Executive Summary / Key Takeaways

• Strategic Diversification Fuels Growth: VIAVI Solutions is successfully executing a strategic pivot away from heavy reliance on volatile telecom service provider spending, with robust growth now driven by the data center ecosystem and aerospace and defense sectors. This diversification is significantly de-risking the business model and accelerating revenue velocity.
• Strong Q1 FY26 Performance & Optimistic Outlook: The company reported strong fiscal Q1 2026 results, exceeding guidance with net revenue up 25.6% year-over-year to $299.1 million and non-GAAP EPS of $0.15. Management projects continued strong momentum, with Q2 FY26 revenue guidance of $360-$370 million and non-GAAP EPS of $0.18-$0.20, reflecting the impact of recent acquisitions and sustained demand.
• Transformative Acquisitions Bolster Market Position: Recent acquisitions, including Inertial Labs (PNT solutions) and Spirent's high-speed Ethernet, network security, and channel emulation testing business, are expanding VIAVI's total addressable market and strengthening its technological leadership in high-growth areas like AI data centers and autonomous systems.
• Technological Edge in High-Growth Markets: VIAVI's advanced test and measurement solutions for 800-gig and 1.6 terabit Ethernet, coupled with its resilient Positioning, Navigation, and Timing (PNT) technologies, provide a critical competitive advantage in the rapidly evolving data center and aerospace/defense markets.
• Operational Efficiency and Margin Expansion: Restructuring initiatives and a shift towards higher-margin product segments, particularly in the Network and Service Enablement (NSE) business, are contributing to improved operating margins, with NSE operating margin increasing to 7.5% in Q1 FY26 from -4.6% in the prior year.

A New Era for VIAVI: Capitalizing on Digital Infrastructure and Defense

VIAVI Solutions Inc. (NASDAQ: VIAV), with roots tracing back to 1923 as JDS Uniphase, has undergone a significant transformation, strategically repositioning itself as a critical enabler of the modern digital infrastructure and a key player in advanced defense applications. The company, headquartered in Chandler, Arizona, provides essential network test, monitoring, and assurance solutions for telecommunications, cloud, enterprises, and military sectors, alongside specialized light management technologies. This strategic evolution, particularly evident over the past few years, has been a conscious effort to diversify revenue streams and mitigate the inherent volatility of its traditional telecom service provider market.

The company's overarching strategy centers on defending and consolidating leadership in its core business segments, investing in secular trends to expand its total addressable market, and extending its technologies into lucrative adjacent applications. This approach is designed to foster sustained growth and enhance profitability by aligning with the most dynamic sectors of the global economy.

Technological Leadership: The Core of VIAVI's Competitive Edge

VIAVI's competitive advantage is deeply rooted in its proprietary technologies, particularly in fiber optics, high-speed Ethernet testing, and Positioning, Navigation, and Timing (PNT) solutions. In the rapidly evolving data center ecosystem, VIAVI offers advanced test and measurement equipment for 800-gig and 1.6 terabit Ethernet, chip-to-chip interconnects, and protocol testing. This technology is crucial for the development and production of high-performance semiconductors, optical modules, and systems that underpin the massive build-out of AI data centers. The company's second-generation 1.6-terabit test solution, launched in the June 2025 quarter, demonstrates its leadership, with much of the competition only recently releasing their first-generation offerings. This technological lead enables VIAVI to capture early-market opportunities and command higher margins in these fast-paced, innovation-driven segments.

In the aerospace and defense sector, VIAVI's PNT solutions are a cornerstone of its offering. Following the acquisition of Jackson Labs Technologies in 2022 and Inertial Labs in January 2025, VIAVI has built a robust, modular, and future-ready PNT platform. This portfolio includes resilient PNT and Multi-Sync gateway systems, full-constellation GPS simulators for R&D and jamming scenarios, and transcoder modules for retrofitting legacy GPS equipment. These solutions provide critical security and accuracy, offering anti-spoofing detection and mitigation, authentication on GNSS constellations, and encryption, with timing accuracy of less than 5 nanoseconds, traceable to UTC/NIST. Such capabilities are vital for autonomous air, land, and sea vehicles, as well as critical infrastructure operating in GPS-denied environments. The integration of Inertial Labs' expertise in Inertial Measurement Units (IMUs), Inertial Navigation Systems (INS), and LiDAR scanning further enhances VIAVI's ability to serve high-growth applications like drones and autonomous vehicles.

Competitive Landscape: A Shifting Arena

VIAVI operates in a dynamic and intensely competitive environment, facing both established players and emerging innovators. Its primary direct competitors in network testing and assurance include Keysight Technologies (KEYS) and NetScout Systems (NTCT). With the recent acquisition of Spirent (SPT)'s high-speed Ethernet, network security, and channel emulation testing business, VIAVI now directly competes with Keysight in the Layer 2-7 testing space, where Keysight previously gained significant ground through its acquisition of Ixia.

Keysight is recognized for its technological leadership in precision instrumentation and a broad product portfolio, often exhibiting stronger profitability margins and more consistent cash flow generation. VIAVI, however, holds a significantly greater share in Layer 0/1 testing, a traditional strength. The intense R&D investment required in this sector means that only major players like VIAVI and Keysight can sustain the pace of innovation. Against NetScout, VIAVI's integrated monitoring capabilities for service enablement offer a competitive edge, though NetScout's software-centric analytics approach provides scalability advantages.

VIAVI's strategic acquisitions, particularly Spirent's business, are designed to bolster its competitive standing by expanding its capabilities across network layers and into high-growth verticals like AI and digital infrastructure. While VIAVI's overall market positioning is that of a mid-tier player, its strengths in service integration and specialized optical products, such as anti-counterfeiting technologies, provide unique differentiation.

Financial Performance: A Story of Resurgence and Strategic Gains

Fiscal year 2025 marked a significant turnaround for VIAVI, ending two years of decline with an 8.4% year-over-year revenue growth to $1.08 billion. This momentum accelerated into the first quarter of fiscal year 2026 (ended September 27, 2025), where VIAVI reported net revenue of $299.1 million, a substantial 25.6% increase year-over-year, surpassing the high end of its guidance range. Non-GAAP diluted EPS for the quarter was $0.15, up 150% year-over-year, also exceeding guidance.

The Network and Service Enablement (NSE) segment was a primary driver of this growth, with revenue increasing 35.5% year-over-year to $216 million in Q1 FY26. This surge was fueled by robust demand for lab and production products within the data center ecosystem and strong performance in aerospace and defense. The acquisition of Inertial Labs contributed $18.7 million to NSE's net revenue in Q1 FY26. NSE's non-GAAP operating margin saw a remarkable improvement, rising to 7.5% from a negative 4.6% in the prior-year quarter, driven by higher volume and a favorable product mix.

The Optical Security and Performance Products (OSP) segment also contributed positively, with revenue up 5.5% year-over-year to $83.1 million in Q1 FY26, primarily due to strength in anti-counterfeiting and other products. However, OSP's gross margin decreased by 300 basis points to 52.3% due to an unfavorable product mix and higher manufacturing costs.

From a liquidity perspective, VIAVI's cash and cash equivalents, along with restricted cash, increased by $120 million to $552.10 million as of September 27, 2025. The company generated $31 million in cash from operating activities during the quarter. On August 20, 2025, VIAVI refinanced its 1.62% Senior Convertible Notes due 2026 with $250 million of 0.62% Senior Convertible Notes due 2031, a move intended to retire the remaining 2026 Notes upon maturity. The company also repurchased 2.7 million shares for $30 million, with $168.4 million remaining under its current authorization.

Strategic Outlook and Guidance

Management's outlook for the second fiscal quarter of 2026 (ending December 27, 2025) reflects continued strong momentum. VIAVI expects total revenue between $360 million and $370 million, with non-GAAP EPS projected to be between $0.18 and $0.20. This guidance includes the financial performance of Spirent's acquired business lines for approximately 10 weeks, which are expected to add about $200 million to VIAVI's annual revenue run rate.

NSE revenue is projected to be between $283 million and $293 million, with Spirent's contribution expected to be slightly accretive to NSE's existing operating margin, which is guided at 13.6% for the quarter. OSP revenue is anticipated to be approximately $77 million, with an operating margin of 34%, reflecting seasonal demand patterns.

The data center ecosystem, encompassing high-performance semiconductors, optical modules, and network equipment manufacturers, is expected to drive continued strong demand for VIAVI's lab and production products, supporting AI data center build-outs. The aerospace and defense business is also forecast to maintain its strong growth trajectory. While the wireless business remains a "last cylinder in the engine to turn on," management anticipates a gradual recovery in fiber deployments and views wireless field instrument demand as a leading indicator for future 5G build-outs.

Key Risks and Challenges

Despite the positive outlook, VIAVI faces several risks. The telecom industry's inherent cyclicality and uncertainty surrounding customer procurement decisions for infrastructure upgrades and 5G adoption could still impact financial performance. Global tariffs, while largely mitigated through pricing adjustments and supply chain realignment, could still cause order delays or reductions. Competition from larger, well-resourced players like Keysight, particularly in rapidly evolving software-centric solutions, poses a continuous challenge. The successful integration of recent acquisitions, such as Spirent's business, carries inherent risks related to transaction costs, employee retention, and realizing anticipated synergies. Furthermore, VIAVI's increased debt load from financing these acquisitions could limit its operational and financial flexibility.

Conclusion

VIAVI Solutions is undergoing a profound strategic transformation, successfully pivoting its growth engine towards the high-growth data center ecosystem and the resilient aerospace and defense sectors. This strategic diversification, underpinned by a strong commitment to technological leadership and operational efficiency, is fundamentally reshaping the company's risk profile and enhancing its long-term growth prospects. The robust financial performance in fiscal Q1 2026, coupled with an optimistic outlook for Q2 FY26, underscores the efficacy of this strategy.

The strategic acquisitions of Inertial Labs and Spirent's high-speed Ethernet business are pivotal to this narrative, significantly expanding VIAVI's market reach and strengthening its competitive moats in critical technologies like 1.6 terabit Ethernet testing and assured PNT solutions. While challenges such as telecom market volatility and competitive pressures persist, VIAVI's proactive management of these risks, combined with its focus on innovation and market expansion, positions it for sustained value creation. Investors should recognize VIAVI's strategic resurgence as a compelling investment thesis, driven by its ability to capitalize on the accelerating demands of digital infrastructure and defense.