Viavi Solutions Inc. (VIAV) Earnings Call Transcript & Summary

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. [Operator Instructions] 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 Viavi Solutions Fourth Quarter and Fiscal 2026 Earnings Call. My name is Vibhuti Nayar, Head of Investor Relations of 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 end markets and 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. 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 million 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% and 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 margin. 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 million to $348 million. Revenue from Spirent 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 steel products, driven by the data center ecosystem as well as the acquisition of Spirent 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. NSE's operating margin for the quarter was 20% versus 4.6% during the same quarter last year. NSE 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 million to $89 million. On a year-over-year basis, OSP revenue was up 9.6%, driven by strength in 3D sensing and anticounterfeiting 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 billion, which is up 40% on a year-over-year basis. Spirent product lines that were acquired in the second quarter of fiscal 2026 contributed $145 million to the full fiscal year revenue. The revenue growth was mainly driven by lab and 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 Spirent Product Lines and Inertial 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 EPS -- full year EPS was $1 versus $0.47 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 prioritize 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. Viavi typically operates on a 13-week fiscal quarter. This requires us to add 1 week to the first fiscal quarter every 5 or 6 years. We are adding 1 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 OSB, 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 million and $460 million. We expect NSE revenue between $360 million and $368 million. OSP revenue is expected to be in the range of $90 million 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 1 week of variable costs, and it will primarily benefit NSE's operating margins. NSE operating margin is expected to be 23.1%, plus or minus 50 basis points. OSP operating margin is expected to be 43.2%, plus or minus 20 basis points. And EPS is expected to be between $0.40 and $0.42. This includes a net benefit of about $0.02 from tariff refunds and from the additional 1 week of variable expenses that I mentioned earlier. Our tax expenses for the first quarter are expected to be around $12 million, plus or minus $500,000 as a result of jurisdictional mix. We expect other income and expenses to reflect a net expense of approximately $2.5 million and the share count is expected to be around 268 million shares. With that, I will turn the call over to Oleg. Oleg?

Thank you, Ilan. Fiscal 2026 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. NSE 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 Spirent 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 multiyear 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 DAA cable architecture migration. Conversely, our wireless products continue to see anemic -- to the same anemic although stable customer demand. That said, we made optimistic regarding the longer-term demand for our wireless product. Now turning to OSP. OSP saw strong year-on-year growth, driven by strength in 3D sensing and anticounterfeiting and other products. Looking ahead to Q1. Historically, Q1 has been a softer quarter for NSE. However, this time around, we expect NSE 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 end 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.

[Operator Instructions] Your first question comes from the line of Ryan Koontz with Needham & Company.

Great. Appreciate that. Look, maybe you can help out a little bit and understand this a 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 NFC domain? 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 R&D side, the website, 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. And I mean the growth is...

Scale of that -- sorry, you're saying.

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

Rough percentage within the NSE bucket?

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

Great. And maybe as a follow-up, we're on the verge of this 1.6T cycle here with some new Broadcom switches coming to market and obviously, kind of the optical layer 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 into the lab in the early part and then the production and then field. But how long does it take you -- or how long do you think it will be until you see a peak in 1.6T 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, things moving to production. And I would say probably, I mean, in '27, it may get to probably parity between 800 million and 1.6 and then 1.6 will continue to get bigger while 800 gig may pullback. 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 stop is going to be 1.6. So there's big installed base that's being upgraded as well. So I mean, it's still 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...

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

Your next question is from the line of Ruben Roy with Stifel.

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. I'm just trying to understand the moving parts for the September quarter given that you have the extra week.

Yes. 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 customers end of the quarter. whereas our OpEx is linked to a number of weeks in the quarter for us. So in that respect, I mean, whether you have 1 week more or less, it really doesn't make a difference. Most of our revenue is shipped in the last weeks of the quarter? I mean just kind of you're keeping up with the customers' end quarter revenue requirements. So in that respect, I don't think there is any revenue swing 1 way or the other. With the like 1 week more, 1 week less, it's really more linked to the calendar quarter.

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

Yes.

Right, right. There will 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 sort of ramp here. So you're guiding 27.1% and operating margin, it seems like you're getting a better view on field production -- or sorry, lab and production versus field. And I'm just wondering if you could talk a little bit about how you're thinking about longer-term operating margins as some of the new programs ramp 1.6T and otherwise on as well, the R&D fell in absolute dollars here and with other things that you guys are working on, whether it's CTO, 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 would be helpful.

Sure. So I mean, the thing I would say, clearly, all these -- there's some product lines are higher, some are lower. But generally, NSE is north of 60%, right? An annual from, I'd say, low 60s on some of the field instruments into the high 70s on some of the lab products, right? So as that becomes bigger and bigger share of revenue vis-a-vis, let's say, 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 weighting average between -- on a gross margin between NSE and OSP as since is growing much faster the gross margin will continue to creep up. Now when it comes to OpEx, our OpEx is scaling very well. I mean clearly, we are putting some money into reinvestment, but relatively speaking, I mean, 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 a certain trajectory, I think high mid- to high 20 percent operating margin in a 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'll ask about the R&D, it's not going to be materially higher. I mean, there is always the marginal commissions, et cetera. 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 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 such higher than what we've been used to in field instruments. So you spend the 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.

Yes. It's what we like to hear. Congrats on the continued momentum.

Your next question comes from the line of Andrew Spinola from UBS.

I wanted to ask, Oleg, you typically described the data center business growing about 50%. I was wondering if you could 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?