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.

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.

Finally, we are recording today's call and will make the recording available on our website by 4:30 PM 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 second quarter of fiscal year 2026. Net revenue for the quarter was $369.3 million, which is at the high end of our guidance range of $360 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 22 cents was also above the high end of our guidance range of 18 to 20 cents, and was up 7 cents sequentially.

On a year-over-year basis, EPS was up 9 cents. 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 to $293 million. Revenue from Spirent was $43 million, which was slightly below our expectation of $45 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 Inertial Labs and Spirent product lines. We also saw strong demand for lab 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 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. OSP 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 the first quarter of fiscal 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 of 2026 for 7.9 million shares of Viavi's common shares at a 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 of 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 of 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 majority of these charges by the end of June of 2026, with the plan to be substantially completed by the end of December of 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 the third quarter of fiscal 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 lab 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 13 weeks of Spirent product lines versus 10 weeks in the prior quarter. For OSP, we expect quarter-over-quarter revenue to be higher, in line with seasonality of higher demand for anti-counterfeiting and other products.

For the third fiscal quarter of 2026, we expect Viavi revenue in the range of $386 and $400 million. We expect total NSE revenue between $304 and $316 million.

OSP revenue is expected to be in the range of $82 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. OSP operating margin is expected to be 35.3%, plus or minus 50 basis points.

EPS is expected to be between 22 cents and 24 cents. Our tax expense for the third quarter is expected to be around $9 million, plus or minus $500,000, as a result of jurisdictional mix.

Our acquisition of Spirent product lines, as well as Inertial Labs, has resulted in greater profits in the US, which allows us to benefit from our NOLs. As a result, we now expect our tax rate to be in the mid-teens on a go-forward basis.

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 Inertial 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?

Thank you, Ilan. The second quarter of fiscal 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, growth 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 NEMs, drove strong demand for lab 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're seeing some opportunistic demand from the cable operators as they transition to new DAA architecture and DOCSIS 4.0 standard.

The demand for wireless infrastructure test continues to be weak, but stable. Looking ahead to Q3, we expect NSE revenue to be counter-cyclically up 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 in anti-counterfeiting and other products.

3D sensing demand was in line with seasonal expectations. We expect fiscal Q3 to be up quarter-on-quarter in line with the seasonally higher demand for anti-counterfeiting and other products.

In summary, calendar 2025 was a pivotal year for Viavi. Our diversification and investment strategy over the past 5 years, focus on data center and aerospace and defense PNT applications, has positioned us well to ride strong growth in both of these markets.

We have exited calendar 2025 with robust bookings and revenue momentum, and anticipate these trends to continue through the calendar year. In conclusion, I would like to thank Viavi team for its continued strong 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.

Thank you. Hi, Oleg and Ilan.

Congrats on the continued progress and results. Oleg, to start, last quarter you broke out for us a little bit sort of the mix as your NSE business continued to evolve.

Thinking about it in terms of data center, aerospace and defense, and 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 quarter, that'd be great. Thank you.

Sure. I think, last quarter we kind of 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 going to see service provider to kind of trend a little bit below 40%, the aerospace and defense trend up above 15%, and the data center trend up above 45%.

It's not because the service provider is going down, actually it's steady and showing slight recovery, it's just fundamentally the percentage allocation and the growth across different segments is vastly different. That's kind of the mix.

I think now I'll say we're, net of it we're now only about 40%, a little bit under 40% exposed to service provider, traditional 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 NEMs, but also it includes a growing component of our traditional field instruments, and it's actually a meaningful pop in that we're now seeing what I call next-gen service providers who 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. If I looked at a year ago, it 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.

It's been a truly amazing turnaround, and I 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 I call monitoring and policing on their networks to ensure that they get what they pay for. It's actually been another very positive development for us on the fiber instruments.

That's on the NSE.

Thanks, Oleg. I guess I had a follow-up on that, obviously with Corning and Meta sort of expanding their partnership, and $6 billion commitment on new fiber.

I'd imagine that that's something that would play into your longer-term opportunity set for the field instruments. I guess if I think about that, you made a statement, Oleg, on your prepared remarks regarding your expectations for DC growth to continue through '26.

Are things like that and like the scale-across opportunities that you just mentioned giving you extended visibility on demand relative to sort of what the order book might have looked like 12 months ago? Are you getting a longer look on backlog and bookings at this point?

The answer is yes. I think on this truly big ones, as you've seen with the Corning deal, right, it's another example what I've been talking about, that the hyperscalers are no longer content just pay you the money and you deliver the services and product, they're vertically integrating all the way back into their supply chain through either partnerships or strategic alliances like what you've seen with Corning and Meta.

We're seeing similar thing happening with us where you have a, at the very least, multi-quarter commitments and multi-year engagements. When it comes to data center, I would say for us, traditionally we only had maybe 1, 1 and 1/2 quarter visibility.

We have a pretty good view, at least on the base demand from this type of activities, up to 3 quarters ahead.

Got it. If I could sneak one in for Oleg, just on the restructuring, Oleg.

Is that impacting any specific product area or group, or is this just sort of your annual look at the business, and obviously there's a lot going on in DC and in aerospace and defense that maybe you want to focus more on? Maybe you could help us out on how to think about that restructuring.

That'd be great. That's it.

Thank you.

Ruben, thanks for the question. Generally, it's across multiple functions just to make sure that we operate under a much higher efficiency, it's not targeting specific areas.

I wanted also to highlight that some of these savings we do plan to reinvest in those higher-growth areas that Oleg just discussed, some of it would be a trade-off.

I think, clearly, if we look at where most of the cost is coming out, it's coming out of the slower or stagnant product segments. 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 put more wood behind the arrow on things like data center ecosystem, aerospace and defense, things like that.

Right, and in addition to some support function optimization.

Mhm.

Great, thanks. A lot of activity in defense and aerospace of late, Oleg.

I hope you could double click on what you see as exciting defense programs, aerospace programs that you're involved in with your product lines, and how you think about that business going forward.

Sure. I think the biggest drivers is what we call resilient PNT, positioning, navigation, timing.

In essence, it's alternative GNSS, everything that allows you to operate in the absence of GPS signal. As you can imagine, it's drones, drones, and more drones.

It's very much targeting all autonomous systems like drones above ground, robotic vehicles, surveillance, in heavy industrial machinery, undersea and seaborne drones. It's pretty much anything that's above ground, underground, underwater, in the air, robotic systems.

That's mainly where a lot of these products are going to. On the other hand, we are seeing emerging opportunities in data centers, because we're seeing more and more as you increase the speeds in the data centers, you need accurate timing for synchronization.

If you think about traditional distributed clock model, from one end goes across all the racks, that may be fine when you're 100 gig data center. When you're going to 1.6, 3.2, the latency becomes unbearable, we're seeing demand for timing at multiple entry points into the data center, you almost deliver precise timing directly to the rack or the individual server banks.

We see that business as, I'd say gaining longer-term momentum, particularly in the data center, but I'd say short-term and near-term opportunities is a very strong growth in the drone systems. Also our traditional avionics communication and the spectrum management is also seeing a lot of opportunities.

Great. Thank you for that.

In the optical domain you talked a lot about strength in data center driving outperformance here. Any evidence you can share with us around the cadence of optical innovation, getting to 1.6T broadly within the data center, between the data centers, where you're seeing the most demand for your products and what maybe some new areas of growth, some green shoots that you're excited about in the optical data center domain?

I'd say every segment we see growing. Clearly, the semiconductors or memory vendors, they are driven by speed and the version of PCI Express, which is chip-to-chip interconnect, right?

Today we're moving from 800 to 1.6, from PCIe 5.0 to 6.0 and then 7.0, there's very heavy engagement with the semiconductor vendors from big ASIC to optical ICs development. That's kind of where you bring in the bleeding edge products for lab, and then the volume really comes in as those things go into production with the module vendors, your dozen or 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 NEMs who are providing equipment into this data center.

I would say there's two groups: one is the lab, heavily driven, say everything to do with 1.6 and PCI Express 6.0, and in production, heavily with all of our things making anything from testing passive and active components to the final product, but also including testing fiber. We are now seeing emergence of hollow-core fiber and multi-core fiber, and this is a whole new thing, and that's part of the reason you see companies like Meta investing directly in making long-term agreements with the fiber providers is to develop this kind of products.

Those things require a lot of testing and monitoring and in production and final test. I would say every cylinder in this whole fiber value chain is, I say, firing at full speed.

That's broadly stronger in the lab today than field?

It's what we call lab and production. I would say, starting last quarter, we are seeing what we normally call field, the hyperscalers themselves, it's the actual data center, is becoming a huge user of field instrumentation.

For example, when you would go to the traditional fiber service providers, they never really care about putting in monitoring of the fiber. If you go to one of these AI data centers, you see at the edge they want to monitor every incoming wavelength, right, and what they light up or dark fiber, they know, as they turn up the bandwidth, they know exactly characterization and bandwidth and latency they're going to get out of each fiber strand.

Of course, there is a SLA agreements, service level agreements there. They signed with the service providers, they are monitoring that these things are coming in within a very narrow spec, and they maintain the narrow spec of performance on every fiber.

That's a big departure from the old-fashioned, well, it works, it's good enough, if it's a little bit lossy or has a higher latency, what? That's not something that these guys accept.

The beauty of it is, they're deploying these things directly using the same fiber tools which were developed for traditional service providers. They are really finding converts among the hyperscalers, and that usually means when they deploy it, there's a log, maybe by a couple quarters, before the service providers recognize, "Oh, wait a second, I'm now being measured, I better measure myself before I get nailed on my performance problem."

We see it as a very positive trend to ensure a very high resilient fiber network interconnecting the data centers.

That's great. Thank you.

Sure.

Thanks. Oleg, can you expand on that a little and give us maybe some color on how your data center business breaks down across lab, production, and field?

We don't break those things individually because given any quarter, the mix may be a bit up or down. Because think about, all right, if you're really launching 1.6, let's say, or PCIe 6.0, 7.0, you will see initially big mix towards the lab instruments.

As these chips get rolled out and they go into production, you're going to see a lot more production. It's kind of tick-tock type of things, so 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.

Makes sense. I'm thinking about how to model that business into fiscal '27 and beyond, and I wanted to ask you, this might be wrong based on what you just said, but I would 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 the 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.

It's a good question. Lab instruments are driven by number of customers and number of projects, right?

Ultimately, best way to look at is the R&D CapEx at semis, system vendors, and module vendors, right? The production is heavily driven by volume that is demanded, right?

You could see the volume of pluggables and the racks and all this. If I look at where are you going to see higher percentage of growth, it's clearly going to be the production, because as you increase number of units you build in every generation and let's say every node, you need to basically for every trench of volume, you need to increase capacity.

It's heavily linked to the, I would say, production run rate, okay? The, I would say, field instruments is, I'd say, linked to the number of data centers being built.

Got it. That's very helpful.

Probably we think about the longevity of this cycle is probably

From what I see in terms of the pretty much every ounce of capacity that was kind of abandoned by service providers when they cut back about 3 years ago in investment has been totally repurposed into the data center, and it's a fraction of what they need. If you take all their announcements, how much they're going to spend, how much they're going to invest, what you have in terms of production capacity, you're going to see significant growth over the next 2 years, right?

Of course, to keep up with it, we now see each technology node is turning over every 2 years. You're no longer, let's say, between 100 gig and 400 gig you had 6 years, you really now have 2 years between 1.6 and 3.2.

Got it. Makes sense.

I wanted to ask one financial question. Just on the NSE op margin guide, I guess it's roughly flat from fiscal Q2 to Q3.

Could you give me maybe some of the push and pulls on that, given that the revenue's up $20 million?

Operating margins up? Are you asking gross margin, operating margin, or

I'm sorry. The guide for the NSE op margin, Ilan, is essentially flat sequentially from Q2 to Q3.

No, it

is, up a bit. He talks operating margins.

It is operating,

yeah. It's

up, yeah.

Right. Your question, the dynamic of the higher operating margin or

Oh, I guess the guide for the NSE op margin at 15.5

About, that's right.

Right, flat, revenues up $20 million. I was just curious if there are some

Right, there is some

mix or anything else kind

of There is some, obviously, mix associated with it, but also in terms of the operating expenses, remember that in the first calendar quarter, all the kind of what we call fringe expenses like Social Security, etc., get reinstated, you get a higher operating expenses in the first calendar quarter

You accrue all this statutory costs.

relative to December. That's a major kind of gap between the last quarter and this quarter.

Got it.

It's partly seasonality.

Statutory costs.

Thank you.

Hey, good afternoon, and congrats on the results and especially the guide. I wanted to kind of focus in on that a bit.

I guess, Oleg, you described as counter-cyclical, usually see declines, but I guess I'd like to try and parse out, you've got 13 weeks of Spirent, at your Q1 run rate or sorry, at your December quarter, I'll just say run rate, that gets you to about, I don't know, $55 million 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 in fiscal Q3?

Tim, I can chime in here and in terms of the thinking. First, for last quarter, in the very first few weeks of the quarter, they actually did not have much revenue.

The second aspect to call out, and I think we did discuss it in the past several times, when you think about the seasonality for the Spirent business, usually the first half of the calendar year is the weaker part, and their stronger part is the second half of the calendar year. It's a little bit lower than your thinking for Spirent for the March quarter.

Again, that does not change our full-year thinking about the revenue for Spirent, not much has changed in terms of what we see and the dynamics of their forecast and thinking.

Generally, they always had first half of the calendar year was lower, second half was stronger. Now, last quarter, there were some government orders that got pushed out into this quarter between the shutdown and, of course, this one-time grant to the government employees of Christmas holidays, there basically was fewer days between middle of December and the end of December to get the orders placed, some of that volume actually pushed out into the March quarter.

As a result, we expect March quarter relatively to be stronger for them than normally would have been, and the December quarter was a bit weaker than it normally would have been.

Right. That's kind of what I'm trying to get to is to the continuation of this organic growth, and sounds like I'm a little high with my first pass, and I think it was a $200 million run rate you were looking for.

If it's stronger in the first than the second, I'd imagine it's below that $50 million level. If that's the case, you're looking at mid-single-digit sequential growth organically for Viavi in Q1 in a normally seasonally down quarter, and coming off 15% sequential growth in the December quarter.

That's pretty extraordinary. What's driving all that?

Am I looking at that right, number one? What's

No, no, you're looking exactly right. Remember, the old Viavi before data center, aerospace and defense, we were heavily influenced by service provider dynamics.

The days when service providers were over 80% of NSE, remember, first quarter is they don't release their budgets for the year until the end of February. As a result, you would have a very weak NSE quarter.

By the way, service provider is no different again than it was normally, there's always it is seasonally weaker. The strength in the data center, aerospace defense, and also the Spirent business is not only offsetting, it's actually more than offsetting.

That's why the net-net, the quarter is going to be up for NSE.

Makes sense. One final piece of that question, which is, the again going back historically, you'd typically see a nice seasonal uptick, at least on the service provider side, in your fiscal Q4.

Should we assume that's a genuine directionally true for the business? Are there any changes as your mix and exposure becomes more aerospace, defense and and AI data center-driven, what what does that do to that normally stronger Q2, sorry, fiscal Q4, especially in light of the strength of your of your March quarter guide?

That's right. Actually, maybe the service providers a bit of a headwind this quarter, they're going to be tailwind next quarter.

With the continued strength in data center and aerospace and defense, you actually going to have a tailwind also on the service provider. Our expectation that the June quarter is going to be stronger than the March quarter.

Awesome. Thanks again.

Congrats.

Thank you.

Sure, thanks.

Thank you, Abby. This concludes our earnings call for today.

Thank you for joining and have a good afternoon.