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.

Fiscal 26 ended on a strong note with VIAVI's financial performance in the fourth quarter exceeding expectations. The year-on-year performance was driven by strong growth in many of our end markets. NSC revenue in fiscal Q4 grew approximately 70% year-over-year, primarily driven by continued strong demand from the data center ecosystem and aerospace and defense customers. More specifically, The data center ecosystem, which includes high-performance semis, optical modules, NAMs, and hyperscalers, drove strong demand for lab and production and field instruments in support of data center build-out, maintenance, and monitoring. The recently acquired Spirant high-speed Ethernet product lines are performing well and have also contributed to our growth this quarter. We have recently extended our leadership in this segment with the launch of industry's first validation solution for ultra Ethernet transport, which is purpose-built to support large-scale AI and high-performance computing workloads. The data center ecosystem customer demand for our products remains very strong, and we expect continued robust growth in this segment for the next several quarters. Our aerospace and defense business also saw another quarter of strong year-on-year growth, driven by strong demand for our positioning, navigation, and timing products. We expect P&C to be a multi-year growth driver for our A&D business. The service providers business, which includes field instruments, wireless, and service enablement products, was up, driven by stronger seasonal demand. The highlights included increased demand for our fiber monitoring solutions in support of fiber build-outs and for our cable instruments in support of GAA cable architecture migration. Conversely, our wireless products continue to see the same anemic, although stable, customer demand. That said, we're made optimistic regarding the longer-term demand for our wireless products. Now turning to OSP. OSP saw strong year-on-year growth, driven by strength in 3D sensing and anti-counterfeiting and other products. Looking ahead to Q1, historically, Q1 has been a softer quarter for NSC. However, this time around, we expect NSC revenue to be up quarter-on-quarter, driven by strong and growing demand from data center and aerospace and defense customers. We also expect OSP to be up quarter-on-quarter, driven by seasonally stronger demand for 3D sensing products. Our diversification strategy into data center ecosystem and aerospace and defense and markets has been a key growth driver for us during fiscal 26. We expect this strategy to continue driving our growth for the next several quarters. In conclusion, I'd like to thank the VIAVI team for their strong innovation and execution and thank our customers and shareholders for their continued support. With that, I will now turn it back to operator for Q&A.

We will now begin the question and answer session. Please limit yourself to one question and one follow up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Ryan Kunst with Needham and Company. Ryan, your line is open. You may go ahead.

Great, appreciate that. Oleg, maybe you can help us out a little bit in understanding this terrific quarter you had. Obviously, data center and optical, a big part there. Can you give us an idea of the scale of optical and data center within your NSC domain and what kind of growth rate you're seeing there now for those products?

Well, I mean, pretty much when we talk about data center, it's all optical, right? It's both optical on the You know, R&D side, the lab side, it's optical for the production test. It's optical for fiber monitoring and the data cell build out. So, in that respect, it's, I mean, pretty much all optical products. There's very little copper or anything like, if anything at all.

Right.

And, I mean, the growth is, you know.

Sorry, Oleg. You were saying?

Okay, scale, I mean, in terms of revenue you're talking about, I mean.

Yeah, or percentage within the NSE, okay.

Well, I think the, I think, you know, as we were saying, I mean, our data center is now running at about 50% of the NSE revenue. A&D is, I would say, probably about 17%, and the rest is service provider business.

Great. And maybe as a follow-up, you know, we're on the verge of this, you know, 1.6T cycle here with some new Broadcom switches coming to market and obviously the optical layer will go that way in a hurry here. Where do you feel like we are in that cycle for 1.6T adoption as it relates to your business? Obviously, you sell to the lab in the early part and then the production and then field, but

you know how long does it take you how long do you think it will be until you see a peak in 1.6 demand for your products I mean if I look at today in terms of share volume 800 is still the biggest driver but 1.6 is ramping very quickly and that's mainly a lot of the production you know things moving to production and I would say probably I mean, in 27, it may get to probably parity between 800 and 1.6, and then 1.6 will continue to get bigger while 800 gig may pull back. But I think 800 gig will be a big driver for a long time because a lot of the data centers are 800 gig. Only the new stuff is going to be 1.6. So there's big install base that's being upgraded as well. So, I mean, it's still, you know, very much... But 1.6 is really what's kind of the primary performance driver today.

Got it. Sounds like it could be a couple of years, though, until you have a peak and maybe a shift.

Oh, I think we will. I think, look, we're still seeing a lot of 400. It's going to be multiple nodes in parallel running and the mix gradually shifting to 1.6, taking the lead, followed by 800. And, I mean, 400 gig is going to be around for quite a while as well. They just don't go away. Thanks so much.

Appreciate that.

Sure.

Your next question from the line of Ruben Roy with Stiefel. Ruben, your line is open. Please go ahead.

Yeah, hi. Thanks for taking my questions. I have a quick clarification question and then a follow-up. Ilan, I know you mentioned the 14-week quarter and the costs associated with that. Does the extra week have... Any meaningful revenue contribution? I'm just trying to put apples to apples together on the September guide, especially given that traditionally your service provider is seasonally weaker and just trying to understand the moving parts for the September quarter, given that you have the extra week.

Yeah, I would say revenue, if there is any, it's de minimis. It's very small. The revenue shipments are nonlinear in the quarter anyhow. And generally, revenue is linked to the customer's end of the quarter, whereas our optics is linked to a number of weeks in the quarter for us. So in that respect, I mean, whether you have one week more or less, it really doesn't make a difference. Most of our revenue is shipped in the last four weeks of the quarter. I mean, just kind of you're keeping up with the customer's end quarter revenue requirements. So in that respect, I don't think there is any revenue swing one way or the other. If you have like one week more, one week less, it's really more linked to the calendar quarter.

And Ruben, I can add also that, you know, without guiding anything, you know, in terms of the December quarter, If it was impacting or shifting, then it would impact the December quarter, but that's not the trajectory that we see for the December quarter.

Yeah.

Right, right. There would be an extra week of incremental shipping capacity into December. Okay. That's really helpful, guys. And then I guess for both of you, just thinking through the margin structure of the business now that the data center strategy is continuing to you know sort of ramp here so you're guiding 27.1% operating margin it seems like you're getting a better view on you know field production or I'm sorry Latin production versus field and I'm just wondering if you could talk a little bit about you know how you're thinking about longer-term operating margins of some of the new programs ramp 1.6T and otherwise Ilan as well the R&D fell in absolute dollars here and with other things that you guys are working on, whether it's CPO, OCS, AI RAN 3.2T, you name it. What's sort of the sustainable investment level? And I guess if you could tie that back to the operating margin view longer term, that'd be helpful. Thank you.

Sure. So, I mean, the thing I would say, clearly, there's some product lines are higher, some are lower, but generally NSC is north of 60%, right? And Anywhere from, I'd say, low 60s on some of the field instruments into the high 70s on some of the lab products. So as that becomes bigger and bigger share of revenue vis-a-vis, let's say, OSP, The gross margin will keep trending up. Now, there's clearly some headwinds on, let's say, the semiconductor pricing. It can obviously slow down some of the growth because your cost of goods. But so far, we've been just passing all those increases to our customers as part of the price adjustment. So in that respect, it's going to be really a waiting average Thank you very much. Our OPEX is growing much slower than our revenue. As a result, it all drops to the operating margin. So I would say if we continue on this trajectory, I think mid to high 20% operating margins in the not-too-distant future is probably the expectation.

Ruben, I will echo what Oleg just said in terms of the continued leverage that we expect in terms of the operating expenses. And specifically, you asked about the R&D. It's not going to be materially higher. I mean, there is always the marginal commissions, etc. But the leverage kind of will continue to play in favor of the operating margin. And again, it can continue throughout the fiscal year to, as Oleg mentioned, from the mid to the high 20s.

And you know what's really good is on R&D, we're actually getting a bigger operating leverage because the volumes in lab and production are just so much higher than what we've been used to in field instruments. So, you know, you spend this R&D, but you get much more margin dollars within a fairly short period of time. And there is really no up and down. And before, just as you start reaching the peak of the one technology cycle, the next one starts ramping up. And then all of the technology actually flows down to some field instruments, which needs relatively little investment to incorporate it all. So it's just basically better leverage of the R&D all around.

Yeah, that's what we like to hear. Thanks, guys, and congrats on the continued momentum.

Thank you. Sure, thanks.

Your next question comes from the line of Andrew Spinola from UBS. Andrew, your line is open. Please go ahead.

Thank you. I wanted to ask, Oleg, you typically describe the data center business growing about 50%. I was wondering if you'd just give us an update on how it grew in the fourth quarter and what's in your Q1 guide in terms of expectations for that business.

Well, I mean, it is growing very rapidly, and I think we're... cases in the early stages of penetration. I mean, today it's mostly high performance semis in the lab, but what's growing really, really fast is the production piece of it. And it's everything from making fiber optic modules to making fiber optic cables to, you know, now getting into the CPO testing, you know, where we're We're entering the traditional semiconductor test, but we play at the optical plane of the semiconductor test, and that's a completely new market. So I don't want to give out percentages, but let's put it this way. I think that business, even if I take out Spirant, it's more than doubled for us year over year.

Make sense. And just to follow up on that, I guess one of the reasons I was asking is it looks like your guide at NSC is something like 3% sequentially to the midpoint. So I was just, you know, I've been thinking about 2027 as the year where things or, you know, fiscal 27 is where things will accelerate as 1.6T as earlier questions mentioned accelerates. And then, you know, just looking at the supply chain and some of the numbers that are there for 27 in terms of, you know, compute growth, etc., Is there anything slowing in your business that you're going to grow 3% here sequentially or is this just the trend?

Well, I think you have to remember September quarter generally for us was a down quarter for NSE. The mere fact it's up means the lab and production piece in aerospace and defense is more than offsetting any kind of, you know, the... Service provider slash wireless customer, right? So you got to look at the, you know, you got to de-average the growth, right? In terms of the 1.6, you know, if it's growing, great. But remember, some of that is going to be substitution against 800. What's really going to be driving the growth is the broader and broader adoption. of the technology and the volumes of production scaling, right? So for example, for production, you're looking really at the capacity being in place or capacity being replaced because that's what's ultimately driving your dollars, right? So if you go for, let's say, from, if you tell me somebody's going to spend this year $600 billion and next year they're going to spend Thank you for joining us. I think on this particular product lines, we should do better than the purely CapEx growth. But then there is, of course, the base business service provider that's growing 1%, 2%. So you have to take the weighted average of the two to calculate the total growth.

Understood. Appreciate the caller. Thank you.

Your next question from the line of Michael Genovese with Rosenblatt Securities. Michael, your line is open. Please go ahead.

Great, thanks. Oleg, can we get an update on you from the timing of what's going on with OCS and then what's going on with CPO? So one OCS question, one CPO question.

Well, you know, there's been a lot of, you know, industry talk. It's like, oh, because the yield is going to be slower. That's all nonsense. The reason people are doing CPO and all these other things, it's all about performance and power. You know, to manage yields, you just do more tests. You do more of a known good dye, known good optical engine, known good substrate and all these kind of things, which means a lot of testing, which ultimately pretty good for us. But also at the same time, the process is being improved and things are getting better. And it's, from my perspective, it's progressing and I have POs to show for that.

I'm going to come back to CPO, but if we just look at OCS, are there already OCS revenues in the numbers, and what is the step-up of that expected to look like over the next couple of quarters?

There is some OCS, but I think the majority of OCS probably will be coming in the next several quarters. I mean, there is already some in sole capacity. And remember, we've been selling equipment to a big OCS vendor, hyperscaler, who makes their own stuff. But now it's becoming broader and going into the, you know, other companies introducing OCS. And many other companies are looking to do more optical switching in their core. So I see this demand as being very healthy.

And I think previously you said CPO revenues begin in the fall. Is that commentary still relatively on track?

We're already getting some this quarter and probably in December it will start accelerating.

And then finally for me, in the past, well, last quarter, right, you started to mention when in the future you could see a $500 million plus I would say if I kind of take my tone from before 500, I think I would say this quarter, I think the 500 will likely come a bit sooner than what we were originally thinking.

given the trajectory and the growth. We were talking about the end of next calendar year. Exiting fiscal 28, I think we may see 500 in the next calendar year.

Sorry, it was originally exiting 28 or exiting 27?

It was exiting fiscal 28. It was originally we talked fiscal 28. I think we're now, I'm looking like calendar 27, sometime in calendar 2027. So if you look at calendar, instead of being, let's say, exiting like a June quarter 29, okay, 28, June quarter 28, you're looking at sometime in during calendar 27. Yeah, perfect.

Okay, great. Thanks so much. Appreciate it. Yep. Yep.

Your final question comes from the line of Tim Savizio with Northland Capital Markets. Tim, your line is open. Please go ahead.

Hey, good afternoon. Congrats on the results. I had a question around Spiron. You saw, you know, pretty decent decline there from Q3, and yet we're able to grow You know, NSE pretty substantially despite that. I wonder if you can talk about what may have accelerated in the organic business to enable that in the quarter. And I assume what most of Spirant is also cloud-driven. If we can get an update on that. You made a comment kind of about growth excluding Spirant. And then what might you expect for Spirant here in your fiscal Q1 guide?

Well, I think, remember, we actually felt Spiron did pretty well. Remember, the first half of the calendar year is about 45% of their revenue and 55% of the revenue is in the second half. So in the March quarter, they had some carryover. But, I mean, June quarter came in pretty much as we expected. And a lot of it is enterprise-driven. I mean, there were, you know, I know, for example, September quarter, they're going to be up around 10% in revenue. And December is usually their strongest quarter. Probably now they're up 10%. But sparing aside, really, the biggest growth was very much lab and production, followed by aerospace and defense. And lab and production, I mean, it's just ticking up. double-digit revenue growth in the absolute dollars quarter over quarter.

Okay, great, thanks. And back to co-packaged optics, you talk about the testing intensity, but do you have any metrics for us as regards kind of how CPO looks relative to pluggables? from a test perspective and what that might mean for VIAVI.

Well, I mean, listen, pluggables is clearly a simpler architecture. And why would you want to do CPO? You want to do CPO, I mean, I would say maybe without really exaggerating here, but if you have a co-packaged optics, Your 3 nanometer silicon performs as a 2 nanometer silicon. So you are getting almost a whole node of advantage by co-packaging the optics. So you can take it either in performance or you can take it in the cost. So you can use a 3 nanometer silicon and get a 2 nanometer performance with co-packaged optics or have a 2 nanometer silicon and have a pluggable. Now, you combine these things together, you get lower power and higher performance, right? I mean, that's really what everybody, why would anybody go to the length of complexity and yield and all these difficulties to implement this new technology? It's purely because it cuts down on power and or you can get yourself more performance out of the silicon. So that's It's really the optimization game that everybody's playing. Now, it comes at a much higher cost, but relatively speaking, you know, if you get the same performance with the older silicon node, then it's worth it.

Okay, and finally on the, back to Spiron, I guess, a little bit, but I wonder if we can get an update on where you are Synergy-wise with that transaction and how you expect that to sort of flow through the income statement or OPEX over the next few quarters here?

It's already all done and implemented and accounted for. We are done with the integration as of June quarter. and we did it not just Spirant, we did it general, both VIAVI and Spirant. We rationalized go-to-market and the R&D during the first two calendar quarters and exiting June, we are all set.

Yeah, I mean, the savings from the restructuring are being realized and also to your prior comment, Tim, you know, actually Spirant does grow kind of a single digit year over year. As Oleg mentioned earlier, you know, the core of Levin production is is the main growth there. And seasonality for Spirant remains the same. In the first half of the calendar year, it's usually weaker, and the second half of the calendar year is usually much stronger. So June is traditionally a little bit weaker, but as Oleg mentioned, we see at least 10% quarter-of-a-quarter growth from June to September. with another probably good quarter we expect in December. So I don't think that trajectory for transparent overall change. I think it performs really well with good margins, and we are very, very pleased with this.

And if anything, we are ahead of schedule on the roadmap integration. I mean, as I mentioned, we just released the first of the ultra-Ethernet transport projects, There are no further questions at this time. I will now turn the call back to Vibhuti Nayar for closing remarks.

Thank you Kendra. This concludes our earnings call for today. Thank you for joining everyone. Have a good evening.