Viavi Solutions Inc.VIAVNASDAQ
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Operator: Ladies and gentlemen, good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Viavi Solutions' Fiscal Second Quarter 2026 Earnings Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 a second time. Thank you. And at this time, I would like to turn the conference over to Vibhuti Nayar, Head of Investor Relations. Please go ahead.
Vibhuti Nayar: Thank you, Abby. Good afternoon, everyone, and welcome to Viavi Solutions fiscal second quarter 2026 earnings call. My name is Vibhuti Nayar, Head of Investor Relations for Viavi Solutions. With me on today's call is Oleg Khaykin, our President and CEO, and Ilan Daskal, our CFO. Please note this call will include forward-looking statements about the company's financial performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations and estimations. We encourage you to review our most recent annual report and SEC filings, particularly the risk factors described in those filings. The forward-looking statements, including the guidance that we provide during this call, and our expectations regarding the acquired business are valid only as of today. Viavi undertakes no obligation to update these statements. Please also note that unless we state otherwise, all results discussed on this call except revenue, are non-GAAP. Thank you, Vibhuti. Good afternoon, everyone.
Ilan Daskal: Now I would like to review the results of the 2026. Net revenue for the quarter was $369.3 million, which is at the high end of our guidance range of $360 million and $370 million. Revenue was up 23.5% sequentially and on a year-over-year basis, was up 36.4%. Operating margin for the second fiscal quarter was 19.3%, above the high end of our guidance range of 17.3% to 18.5%. Operating margin increased 360 basis points from the prior quarter and on a year-over-year basis, was up 440 basis points. EPS at $0.22 was also above the high end of our guidance range of $0.18 to $0.20 and was up $0.07 sequentially. On a year-over-year basis, EPS was up $0.09. Moving on to our Q2 results by business segment. NSE revenue for the second fiscal quarter came in at $291.5 million, which is at the high end of our guidance range of $283 million to $293 million. Revenue from Spirent was $43 million, which was slightly below our expectation of $45 million to $55 million due to timing of certain opportunities. On a year-over-year basis, NSE revenue was up 45.8% as a result of the acquisitions of Inertia Labs and Spirent product lines. We also saw strong demand for lead and production and field products driven by the data center ecosystem. NSE gross margin for the quarter was 64.7%, which is 10 basis points lower on a year-over-year basis. NSE's operating margin for the quarter was 15.6%, compared to 8.7% during the same quarter last year. NSE operating margin was above the high end of our guidance range of 12.9% to 14.3%, primarily driven by higher fall through. OSP revenue for the second fiscal quarter came in at $77.8 million, slightly above our guidance range of about $77 million and was up 9.7% on a year-over-year basis. The increase in revenue for the quarter was primarily a result of strength in anti-counterfeiting and other products. OSP gross margin was 50.8%, up 20 basis points from the same period last year. OSP's operating margin was 33.4%, an increase of 100 basis points on a year-over-year basis. OSB operating margin came in slightly below our guidance range of 33.5% to 34.5%, due to slightly higher variable costs. Moving on to the balance sheet and cash flow. Total cash and short-term investments at the end of Q2 were $772.1 million compared to $549.1 million in 2026. Cash flow from operating activities for the quarter was $42.5 million versus $44.7 million in the same period last year, mainly due to timing of working capital. CapEx for the quarter was $5.6 million versus $8.2 million in the same period last year. During the quarter, we successfully exchanged principal amount of about $100 million 1.625% convertible notes due in March 2026, for 7.9 million shares of Viavi's common shares at the price per share of $17.88. We have remaining principal amount of about $50 million on these notes, which will be paid in cash. The associated premium on these convertible notes will be settled in shares. Additionally, we prepaid in January 2026 $100 million of the $600 million term loan B. This is in line with our continued financial discipline. During the quarter, we did not purchase any shares of our stock as we prioritized our capital allocation towards debt management. The fully diluted share count for the quarter was 233.4 million shares, up from 224.8 million shares in the prior year and versus 228.7 million shares in our guidance for the second fiscal quarter. Last week, we approved a restructuring and workforce reduction plan to improve operational efficiencies and better align workforce and resources with our current business needs and strategic priorities. We expect approximately 5% of our global workforce to be impacted and estimate to incur approximately $32 million restructuring charges in connection with this plan. Upon completion of this initiative, we expect annual savings of about $30 million, which will mainly benefit our operating expenses. We intend to reinvest a portion of these savings with higher growth areas of our business. We expect to recognize the majority of these charges by June 2026, with a plan to be substantially completed by December 2026. The savings of about $30 million include previously communicated $16 million of synergies from the acquisition of Spirent's product lines. Moving on to our guidance for 2026. We expect the third fiscal quarter revenue for Viavi to be up sequentially as a result of continued strength in many of our end markets. For NSE, we expect quarter-over-quarter revenue to be higher as a result of continued strong demand for lead and production and field products, which is driven by the data center ecosystem as well as aerospace and defense customers. Our guidance for the third quarter also includes full thirteen weeks of Spirent product lines, versus ten weeks in the prior quarter. For OSB, we expect quarter-over-quarter revenue to be higher in line with seasonality of higher demand for anti-counterfeiting and other products. For 2026, we expect Viavi revenue in the range of $386 million and $400 million. We expect total NSE revenue between $304 million and $316 million. OSP revenue is expected to be in the range of $82 million and $84 million. Operating margin for Viavi is expected to be 19.7% plus or minus 50 basis points. NSE operating margin is expected to be 15.5% plus or minus 50 basis points. OSB operating margin is expected to be We expect other income and expense to reflect a net expense of approximately $12.5 million and the share count is expected to be around 245 million shares. During the third quarter, we expect to pay earn-out liability for Inertia Labs of about $75 million as a result of their strong performance in calendar 2025. With that, I will turn the call over to Oleg. Oleg?
Oleg Khaykin: Thank you, Ilan. The 2026 came in at the high end of our guidance driven by strong growth in many of our end markets. The results were significantly up both year on year and quarter on quarter. NSE revenue in Q2 grew approximately 46% year over year, primarily driven by strong demand from the data center ecosystem and aerospace and defense customers. The data center ecosystem, which includes high-performance semis, optical modules, and NAMS, drove strong demand for lead and production products in support of AI data center build-out. In addition, we are now also seeing emerging strong demand for our fiber field instruments by hyperscalers and service providers to build, operate, and optimize the next generation of fiber networks to interconnect the data centers. The Q2 quarter-on-quarter and year-on-year growth was also helped by the acquisition of Spirent's HSE product line, which came in slightly below our expectations due to the timing of several opportunities. Given strong and growing customer demand, we expect the data center ecosystem revenue momentum to continue through the calendar 2026. Our aerospace and defense business also saw another strong quarter of growth driven by continued high demand for our positioning, navigation, and timing products. We expect this trend to continue through the rest of the calendar year. The service providers business was generally stable during the quarter. We are seeing some opportunistic demand from the cable operators as they transition to new DAA architecture and access 4.0 standard. The demand for wireless infrastructure test continues to be weak but stable. We expect NSE revenue to be counter-cyclically up Looking ahead to Q3, quarter on quarter driven by continued strong and growing demand from data center and aerospace and defense customers. Now turning to OSP. OSP saw strong year-on-year growth driven mostly by recovery and anti-counterfeiting and other products. 3D sensing demand was in line with seasonal expectations. We expect From innovation. And execution and thank our customers and shareholders for their continued support. With that, I will turn it back over to the operator for Q&A.
Operator: Thank you. And we'll now begin the question and answer session. If you have dialed in and would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the queue. If you're called upon to ask your question and are listening
Ruben Roy: Thinking about it in terms of data center, I would say, some events in telco. If you could give us an update on what the mix looks like? And then as we think about the guidance, if you could kind of dial in a little bit into the moving parts. On the growth for the March, that would be great. Thank you.
Oleg Khaykin: Sure. So, you know, I think, you know, last quarter, we kinda talked 45% service provider, 40% data center, 15% aerospace and defense, I think with the significant growth in data center, right, and the other I think we are now I'd say, closer the other way around 40% service provider, 45% data center, around 15% aerospace and defense. To be more precise, I think we're gonna see you know, service provider to kinda trend a little bit below 40% The aerospace and defense trend up about 15%. And the data center turned up about 45%. And it's not because the service provider is going down. Actually, steady and showing slight recovery. It's just fundamentally the percentage allocation and the growth across different segments is vastly different. So that's kind of the mix. So I think now we are I would say, we are, you know, narrow it we're now only about 40% a little bit under 40% exposed to service provider. Additional telecom service provider, And I'd say 60% is driven by the data center ecosystem and the aerospace and defense. In terms of the guidance on the Q3 that you've seen pretty strong numbers, it's continued, very strong growth in the data center ecosystem that's again, semis, modules, systems, and the NAMS. But also it includes a growing component of our traditional field instruments And it's actually a meaningful pop in that we're you know, we're now seeing the what I call next gen service providers to who are doing interconnect of data centers. And the data center operators themselves investing into our fiber monitoring and fiber measurement systems to monitor and optimize performance of their data centers. And I mean, you know, if I looked at a year ago, you might have been single digits data center for our traditional field instruments. I think we are now looking at about a third of our revenue in the field instruments coming out from data center. So it's been a truly amazing, you know, turnaround and think the recognition is growing that the fiber networks are generally crap. And they need to be significantly improved And we are seeing a lot of pressure from the hyperscalers on service providers to improve the performance. But they're also going further and they're putting a lot of what we call, monitoring and policing on their networks to ensure that they pay for what they they get what they pay for. So it's actually, been another very positive development for us. On the fiber instruments. That's on the NSE. Thanks a lot.
Ruben Roy: Yeah. Yeah. I I guess yeah. I I had a follow-up on that, you know, obviously, with, you know, Corning and Meta, you know, sort of, expanding their partnership and, you know, $6 billion commitment on new fiber. I would imagine that, that's something that would play into your longer-term opportunity set for the field instruments. But I guess, if I think about that and I you made a statement, Alec, on your prepared remarks regarding your expectations for DC growth to continue through 'twenty six. I mean, are things like that and like the scale across opportunities that you On demand relative to sort of what the order book might have looked like just mentioned giving you extended visibility? you know, twelve months ago? I mean, are you are you getting a a longer look on on backlog and bookings at this point? Engagements.
Oleg Khaykin: And, you know and so when it comes to data center, I would say, for us, traditionally, we only have, like, maybe one, one and a half quarter visibility. We we we have a pretty good view, at least on the base demand from this type of activities up to three quarters ahead. Got it. If I could sneak one in for Ilan, just on the
Ruben Roy: restructuring, Ilan. Is that impacting any specific product area or or group? Or, you know, is this just sort of your annual, you know, look at the business and, know, there's a lot going on in D. C. And aerospace and defense that maybe you want to focus more on. It it you know, maybe you could if you could help us out on how to think about that restructuring, that'd be great. That's it. Thank you.
Ilan Daskal: Yeah. So, Ruben, thanks for the question. Generally, it's it's across multiple function just to make sure that we operate, you know, under a much higher efficiency. So it's not targeting, you know, specific areas. And and I wanted also to highlight that some of these savings, do plan to reinvest in in those higher growth areas that Oleg just discussed. So some of it could be a trade off.
Oleg Khaykin: Yeah. I think, you know, clearly, if we look at, where most of the cost is coming out, it's coming out of the slower or stagnant, product segments. So it's really point here is to free up resources and take some of it as the financial leverage, but others as the ability to invest and grow the could move what be wood behind the arrow on things like data center ecosystem, aerospace and defense, things like that.
Ilan Daskal: Right. And and in addition to some support function optimization.
Oleg Khaykin: Mhmm.
Operator: And our next question comes from the line of Ryan Koontz with Needham. Your line is open.
Ryan Koontz: Great. A lot of activity in and aerospace of late. Oleg, I hope you could double click on you know, what you see as exciting, you know, defense programs, aerospace programs that you're involved in with your product lines and how you think about that business going forward?
Oleg Khaykin: Sure. I think the the the biggest driver is what we call resilient PNT. Position navigation timing. In in the absence, it's alternative GNSS So everything that allows you to operate in the absence of GPS signal And as you can imagine, it's drones, drones, and more drones. It's very much targeting all autonomous systems like drones above ground, you know, robotic vehicles, you know, surveillance, you know, heavy industrial machinery, undersea, and seaborne drones. So it's pretty much anything that's above ground, underground, you know, underwater, in the air, robotic systems. So that's mainly where a lot of these product products are going to. On the other hand is also our P and C timing. Is, you know, we are seeing emerging opportunities in data centers. Because you we're seeing more and more as you increase the speeds in the data centers, you need accurate timing for synchronization. And if you think about traditional distributed clock model, from one end goes across all the racks, It may be fine when you're a 100 gig data center when you're going to one point six three point two. The latency becomes unbearable. So we are looking we're seeing demand for timing Great. Thank you for that.
Ryan Koontz: And in the optical domain, you talked a lot about strength in data center, driving out here. You know, any evidence you can share with us around you know, the cadence of, you know, optical innovation getting to to 1.6 t broadly within the data center, between the data centers, where are you seeing the most demand for your products, and what what are maybe some new areas of growth, some green shoots that you're excited about in the in the optical data center domain?
Oleg Khaykin: Well, I'd say every segment, we see growing. I mean, clearly, the semiconductors or memory vendors that they are driven Oh, you're, you know, dozen so companies in Asia making pluggables and, of course, the big leaders in North America for cross points, which is optical switches. And various modules. And then all the NAMS who are providing equipment into these data centers. So I would say there's I would say there's two groups One is the lab. Heavily driven. So let's say one everything to do with 1.6 and PCI Express six point o. And in production, heavily with all of our things making, you know, anything from testing passive and active components to the final product but also including testing fiber as you we're now seeing emergence of hollow core fiber and multiport fiber And this is a whole new thing, and that's why action. But I would say starting last quarter, we are seeing what we normally call field is becoming a I mean, the the the hyperscalers themselves. So it's the actual data center is becoming a huge user of field instrumentation mean, for example, when you would go to the traditional fiber service providers, they never really care about putting in monitoring of the fiber. Well, if you go to one of these AI data centers, you see at the edge they are they want to monitor every incoming you know, wavelength. Right? And would they light up or dark fiber? So they know as they turn on or up the bandwidth, they know exactly characterization and bandwidth and latency they're gonna get out of each fiber strand. And, of course, there is a SLA agreement, service level agreements there. Assigned with the service providers. So they are monitoring that these things are coming in within a very narrow spec. And they maintain the narrow spec of performance in every fiber. And that's a big departure from the old fashioned well, you know, it works. It's good enough. If it's a little bit, you know, lossy or has a higher latency, so what? Well, that's not something that these guys accept. And the beauty of it is they're deploying these things directly. It's using the same fiber tools that which were developed for traditional service providers, they are really finding converts among the hyperscalers. And that usually means when they deployed, there's a leg maybe by a couple quarters before the service providers recognize, oh, wait a second. I'm not being measured, so I better measure myself. Because before I get nailed. For my performance problem. So we see it as a very positive trend to ensure a very high resilient fiber network. Interconnecting the data centers.
Ryan Koontz: Okay. That's great. Thank you.
Operator: And our next question comes from the line of Andrew Spinola with UBS. Your line is open.
Andrew Spinola: Thanks. Oleg, can you expand on that a little and give
Oleg Khaykin: It's That's why we don't really break these things down within that category. We just call it generally data center ecosystem. Which includes semis, modules, systems, and field instruments that are used in data centers themselves.
Andrew Spinola: Makes sense. I'm I'm thinking about how to model that business into, like, fiscal twenty seven and beyond. And I wanted to ask you this might be wrong based on what you just said, but I I thought we think about lab as being maybe more consistent as the customers continue to invest in the next generation fiber monitoring growing as the number of data centers grow. But maybe production being more cyclical and having some bigger swings up and down as as various generations get introduced, Trying to think about how I should think about production assuming that's a bigger growth driver right now, how to think about how that evolves over a cycle?
Oleg Khaykin: So it's a good question. So lab instruments are driven by number of customers and number of projects. Right? And ultimately, it relates best way to look at is the r and d CapEx at semis system vendors, and module vendors. Right? The production is heavily driven by volume that is demanded. Right? And you could see the volume of much pluggables and the racks and all this. I mean, that is a but, you know, I look at the where are you gonna see higher percentage of growth? It's clearly clearly gonna be the production. Because it's, you know, as you increase number of units you build in every generation and and, let's say, every node, And that that's you need to basically for every tranche of volume, you need to increase capacity. So it's heavily linked to the I would say, production run rate. Okay? And the I would say, field instruments is that say linked to the number of data centers being built. Got it.
Ilan Daskal: It. Okay. That that's very helpful. We think about the longevity of this cycle is probably Yeah. And that from what I see in terms of the,
Oleg Khaykin: you know, pretty much every ounce of capacity that was kinda abandoned by service providers when they cut back about three years ago in investment. It's been totally repurposed into the data center. And it's a fraction of what they need and what they if you take all their announcements, how much they're gonna spend, how much they're gonna invest, what you have in terms of production capacity you're gonna see significant growth over the next two years. Right? And, of course, keep up with it, you need to keep introducing We now see the new each technology notes turning over. Every two years. So no longer, let's say, between between a 100 gig and a 400 gig you have six years. You really now have two years between
Ilan Daskal: Right. So your question the dynamic of the higher operating margin?
Andrew Spinola: Oh, I I I guess the the guide for the NSC op margin at 15 and past. That's right. Right. Flat. Revenue's up 20,000,000. I was just curious if there are some Right. Mix or anything kind of
Ilan Daskal: So there is some, obviously, mix
Oleg Khaykin: Joe with
Operator: Northland Capital Markets. Your line is open.
Tim Savageaux: Congrats on the results and especially the guide. And, I wanted to kinda focus in on that a bit. I guess, I'll let you describe it as countercyclical. You usually see declines, but I guess I'd like to try and parse out you got thirteen weeks of spiron you know, at your Q1 run rate or sorry, at your December quarter, I'll just say, rate that gets you to about, I don't know, 55,000,000, sort of the high end of where you were where you guided last quarter. Is that a reasonable assumption to try and get to Spirent contribution versus organic growth
Ilan Daskal: So so, Tim, I can chime in here and and
Tim Savageaux: In fiscal Q3?
Ilan Daskal: and, you know, in terms of the thinking. So first, for last quarter, in the very first few weeks of the quarter, they actually did not have much revenue.
Tim Savageaux: The second aspect to call out
Ilan Daskal: and I think, you know, we
Oleg Khaykin: last quarter, there were some government orders that got pushed out into this quarter. Between the shutdown and, of course, you know, this one time grant to the government employees of Christmas holidays. I mean, there basically was fewer days between December and the December to get the, orders placed. So some of the volume actually pushed out into the March quarter, As a result, we expect March quarter relatively to be stronger for them. Than it normally would have been, and the December quarter was a bit weaker than it normally would have been.
Tim Savageaux: Right. Yeah. That's kinda what I'm trying to get to is, you know, to the continuation of this organic growth. And sounds like I'm a little high with my first pass and you know, I think it was a $200,000,000 run rate you were looking for. And if it's stronger in the first and the second, I'd I'd imagine
Ilan Daskal: it's it's below that $50,000,000 level
Tim Savageaux: And if that's the case, you know, you're looking at In a normally seasonally down quarter and Mid single digit sequential growth organically for Viavi in Q1. coming off 15% sequential growth in the December So that's pretty extraordinary.
Ilan Daskal: What's what's driving all that? And am am I looking at that right, number one? And what's wrong? No. No. You're you're looking exactly right. So remember,
Oleg Khaykin: the old I say old Viavi before data center, aerospace, and defense, we were heavily influenced by service provider. Dynamics. And the days one, service providers were over 80% of NSC Remember, first quarter is they don't release their budgets for the year until the February. So as a result, you would have a very weak NFC quarter. By the way, service provider is no different again than it was normally. There's always it is seasonally weaker. But the strength in the data center, aerospace defense, and also, the sparring business is not only offsetting, it's actually more than offsetting. That's why the net net, the quarter is gonna be up for NSE.
Tim Savageaux: Okay. Makes sense. And one final piece of that question, is you know, the again, going back historically, you typically see a nice seasonal uptick at least on the service provider side, In your fiscal Q4. Should we assume
Oleg Khaykin: that's a genuine directionally true for the business
Tim Savageaux: Are there any changes as your mix and exposure becomes more aerospace, you know, defense and and AI data center driven,
Oleg Khaykin: Awesome.
Tim Savageaux: Thanks again. Congrats. Thank you. Sure. Thanks.
Operator: And that concludes our question and answer session. I will now turn the conference back over to Vibhuti Nayar for closing remarks.
Vibhuti Nayar: Thank you,
Operator: thank you, Abby. This concludes our earnings call for today. Thank you for joining, and have a good afternoon. Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.