Viavi Solutions (VIAV) Q4 2026 earnings call transcript

Thank you, Kendra. Good afternoon, everyone. And welcome to VAV Solutions Fourth Quarter and Fiscal 2026 Earnings Call. My name is VABUTI NIAR, Head of Investor Relations for VAV Solutions. With me on today's call is Oleg Heiken, 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 defer 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-market and acquired business, are valid only as of today. VAV undertakes no obligation to update these statements. Please also note that unless we state otherwise, our results discussed on this call, except revenue, are non-gap.

We reconcile these non-gap results to our preliminary gap financial 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 VAV's website at www. investor. vavsolutions. com.

We are recording today's call, and we will make a recording available on our website by 4.30pm, Pacific Time, this evening. Now, I would like to turn the call over to Ilan. Ilan.

Thank you, Viburi, good afternoon, everyone. Now, I would like to review the results of the fourth quarter of fiscal year 2026. Next 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 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 long 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 $29.31 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 tariff 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 spirant 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 labor 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.

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.

NSE 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, NSE 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 billion and $518 million, which is up 40% on a year-over-year basis.

Spiring product lines that were required in the second quarter of fiscal 2026 contributed $145 million to the full fiscal year revenue. The revenue growth was mainly driven by 11 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 Spiring product lines and inertial ads.

For OSP, we saw year-over-year growth across all of its product lines. Full-year operating margin for VAV was 20.6%, 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 $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 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. We have it 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 tariff refund in July of 2026. That will primarily benefit our Q1 cost of goods sold.

We expect the first fiscal quarter revenue for VAV 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 of a quarter revenue to be higher, driven by stronger demand for 3D sensing products.

For the first fiscal quarter of 2027, we expect VAV revenue in the range of 450 and 460 million dollars.

We expect NSE revenue between 360 and 368 million dollars. OSP revenue is expected to be in the range of 90 and 92 million dollars.

Operating margin for VAV 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 tariff refund, which will be offset by the additional one 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 40 cents and 42 cents. This includes a net benefit of about 2 cents from tariff refunds and from the additional one week of variable expenses that I mentioned earlier.

Our tax expenses for the first quarter are expected to be around 12 million dollars, plus or minus 500,000 dollars, as a result of jurisdictional mix.

We expect other income and expenses to reflect a net expense of approximately 2.5 million dollars, 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, Elon. Fiscal 26 added on a strong note with VAV'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 sammies, 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 provider's business, which includes field instruments, wireless, and service enablement products, was joined 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 the anemic to the same anemic, although stable customer demand. That said, we're made optimistic regarding the longer-term demand for our wireless product.

Now, turning to OSP. OSP is a 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 VIV 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.

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 left side. It's optical for the production test. It's optical for fiber monitoring and the data built 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, you know, okay, scale. I mean, in terms of revenue you're talking about, I mean, or percentage within the NSC.

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

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 a 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 primarily performance driver today.

Oh, I think we will. I think we 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.

Sure.

Yeah, I would say revenue. If there is any diminumous, it's very small. The revenue shipments are nonlinear in the quarter. Anyhow, and generally a revenue is linked to the customers end of the quarter, whereas our opposite is linked to a number of quarter of weeks in the quarter for us. So I need respect. I mean, whether you have a 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 customers end quarter revenue requirements. So in that respect, I don't think there is any revenue swing one where the other with the fee of 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, you know, the December quarter. But that's not the trajectory that we see for the December quarter.

There would be an extra week given their incremental shipping capacity into December.

Sure. So I mean, the thing I would say, you know, clearly all these, there's some product lines are higher, some are lower. But generally, NSC is north of 60%, right? And anyone 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 OSP, the gross margin will keep trending up. Now, there's clearly, you know, 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, you know, it's going to be really a weighting average between on a gross margin, between NSC and OSP as since NSC 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 the investment, 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 to high 20% operating margins in not the distant future is probably the expectation.

Yeah, 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 know, about the R&D, it's not going to be materially higher. I mean, there is always the marginal, you know, commissions, et cetera. But the leverage kind of will continue to play, you know, in favor of the operating margin.

And again, it can continue throughout the fiscal year to, as Oleg mentioned, from the meat 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 11 production are just so much higher than what we've been used to in field instruments. So, you know, you spend the same 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 a relatively little investment to incorporate it all. So, it's, you know, it's just basically better leverage of the R&D all around.

Thank you.

Sure, thanks.

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 families in a 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 were entering the semiconductor traditional semiconductor test, but we played the optical plane of the semiconductor test, and that's a completely new market. So, you know, I don't want to go out percent of these, but let's put it this way. I think that business, even if I take out a spiron, it's more than doubled for us year over year.

Well, I think you have to remember September quarter generally for us was a down quarter for NSE. The mere fact it's up is means the 11 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 the average of the growth, right? In terms of the 1.6, you know, it fits 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 the say from, if you tell me somebody's spent this year, 600 billion and next year they're going to spend, you know, $1 trillion, I should expect at least that kind of growth, right? Now, granted, some of it is construction and digging trenches, but there is the capex that is equipment.

So that actually ultimately will translate to us. And in some of these cases, we're not even present, but we will be present with 1.6, so that our market actually going to expand. So I think on this particular product lines, we should do better than the purely capex growth. But then there is, of course, you know, the base business service provider that's, you know, growing 1 to percent. So you have to take the weighted average of the two to calculate the total growth.

Thank you.

Well, you know, there's been a lot of, you know, industry talk is like all because the yield is going to be slower. That's all nonsense. CPO and all that this thing is moving forward. Are there issues? Of course, there are. But if you look at the, it's the reason people are doing CPO and all these other things, it's all about performance and power.

And, you know, to manage yield, you just do more tests. You do more of a non good diet, non good optical engine, non 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 I, from my perspective, it's progressing and I have POs to show for that.

There, there is, there is some OCS, but I think majority of OCS probably will be coming in the next revenue of the coming in the next several quarters. I mean, there is already some in sole capacity. I 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 other companies introducing OCS. And many other companies are looking to do more optical switching in their core. So, I see these demand as being very healthy.

I'm getting some this quarter and probably in December it will start accelerating.

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.

Exiting fiscal 28, I think we may see 500 in the next calendar year.

It was exiting fiscal 28. It was originally we talked in fiscal 28. I think we're now I'm looking like calendar 27 sometime in California 27. 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.

Yep.

Well, I think the remember, we actually felt spirant did pretty well. Remember the first half of the calendar year is the about 45% of their revenue and 55% of revenues in the second half. So in the March quarter, they had some carry over. So did, but I mean June quarter came in pretty much as we expected. And as a lot of it is enterprise driven. I mean, they were, you know, the, you know, like I know, for example, September quarter. They're going to be up around 10% in revenue and December is usually their strongest quarter, probably another up 10%. But, but spirant aside really the biggest growth was very much.

11 production, followed by aerospace and defense and 11 production. I mean, it's just a ticking up double digit revenue growth in the absolute dollars quarter of a quarter.

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, for, I mean, I would say maybe without really exaggerating here. But you if you have a copackaged optics, your three nanometer silicon performs as a two nanometer silicon. So you are getting almost a whole node of advantage by copackaging the optics, right? That's really it's so you can take it either in performance or you can take it in the cost. So you can use a three nanometer silicon and get a two nanometer performance with copackaged optics or have a two 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.

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 parent. We did it general, both via the and spiron. We rationalized go to market and the R and D during the first two counter quarters and exiting June. We are all set.

Yeah, I mean, the savings from the restructuring or being realized and also to your prior comment team, you know, actually, spiron does grow kind of a single digit year over year. As all I mentioned earlier, you know, the core of production is the main growth there and seasonality for spiron remains the same. In the first half of the calendar year is usually weaker and the second half of the calendar year is usually much stronger.

So June is traditionally a little bit, you know, weaker, but as I mentioned, we see at least 10% quarter of a quarter growth from June to September with another probably good quarter. We expect, you know, in December. So I don't think that trajectory, you know, for spiron 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, you know, transport testing, which is, you know, what you'd use for AI and high performance compute workloads simulation. So it's actually been much better than I expected.

Thank you.

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