Viavi Solutions Inc.

Good afternoon. My name is Kendra and I will be your conference operator today. At this time, I would like to welcome everyone to VIAVI Solutions fiscal fourth quarter and fiscal 2026 earnings call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand. At this time, I would like to turn the conference over to Vibhuti Nayar, Head of Investor Relations. Please go ahead.

Thank you, Kendra. Good afternoon, everyone, and welcome to VRV Solutions' fourth quarter and fiscal 2026 earnings call. My name is Vibhuti Nayar, Head of Investor Relations for VRV 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 end markets and acquired business are valid only as of today. BIAVI 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. We reconcile these non-GAAP results to our preliminary GAAP financials and discuss their usefulness and limitations in today's earnings release. The release, as well as our supplemental earnings slides, which include historical financial tables are available on VIAVI's website at www.investor.viavisolutions.com. We are recording today's call, and we will make the recording available on our website by 4.30 p.m. Pacific time this evening. Now, I would like to turn the call over to Ilan. Ilan?

Thank you, Vibhuti. Good afternoon, everyone. Now, I would like to review the results of the fourth quarter of fiscal year 2026. Net revenue for the quarter was $443.1 million, which is above the high end of our guidance range of $427 to $437 million. Revenue was up 8.9% sequentially and on a year-over-year basis was up 52.5%. Operating margin for the fourth fiscal quarter was 24%. above the high end of our guidance range of 22.2% to 23.2%. Operating margin increased 280 basis points from the prior quarter, and on a year-over-year basis was up 960 basis points. During the quarter, we received $1.5 million tariffs refund, which slightly benefited operating margins. Also during the quarter, we completed a follow-on offering and issued approximately 12.78 million shares at a share price of $45 for a total gross amount of $575 million. The proceeds were used to pay off the remaining balance of the term loan B, and the excess amount is included in the cash balance at the end of the quarter. EPS at $0.34 was above the high end of our guidance range of $0.29 and $0.31 and was up $0.07 sequentially. On a year-over-year basis, EPS was up $0.21. The lower interest expenses in the quarter, as well as the tariffs refund in the quarter, contributed about $0.02 to the EPS. Moving on to our Q4 results by business segment. NSE revenue for the fourth fiscal quarter came in at $353.9 million, which is above the high end of our guidance range of $340 to $348 million. Revenue from Spire and product lines was $47.7 million. On a year-over-year basis, NSE revenue was up 69.2% as a result of continued strong demand for our lab and production and field products driven by the data center ecosystem, as well as the acquisition of Spirant product lines. We also saw strong demand for our aerospace and defense products. NSE gross margin for the quarter was 64.1%, which is 190 basis points higher on a year-over-year basis and was mainly driven by higher volume and favorable product mix. NSC's operating margin for the quarter was 20% versus 4.6% during the same quarter last year. NSC operating margin was above our guidance range of 18.2% to 19.2%, mainly as a result of higher fall-through. OSP revenue for the fourth fiscal quarter came in at $89.2 million, which is at the high end of our guidance range of $87 to $89 million. On a year-over-year basis, OSP revenue was up 9.6%, driven by strength in 3D sensing and anti-counterfeiting and other products. OSP gross margin was 55.2%, up 50 basis points on a year-over-year basis, primarily driven by higher volume and favorable product mix. OSP's operating margin was 40%, which is above our guidance range of 38% to 38.8% as a result of higher fall through. OSP operating margin increased 40 basis points on a year-over-year basis. Moving on to the full year results of fiscal year 2026. For the full fiscal year, revenue was $1,518,000,000, which is up 40% on a year-over-year basis. Spirant product lines that were acquired in the second quarter of fiscal 2026 contributed $145,000,000 to the full fiscal year revenue. The revenue growth was mainly driven by Levin production and field products, primarily from the data center ecosystem as well as demand for our aerospace and defense products, and also included the contribution from the acquisitions of Spiron product lines and Inertia Labs. For OSP, we saw year-over-year growth across all of its product lines. Full-year operating margin for VIAVI was 20.6%, up 630 basis points from fiscal year 2025, and was a result of higher fall-through driven by higher revenue and favorable product mix. Full year EPS was $1 versus 47 cents in the prior year. Moving on to the balance sheet and cash flow. Total cash and short-term investments at the end of Q4 were $656.7 million compared to $508 million in the third fiscal quarter of 2026. Cash flow from operating activities for the quarter was $66.7 million versus $23.8 million in the same period last year and was driven by higher net income and timing of working capital. CapEx for the quarter was $11.1 million versus $5.5 million in the same period last year CapEx for the full fiscal year was $31.1 million versus $27.8 million in the prior year. During the fourth quarter, we did not purchase any shares of our stock as we prioritized debt management. During the full fiscal year of 2026, we purchased approximately 2.7 million shares of our stock for about $30 million. This repurchase was in conjunction with the exchange of our convertible notes that we completed during the first fiscal quarter of 2026. We have almost $170 million remaining under our current authorized share repurchase program. The fully diluted share count for the quarter was 261 million shares, up from 227 million shares in the prior year, and versus 256.1 million shares in our guidance for the fourth fiscal quarter. Moving on to our guidance for the first quarter of fiscal year 2027. PIAVI typically operates on a 13-week fiscal quarter. This requires us to add one week to the first fiscal quarter every five or six years. We are adding one week to the first quarter of fiscal year 2027, hence it will include some elevated variable costs. In addition, we received approximately $11 million tariffs refund in July of 2026 that will primarily benefit our Q1 cost of goods sold. We expect the first fiscal quarter revenue for VIAVI to be up sequentially, driven by continued strength in many of our end markets. For NSE, we expect first fiscal quarter revenue to be up relative to the prior quarter, which reflects a seasonally strong quarter across many of our end markets. For OSP, we also expect the quarter-over-quarter revenue to be higher, driven by stronger demand for 3D sensing products. For the first fiscal quarter of 2027, we expect VIAVI revenue in the range of $450 and $460 million. We expect NSE revenue between $360 and $368 million. OSP revenue is expected to be in the range of $90 and $92 million. Operating margin for VIAVI is expected to be 27.1%, plus or minus 40 basis points. The operating margin includes a net benefit of about 100 basis points from the tariffs refund, which will be offset by the additional one week of variable costs, and it will primarily benefit NSC's operating margins. NSC operating margin is expected to be 23.1%, plus or minus 50 basis points. OSB operating margin is expected to be 43.2% plus or minus 20 basis points. And EPS is expected to be between 40 cents and 42 cents. This includes a net benefit of about two cents from tariff refunds and from the additional one week of variable expenses that I mentioned earlier. Thank you, Ilan.