0001628280-26-004138
SEC filingViavi's Q2 FY26 revenue surged 36.4% YoY to $369.3M, driven by acquisitions, but GAAP operating margin contracted 510 bps to 3.1%.
For the second quarter of fiscal 2026 (ended December 27, 2025), Viavi Solutions reported net revenue of $369.3 million, a 36.4% increase compared to $270.8 million in the same quarter last year. The growth was overwhelmingly driven by two recent acquisitions: Spirent Communications' high-speed ethernet and channel emulation testing business (HSE and CE) contributed $43.0 million, and Inertial Labs contributed $21.1 million. Organic growth was also supported by continued demand in the data center ecosystem and improved performance in the Optical Security and Performance Products (OSP) segment.
Gross profit rose 31.0% to $210.6 million, but gross margin contracted 240 basis points (bps) to 57.0% from 59.4% a year ago. The margin decline was attributed to higher amortization of acquired intangibles and acquisition-related inventory step-up costs.
GAAP operating income fell sharply to $11.4 million (3.1% margin) from $22.2 million (8.2% margin) in the prior year, a decline of 510 bps. The compression was driven by significant non-recurring charges, including a $38.7 million loss on extinguishment of convertible notes, a $10.8 million change in fair value of contingent consideration, and higher acquisition and integration costs. On a non-GAAP basis, operating income was $71.4 million with a 19.3% margin, up 440 bps year-over-year, reflecting the underlying operational leverage from higher revenue.
GAAP net loss was $48.1 million (diluted EPS of $(0.21)), compared to net income of $9.1 million (diluted EPS of $0.04) in the prior year. Non-GAAP net income was $51.5 million (diluted EPS of $0.22), up 75.2% from $29.4 million (diluted EPS of $0.13).
Network and Service Enablement (NSE): NSE revenue surged 45.8% YoY to $291.5 million. The growth was driven by the acquisitions of Spirent's HSE business (contributing $41.3 million in Lab and Production) and Inertial Labs ($21.1 million in Aerospace and Defense), along with strength in Fiber and Access Solutions. These gains were partially offset by lower volume in Wireless. Gross margin was essentially flat at 64.7% (vs. 64.8% a year ago), while operating margin improved dramatically to 15.6% from 8.7%, reflecting operating leverage from higher volume and favorable mix.
Optical Security and Performance Products (OSP): OSP revenue increased 9.7% to $77.8 million, driven primarily by anti-counterfeiting and other products. Gross margin improved slightly to 50.8% from 50.6%, while operating margin rose to 33.4% from 32.4% due to higher volume.
Management's outlook for the third quarter of fiscal 2026 indicates NSE is expected to be up, driven by growth in many end markets and the continued contribution from the Spirent HSE and CE business. The company's long-term strategic priorities include defending leadership in core segments, investing in secular trends (data center, 5G), and expanding into adjacent markets. Management acknowledged ongoing risks from global tariffs, noting actions to optimize supply chain and implement pricing to mitigate the impact. The guidance remains qualitative; no specific numeric ranges were provided for revenue or earnings in the MD&A section.
Operating cash flow (CFO) of $73.5M significantly exceeded net loss of $(69.5)M, indicating strong cash generation from non-cash charges (depreciation, amortization, stock-based compensation, and a $42.5M loss on convertible note extinguishment). The CFO-to-net-income ratio is positive despite the GAAP loss, reflecting healthy underlying cash earnings.
Capex of $14.1M was modest relative to CFO, yielding a free cash flow (FCF) of $59.4M (CFO minus capex). This FCF covered the $30.0M in share repurchases and $18.5M in withholding tax payments, leaving a surplus.
Working capital changes were a net use of cash: accounts receivable and inventories increased by $24.1M and $24.7M respectively, while accounts payable provided $23.9M. Deferred revenue declined $17.0M, a headwind. The $399.3M acquisition of a business drove investing cash flow deeply negative, offset by $749.1M in debt proceeds. Overall, cash and restricted cash rose $344.0M to $776.1M.