Viavi Solutions Inc. (VIAV)

Executive Summary / Key Takeaways

• Strategic De-Risking in Progress: VIAV is executing a deliberate pivot from cyclical service provider markets to high-growth data center and aerospace/defense segments, with data center revenue now approaching traditional service provider levels and creating a more balanced, predictable revenue profile.

• Margin Inflection Validates the Mix Shift: NSE segment operating margins swung from -4.6% to +7.5% year-over-year in Q1 FY26, driven not by cost-cutting but by a favorable product mix toward lab/production test equipment for AI data centers and high-margin PNT products, demonstrating structural earnings power improvement.

• Acquisition Acceleration: The Spirent high-speed Ethernet business ($200M annual revenue run rate) and Inertial Labs PNT acquisition are not mere bolt-ons but strategic expansions that extend VIAV's reach from Layer 0-1 optical testing to Layer 2-7 application performance and security, directly challenging Keysight's (KEYS) dominance.

• Wireless Recovery as Asymmetric Catalyst: While wireless infrastructure test remains sluggish, healthy demand for field instruments signals a potential 5G/6G buildout resumption by calendar 2026, offering meaningful upside optionality with limited downside given current low expectations.

• Execution Overvaluation: Trading at 3.4x sales with gross margins approaching 60%, VIAV's valuation appears reasonable for a company delivering 25%+ revenue growth and expanding margins, but the thesis hinges on flawless integration of recent acquisitions and sustained data center capital expenditure momentum.

Setting the Scene: From Telecom Dependence to AI Infrastructure Backbone

Founded in 1923 as JDS Uniphase Corporation and headquartered in San Jose, California, VIAV Solutions has spent a century evolving from optical components manufacturer to critical infrastructure testing partner. For decades, the company lived and died by the capital expenditure cycles of wireless and cable service providers, a business characterized by 6-8 year technology refresh cycles, intense pricing pressure, and concentration risk among a handful of network equipment manufacturers. This legacy explains why VIAV's revenue declined for two consecutive years prior to fiscal 2025 and why investors historically assigned the stock a cyclical multiple.

The current investment case rests on a fundamental transformation that began in earnest in October 2022 with the Jackson Labs acquisition and accelerated through the January 2025 purchase of Inertial Labs and October 2025 Spirent asset acquisition. VIAV is no longer content to serve as a tactical supplier to telecom operators. Instead, it has positioned itself as an essential enabler of the AI data center buildout and a critical provider of resilient positioning, navigation, and timing solutions for autonomous systems. This matters because it moves VIAV from the passenger seat of a slow-growth industry to the driver's seat of two markets expanding at 30%+ rates with fundamentally different margin structures and competitive dynamics.

The data center ecosystem—encompassing high-performance semiconductors, optical modules, and network equipment manufacturers—now drives strong demand for lab and production products supporting AI infrastructure. Management notes this market operates on 2-3 year technology cycles, versus 6-8 years for traditional telecom, creating more frequent refresh opportunities. More importantly, these customers purchase "first to market" test solutions for R&D and production, commanding premium pricing and higher gross margins than field instruments sold to capital-constrained service providers. The strategic implication is clear: VIAV is replacing low-margin, lumpy revenue with high-margin, predictable growth.

Technology, Products, and Strategic Differentiation: Building Moats in AI and Autonomy

VIAV's competitive advantage stems from its JDSU heritage in optical layer testing, where it maintains significantly greater market share than competitors. This Layer 0-1 expertise is non-negotiable for AI data centers pushing 800-gigabit and 1.6-terabit Ethernet speeds, where signal integrity and optical performance determine system viability. The Spirent acquisition extends this moat upward through the stack, adding Layer 2-7 capabilities in application performance, security, and channel emulation testing. Why does this vertical integration matter? Because it transforms VIAV from a point solution provider into a comprehensive testing partner capable of addressing the entire network stack, increasing customer stickiness and average revenue per account while creating cross-selling opportunities that pure-play competitors cannot replicate.

The Inertial Labs acquisition broadens VIAV's positioning into the rapidly developing PNT landscape, complementing its resilient timing technology with navigation solutions for aerospace, defense, and industrial applications. This is not a peripheral diversification. The company can now sell complete alternative navigation systems—ranging from inertial measurement units to full sensor-fusion platforms—to system integrators serving autonomous vehicles, drones, and critical infrastructure. The "so what" is profound: VIAV has moved from selling test equipment to selling mission-critical subsystems with design-win driven revenue models, longer product lifecycles, and higher barriers to entry. This shift explains why aerospace and defense revenue is growing strongly while traditional wireless test remains soft.

Technology cycles in the data center market create a compounding advantage. Management notes that 1.6-terabit products are entering R&D labs today, with production ramp expected toward the end of calendar 2026, while 800-gigabit serves as the current workhorse with rapidly growing volumes. This two-tiered product roadmap allows VIAV to capture premium pricing on leading-edge solutions while scaling volume on established platforms. The faster 2-3 year cycle means customers must repeatedly invest in new test equipment to remain competitive, reducing the revenue volatility that plagued VIAV's telecom business. For investors, this translates to more predictable, higher-quality earnings.

Financial Performance & Segment Dynamics: Evidence of Structural Improvement

VIAV's Q1 fiscal 2026 results provide compelling evidence that the strategic pivot is working. Total revenue of $299.1 million exceeded the high end of guidance, growing 25.6% year-over-year and 3% sequentially—unusual strength for what has historically been a seasonally soft quarter. More telling is the segment performance. NSE revenue surged 35.5% to $216 million, driven by strong demand from the data center ecosystem and aerospace/defense customers. This growth rate materially outpaces the overall network test market's ~6% CAGR, indicating share gains in high-value segments.

The margin expansion story is even more compelling. NSE gross margin improved 210 basis points to 63%, while operating margin swung from -4.6% to +7.5% year-over-year. This 1,210 basis point operating margin improvement did not come from headcount reductions alone. It reflects the powerful operating leverage inherent in selling high-margin lab equipment versus low-margin field instruments. Each incremental dollar of data center revenue falls through to operating income at rates exceeding 50%, creating a self-reinforcing cycle where growth begets margin expansion, which funds further R&D investment.

OSP segment performance, while slower at 5.5% growth, demonstrates stabilization in mature markets. Anti-counterfeiting revenue recovered as channel inventories depleted, and 3D sensing demand met seasonal expectations with ASP erosion largely stabilized. The segment's 37.1% operating margin, while down 250 basis points year-over-year due to product mix, remains a cash-generating machine that funds investment in growth initiatives. Management's guidance for Q2 FY26 projects OSP revenue down sequentially to $77 million on seasonality, but the long-term trajectory points to renewed growth as new automotive LiDAR and Android facial recognition applications materialize over the next 2-3 years.

Cash flow generation supports the acquisition strategy. Operating cash flow of $31 million in Q1 FY26 more than doubled the prior year's $13.5 million, while free cash flow of $22.5 million demonstrates the business can self-fund growth. The balance sheet held $549.1 million in cash and short-term investments as of September 27, 2025, providing flexibility for the $600 million term loan used to finance the Spirent acquisition. Management's target of 4x gross leverage and below 3x net leverage suggests a prudent approach to capital structure, though the increased indebtedness does raise the stakes for successful integration.

Outlook, Management Guidance, and Execution Risk

Management's Q2 FY26 guidance calls for total revenue of $360-370 million, representing 20-24% sequential growth, with NSE contributing $283-293 million including $45-55 million from Spirent. This implies VIAV's legacy business growing to $238-238 million at the midpoint—still robust 10% sequential growth even excluding the acquisition. The guided NSE operating margin of 13.6% represents a 610 basis point improvement from Q1's 7.5%, suggesting management expects immediate accretion from Spirent and continued mix shift benefits.

The commentary reveals key assumptions underlying this outlook. Management expects data center ecosystem demand to remain strong, driven by AI data center buildouts and hyperscaler fiber deployments. They anticipate the wireless business will be the "last cylinder in the engine to turn on," likely in calendar 2026, as NVIDIA's (NVDA) $1 billion AI-RAN investment accelerates 5G advanced and 6G development. This timing matters because it creates a potential second-half 2026 catalyst that is not priced into current expectations. If wireless infrastructure test demand recovers, VIAV would benefit from operating leverage on a fixed cost base, creating meaningful EPS upside.

Tariff impact represents a manageable headwind. Management expects to absorb approximately $3 million in tariffs from previously committed orders, impacting gross margin by roughly 100 basis points in Q2. However, they have already built tariff increases into new pricing and are realigning the supply chain to reduce impact within 3-6 months. This proactive response demonstrates operational maturity and limits the risk of margin erosion from trade policy. The low-single-digit operating margin impact is more than offset by mix shift benefits, making tariffs a transient rather than structural concern.

Integration risk for both acquisitions remains the primary execution variable. Inertial Labs contributed $18.7 million in Q1 revenue, suggesting the $134 million cash purchase price is generating immediate returns. Spirent's high-speed Ethernet business is expected to be slightly accretive to NSE margins in Q2, with management planning to expand margins further through integration and scale efficiencies. The strategic logic is sound—combining Spirent's Layer 2-7 capabilities with VIAV's Layer 0-1 strength creates a comprehensive testing portfolio—but realizing synergies while retaining key employees and customers will test management's integration capabilities.

Risks and Asymmetries: What Could Break the Thesis

The most material risk to VIAV's transformation is competitive pressure from Keysight Technologies. Keysight holds over 20% market share in electronic test equipment and maintains mid-60% gross margins with 25-28% operating margins, significantly outperforming VIAV's current metrics. Keysight's acquisition of Ixia created a Layer 2-7 competitor that now faces direct challenge from VIAV's Spirent-enhanced portfolio. If Keysight responds with aggressive pricing or accelerates its own AI testing roadmap, VIAV's margin expansion could stall. The risk is particularly acute in the data center ecosystem, where Keysight's scale and R&D intensity (over 15% of revenue) could overwhelm VIAV's more specialized approach.

Customer concentration remains a structural vulnerability. VIAV expects to continue relying on a limited number of customers for a significant portion of revenues, exposing it to order reductions and pricing pressure from industry consolidation. While diversification into data centers and aerospace reduces absolute dependence on service providers, the communications industry consolidation trend directly affects the NSE customer base. A major NEM merger could lead to procurement centralization and margin compression, offsetting gains from mix shift.

The wireless business recovery timeline creates downside asymmetry. If 5G advanced and 6G development fails to accelerate, or if carriers continue delaying infrastructure investments, VIAV's wireless test revenue could remain depressed longer than expected. Management's guidance pushes recovery to "next calendar year," but industry analysts note that RAN spending has been sluggish for multiple years. Continued weakness would not derail the overall thesis given data center growth, but it would limit upside and keep VIAV's revenue growth in the 20-25% range rather than the 30%+ possible with wireless tailwinds.

Technology transition risk in OSP could pressure margins. The segment's 300 basis point gross margin decline year-over-year demonstrates how product mix shifts between older pigment technologies and newer anti-counterfeiting solutions can impact profitability. While management expects stabilization, the 3D sensing market remains mature with saturated volumes. If new automotive LiDAR and Android facial recognition applications fail to materialize at expected scales, OSP could become a slower-growth cash cow rather than a growth driver, limiting overall corporate margin expansion.

Valuation Context: Reasonable Multiple for Transforming Business

At $17.51 per share, VIAV trades at an enterprise value of $3.88 billion, representing 3.39 times trailing twelve-month revenue of $1.08 billion. This multiple sits between NetScout's (NTCT) 1.73x and Keysight's 4.88x, reflecting VIAV's mid-tier market position but superior recent growth trajectory. The company's 59.5% gross margin exceeds Coherent's (COHR) 36% and approaches Keysight's 62%, suggesting pricing power in its core optical testing franchise.

Cash flow metrics reveal a business in transition. The price-to-operating cash flow ratio of 36.4x and price-to-free cash flow of 49.9x appear elevated, but this reflects the company's investment phase. With $549 million in cash and a $200 million undrawn revolver, VIAV has the liquidity to fund integration costs without diluting shareholders. The recent $600 million term loan for Spirent increases gross leverage, but management's target of 4x gross and sub-3x net leverage suggests debt will remain manageable relative to EBITDA generation.

Operating margin of 10.26% trails Keysight's 15.3% and NetScout's 15.0%, but the 570 basis point year-over-year improvement in non-GAAP operating margin to 15.7% in Q1 FY26 demonstrates the trajectory. If VIAV achieves its guided 17.9% consolidated operating margin in Q2 FY26, it will be operating within striking distance of larger competitors while growing revenue 2-3x faster. The market appears to be pricing VIAV as a cyclical telecom supplier rather than a structural AI infrastructure play, creating potential multiple expansion as the transformation proves durable.

Conclusion: Execution at an Inflection Point

VIAV Solutions has reached a critical inflection point where strategic diversification is translating into measurable financial improvement. The company's pivot from volatile service provider markets to AI-driven data center and aerospace/defense applications is de-risking the business model while expanding margins and accelerating growth. Q1 FY26 results provide compelling evidence: 25.6% revenue growth, 1,210 basis points of NSE operating margin expansion, and guidance for continued strong performance in Q2.

The investment thesis hinges on two variables: successful integration of the Spirent acquisition and sustained capital expenditure in AI data centers. If VIAV can capture share in the Layer 2-7 testing market while maintaining its Layer 0-1 optical dominance, it will have created a comprehensive testing franchise capable of competing head-to-head with Keysight. The wireless business recovery, while not essential, offers asymmetric upside that could drive earnings above management's "entirely possible" $1 per share scenario.

For investors, VIAV represents a rare combination of transformation, reasonable valuation, and operational momentum. The stock's 3.4x sales multiple fails to reflect the quality improvement in revenue mix and margin expansion trajectory. While competitive and integration risks remain, the company's century of optical expertise, combined with timely acquisitions and prudent capital allocation, positions it to capture disproportionate value from the AI infrastructure buildout. The next 12-18 months will determine whether VIAV emerges as a de-risked, higher-margin compounder or succumbs to competitive pressure from better-resourced rivals.