In her first major following an 18-month hiatus to give birth, the German fought hard but succumbed to the 2022 Melbourne Park finalist 6-2, 3-6, 6-1.
The unseeded Collins will now play world number one Iga Swiatek.
Collins broke three times in the first set, but three-time major winner Kerber bounced back.
The 35-year-old German saved two break points in the sixth game of the second set, then worked her own break point in the next game, with Collins double-faulting to put the German 4-3 ahead.
It was the glimmer of hope the 2016 Australian Open champion needed, racing through the next two games to level the match.
But Collins kept coming and got a decisive break in the third game of the third set, breaking twice more to romp home.
Reunited with longtime coach Torben Beltz, Kerber's return from pregnancy leave has been rocky - she lost four of five matches at the United Cup before defeat to Collins.
