2.05 billion. The midpoint of $2.3 billion is above the consensus estimate of roughly $2.2 billion. Non-GAAP EPS guidance of $1.85 to $2.05 also brackets the Street at the midpoint. Management is signaling accelerating demand, not just sustaining current momentum. The midpoint of revenue guidance implies roughly 12% sequential growth, a step up from Q4's 13% sequential growth on a much larger base.
Management chose to initiate guidance above consensus despite having just delivered a quarter that beat by a wide margin. That is a deliberate signal of confidence, not caution. The company also highlighted a CHIPS Act letter of intent for up to $50 million and a groundbreaking ceremony with NVIDIA at its Sherman, Texas facility. These are not financial metrics, but they reinforce the narrative that Coherent is becoming a strategic supplier in the AI infrastructure buildout, not just a component vendor.
The capital allocation picture is evolving. Coherent generated only $79.5 million in operating cash flow for the full fiscal year, down sharply from $633.6 million a year ago. That decline is largely explained by a $1.1 billion capex spend, up from $441 million, as the company invests heavily in manufacturing capacity. The balance sheet remains manageable with $3.2 billion in long-term debt against $1.16 billion in cash and $825 million in short-term investments. The company also raised $2 billion in common equity during the year, which helped eliminate mezzanine equity and clean up the capital structure.
The forward read is straightforward. Coherent is in the early stages of a multi-year product cycle driven by AI datacenter optical connectivity. The guidance suggests that cycle is accelerating, not plateauing. The risk is execution on capacity expansion and the pace of Industrial segment recovery, but for now, the datacenter tailwind is strong enough to carry the story. Investors should watch the pace of capex relative to cash flow and whether the Industrial segment stabilizes, but this quarter leaves little to criticize.