Viavi Solutions Earnings Call Signals Profitable Growth

Viavi Solutions Inc ((VIAV)) has held its Q3 earnings call. Read on for the main highlights of the call.

Viavi Solutions Inc. struck an upbeat tone on its latest earnings call, as management highlighted a clean beat on revenue and EPS, alongside notable margin expansion. While investors must weigh a sharp drop in cash, negative operating cash flow, and dilution from convertible notes, the company stressed robust demand trends and confident guidance that collectively signal solid underlying momentum.

Revenue Beat and Strong Growth

Viavi posted Q3 net revenue of $406.8 million, topping the high end of its $386 million to $400 million guidance range. Sales climbed 10.2% sequentially and 42.8% year over year, underscoring how acquisitions and secular demand in networking and test markets are accelerating the company’s growth profile.

Profitability and Margin Expansion

Profitability improved sharply, with GAAP and non-GAAP operating margin reaching 21.0%, above the 19.2% to 20.2% outlook. Operating margin widened by 170 basis points from the prior quarter and 430 basis points from a year ago, showing that higher volumes and cost actions are translating into stronger operating leverage.

EPS Above Guidance

Earnings per share came in at $0.27, beating the company’s $0.22 to $0.24 forecast and continuing a string of upside surprises. EPS rose $0.05 sequentially and $0.12 year over year, reflecting both margin gains and disciplined expense control, even as Viavi continues to invest in growth initiatives.

NSE Segment Outperformance

The Network and Service Enablement segment was a standout, generating $321.5 million in revenue, above the $304 million to $316 million target range. NSE revenue grew 54.4% year over year, driven by the Spirent acquisition plus strong data center and aerospace and defense demand, while segment gross margin hit 65.3% and operating margin climbed to 17.2%.

OSP Growth and Strong Operating Margin

Optical Security and Performance Products delivered revenue of $85.3 million, beating guidance of $82 million to $84 million and rising 11.4% year over year. OSP’s operating margin reached 35.3%, up 140 basis points from a year ago and in line with guidance, showing that the business remains highly profitable despite some pressure at the gross margin level.

Spirent Contribution and Cross-Sell Momentum

Spirent product lines contributed $54.2 million in Q3 revenue, illustrating the deal’s material impact on Viavi’s top line. Management is targeting an annualized run rate of around $200 million for Spirent and sees ongoing cross-selling opportunities, with a normalized June-quarter contribution around $48 million as integration efforts deepen.

Improving Fall-Through and Operating Leverage

Management reported that roughly 40% to 45% of incremental NSE revenue is currently falling through to profit, spotlighting meaningful operating leverage. They also indicated that this fall-through could improve as volumes grow and restructuring programs are completed, potentially driving further earnings power without proportional cost increases.

Debt Reduction and Capital Allocation

Viavi continued to de-risk its balance sheet, paying $49 million of principal on convertible notes and prepaying $150 million of its Term Loan B, leaving $450 million outstanding. The company emphasized that it chose to prioritize debt reduction over share repurchases this quarter, aligning capital allocation with a more conservative leverage profile.

Favorable Tax Position This Quarter

The company reported an effective tax rate of roughly 12% in the quarter, below a more normalized level. Management pointed to U.S. jurisdictional profit mix and the use of net operating losses as key drivers, yielding a lower tax burden that supported net income and EPS performance.

Material Cash Decline

Viavi’s cash and short-term investments fell sharply to $508 million from $772.1 million, a 34.2% decline quarter over quarter. This drop was largely driven by earn-out payments, the payoff of convertible notes, and the prepayment on Term Loan B, all of which boosted balance sheet strength but reduced immediate liquidity.

Negative Operating Cash Flow

Operating cash flow was a use of $26.3 million in Q3, compared with $7.8 million generated in the same quarter last year, a reversal that investors will watch closely. Management cited earn-out payments to Inertial Labs, working capital timing, and higher employee variable compensation as the main factors behind the temporary cash outflow.

Share Count Dilution

Fully diluted share count rose to 249.5 million from 226.9 million a year ago, an increase of about 10%. Management expects shares outstanding to climb to around 256 million in Q4, reflecting conversion-related dilution that will modestly weigh on per-share metrics even as absolute profits improve.

OSP Gross Margin Pressure

Despite solid revenue growth and a strong operating margin, OSP’s gross margin slipped to 50.3%, down 130 basis points year over year. Management attributed the compression to unfavorable product mix within the segment, suggesting that future gross profitability will depend on shifting demand toward higher-margin offerings.

Wireless and Service Provider Weakness

Viavi flagged ongoing weakness in its wireless test business and does not expect a near-term rebound in that market. Management indicated that wireless revenue could be down roughly 45%, although a recovery could represent $20 million to $30 million of upside in future quarters if carrier spending returns.

Restructuring and Reinvestment Uncertainty

The company discussed about $30 million of restructuring actions already announced, with roughly one-third expected to be reinvested in the business. The timing and full benefit of these moves will phase in over coming quarters, with some actions wrapping up by calendar year-end and creating temporary uncertainty around near-term costs.

Tax and Other Expense Headwinds in Guidance

For the upcoming quarter, Viavi’s guidance incorporates tax expense of about $10 million plus or minus $0.5 million. Other income and expense is expected to be a net expense of roughly $12 million, adding modest pressure to EPS despite underlying operational improvements.

Inventory and Component Environment

Inventory increased modestly by single-digit millions of dollars, as Viavi moved to secure key components amid a more constrained supply backdrop. Management flagged ongoing memory shortages and tight long-term supply dynamics, noting that securing parts is critical to supporting growth in data center and other high-demand applications.

No Share Buybacks This Quarter

The company did not repurchase any shares in the quarter, despite the higher share count and investor interest in capital returns. Management reiterated that it prioritized debt repayment and other strategic uses of capital, a stance that may disappoint some shareholders but underscores a focus on long-term balance sheet health.

Forward-Looking Guidance and Outlook

Looking to Q4 of fiscal 2026, Viavi guided revenue to $427 million to $437 million, with NSE at $340 million to $348 million and OSP at $87 million to $89 million, all implying sequential growth. The company expects a consolidated operating margin around 22.7%, EPS of $0.29 to $0.31, and ongoing strength from data center, aerospace and defense, and seasonally firmer service-provider spending.

Viavi’s latest earnings call painted a picture of a company capitalizing on strong secular demand and extracting more profit from each incremental dollar of revenue. While cash usage, dilution, and some segment softness pose near-term challenges, the combination of robust growth, healthy margins, and confident guidance offers a constructive setup for investors tracking the stock.