Viavi Solutions Inc. (VIAV) Earnings

Management highlights

### End Market Growth & Diversification - The company's diversification strategy into the data center ecosystem and aerospace and defense (A&D) was the key driver of fiscal 2026 overall growth, and management expects this strategy to continue driving growth for the next several quarters. - NSE grew ~70% year-over-year in Q4 2026, primarily driven by strong demand from the data center ecosystem and A&D customers. - Data center ecosystem demand for lab, production, and field testing instruments remains very strong, supported by ongoing data center build-out, maintenance, and monitoring activity, with management projecting continued robust growth for this segment for the next several quarters. - A&D posted another quarter of strong year-over-year growth, driven by high demand for positioning, navigation, and timing (PNT) products, which management expects to be a multi-year growth driver for the A&D business. - OSP delivered strong year-over-year growth, driven by strength across 3D sensing, anti-counterfeiting, and other product lines. ### Product & Strategic Milestones - VIAVI extended its market leadership in the data center testing segment with the launch of the industry's first validation solution for ultra Ethernet transport, purpose-built to support large-scale AI and high-performance computing workloads. - The recently acquired Spirent high-speed Ethernet product lines are performing well and contributed to Q4 growth. The Spirent integration was completed as of the end of Q4 fiscal 2026, with go-to-market and R&D rationalization finished ahead of schedule, and synergy savings are already being realized. - Service provider field instruments and service enablement products grew on a year-over-year basis, driven by stronger seasonal demand, with increased demand for fiber monitoring solutions (for fiber build-outs) and cable instruments (for GAA cable architecture migration). Wireless product demand remains anemic but stable, though management is optimistic about long-term demand. ### Balance Sheet & Capital Deployment - The company completed a follow-on offering of ~12.78 million shares at $45 per share, raising $575 million in gross proceeds. All proceeds were used to pay off the remaining balance of term loan B, with excess proceeds added to the end-of-quarter cash balance. - Total cash and short-term investments at the end of Q4 were $656.7 million, up from $508 million in Q3 fiscal 2026. Q4 operating cash flow was $66.7 million, up from $23.8 million year-over-year. - Approximately $170 million remains available under the current authorized share repurchase program.

Guidance

- The first quarter of fiscal 2027 will have 14 weeks (an extra week added per the company's 5-6 year fiscal cycle), which will increase variable costs, but this cost impact will be mostly offset by an $11 million tariff refund that will benefit Q1 cost of goods sold, resulting in a net 100 basis point benefit to consolidated operating margin. - Consolidated fiscal Q1 2027 revenue is expected to be in the range of $450 to $460 million, representing sequential growth from Q4 fiscal 2026, driven by continued strength across most end markets. - NSE revenue is expected to be between $360 and $368 million (sequential growth, a break from the historical seasonal pattern of Q1 weakness for NSE), driven by strong and growing demand from data center and A&D customers. NSE operating margin is expected to be 23.1% ± 50 basis points. - OSP revenue is expected to be between $90 and $92 million (sequential growth), driven by seasonally stronger demand for 3D sensing products. OSP operating margin is expected to be 43.2% ± 20 basis points. - Consolidated operating margin for Q1 fiscal 2027 is expected to be 27.1% ± 40 basis points. EPS is expected to be between $0.40 and $0.42, including a net benefit of $0.02 from the tariff refund offsetting the extra week of variable costs. - Management expects long-term operating margins to trend to the mid-to-high 20% range as higher-margin data center products grow as a share of total revenue and operating expense leverage improves, with R&D investment expected to remain stable and deliver increasing operating leverage.

Segment performance

### Q4 Fiscal 2026 Segment Performance - **Network and Service Enablement (NSE):** Total revenue of $353.9 million, representing 79.9% of total Q4 revenue. This is a 69.2% year-over-year increase, and came in above the guidance range of $340 to $348 million. Gross margin was 64.1%, up 190 basis points year-over-year, driven by higher volume and favorable product mix. Operating margin was 20%, up from 4.6% year-over-year and above the guidance range of 18.2% to 19.2%. The Spirent product line acquisition contributed $47.7 million in Q4 revenue. - **Optical Security and Product Innovation (OSP):** Total revenue of $89.2 million, representing 20.1% of total Q4 revenue. This is a 9.6% year-over-year increase, and came in at the high end of the guidance range of $87 to $89 million. Gross margin was 55.2%, up 50 basis points year-over-year, driven by higher volume and favorable product mix. Operating margin was 40%, up 40 basis points year-over-year and above the guidance range of 38% to 38.8%. ### Full Year Fiscal 2026 Segment Performance Total full-year company revenue was $1.518 billion, up 40% year-over-year, with the acquired Spirent product lines contributing $145 million to full-year revenue. OSP achieved year-over-year growth across all its product lines, driven by strength in 3D sensing and anti-counterfeiting offerings. Full-year company operating margin was 20.6%, up 630 basis points from fiscal 2025, driven by higher revenue and favorable product mix.

Risks & headwinds

The company notes that all forward-looking statements are subject to inherent risks and uncertainties that could cause actual results to differ materially from current expectations, and references investors to the risk factors included in its recent SEC filings. The only specific risk discussed during the call was potential semiconductor pricing headwinds that could increase cost of goods sold, though management stated that so far all cost increases have been passed to customers via price adjustments, mitigating this impact.

Analyst Q&A

• Q: What is the composition of NSE by end market, and where does 1.6T optical adoption stand for VIAVI's business? /

  A: Data center-related products make up ~50% of NSE revenue, A&D makes up ~17%, and the remaining 33% is service provider business. Currently 800G is still the largest volume driver for VIAVI, but 1.6T is ramping very quickly as it moves into production. Management expects 1.6T to reach parity with 800G in fiscal 2027, after which 1.6T will keep growing while 800G gradually pulls back. Multiple generations of optical technology (400G, 800G, 1.6T) will remain in demand in parallel for years, so no abrupt drop-off in older generation demand is expected.

• Q: Does the extra week in Q1 fiscal 2027 add meaningful revenue, and what is the long-term outlook for operating margins and R&D investment? /

  A: The extra week will have a de minimis impact on Q1 revenue, as most VIAVI revenue is shipped in the last four weeks of the quarter aligned to customer calendar quarter close, so the extra week will only add incremental variable costs. Gross margins for NSE products are in the 60%+ range (high 60s to 70s for lab products, low 60s for field instruments), so as higher-margin data center products grow as a share of revenue, overall gross margins will continue to trend up. R&D investment will not increase materially, and operating expenses are growing much slower than revenue, so the company is positioned to reach mid-to-high 20% operating margins in the near term. R&D also delivers better leverage now, as new technology developed for lab products can be easily adapted to field instruments with little additional investment.

• Q: How fast is the data center business growing, and why is NSE only guided for ~3% sequential growth in Q1 given the strong market? /

  A: Excluding the Spirent acquisition, the data center business has more than doubled year-over-year, with the fastest growth coming from production testing, a new market for VIAVI that is expanding rapidly. The 3% sequential NSE growth actually represents strong performance, as Q1 has historically been a down quarter for NSE. The strength in data center and A&D is already offsetting seasonal weakness in service provider wireless, so the sequential growth reflects solid underlying momentum. Growth will continue driven by broader adoption of higher-speed optical and increasing production testing volumes, with only modest growth from the mature service provider base.

• Q: What is the revenue timeline for OCS and CPO testing, and when will total NSE revenue hit $500 million per quarter? /

  A: There is already some small OCS revenue today, with most OCS revenue expected to ramp over the next several quarters as more companies introduce OCS deployments. CPO revenue is already starting to come in during the current quarter (Q1 fiscal 2027), and will accelerate in the December 2026 quarter. CPO requires more testing than traditional pluggable optics to manage yields, which is positive for VIAVI's testing business. Management now expects NSE quarterly revenue to hit $500 million sometime in calendar 2027, earlier than the original expectation of exiting fiscal 2028, due to stronger than expected current growth trajectory.