Viavi Solutions (VIAV): AI Data Center Mix Shift Drives Growth

Thesis

Viavi Solutions(VIAV) has shifted from a telecom-test company tied mainly to carrier budgets into a broader communications infrastructure and optical technology business with rising exposure to AI data center buildouts, aerospace and defense, and anti-counterfeiting. That shift matters because fiscal Q2 2026 showed the new mix working: revenue rose 36.4% YoY to $369.3M, non-GAAP operating margin expanded 440 bps to 19.3%, and non-GAAP EPS climbed to $0.22 from $0.13 a year earlier. Management also guided fiscal Q3 2026 revenue to $386M-$400M and non-GAAP EPS to $0.22-$0.24, pointing to continued momentum rather than a one-quarter spike.

The core investment case rests on three facts. First, the Network and Service Enablement segment is being pulled by the data center ecosystem, where management said mix has moved to roughly 45% data center, about 15% aerospace and defense, and a little under 40% service provider. Second, the Spirent high-speed ethernet, network security, and channel emulation assets added scale in a market already benefiting from higher-speed optical and Ethernet validation. Third, restructuring approved on January 23, 2026 is expected to generate about $30M in annualized savings, with a portion reinvested into higher-growth areas.

The stock is not a clean value story. VIAV carries a $11.05B market cap, trades at 20.6x forward earnings, and generated only a 1.06% free cash flow yield on trailing figures. Net margin is negative on the latest trailing snapshot at -3.38%, and insider activity shows net selling of 516,765 shares in the recent EOD summary. That keeps the setup balanced rather than aggressive. For a moderate-risk investor, the appeal is medium-term execution on mix improvement and earnings growth, not a bargain-basement multiple.

Company Overview

Viavi Solutions(VIAV), headquartered in Chandler, Arizona, operates in communications equipment with 3,600 employees and roots dating back to 1923. The company serves telecommunications, cloud, enterprise, first responder, military, aerospace, and critical infrastructure customers across the Americas, Asia-Pacific, Europe, the Middle East, and Africa. Its two operating segments are Network and Service Enablement, or NSE, and Optical Security and Performance Products, or OSP.

NSE is the larger strategic engine. It provides testing, monitoring, assurance, and security solutions across lab, production, and field environments for wireless, wireline, cloud, satellite, public safety, military, and infrastructure networks. OSP is the optical technology arm, supplying anti-counterfeiting, 3D sensing, government and aerospace, automotive, and industrial applications. In plain English, VIAV sells the picks, shovels, and inspection tools needed to build and verify faster networks, while also monetizing specialized optical coatings and security features in adjacent markets.

The revenue base has been steady but not linear. Annual revenue was $1.20B in fiscal 2021, $1.29B in 2022, $1.11B in 2023, $1.00B in 2024, and $1.08B in 2025. That history shows why the market has treated VIAV cautiously. The recent story is different: quarterly revenue moved from $270.8M in the December 2024 quarter to $299.1M in September 2025 and then to $369.3M in December 2025, reflecting acquisition help and stronger end-market demand.

Business Segment Deep Dive

NSE is where the growth engine now sits. In fiscal Q1 2026, NSE revenue was $216.0M, up 35.5% YoY, with 63.0% gross margin and 7.5% operating margin. In fiscal Q2 2026, NSE revenue accelerated to $291.5M, up 45.8% YoY, and segment operating margin improved to 15.6% from 8.7% in the prior-year quarter. Management tied that performance to demand for lab, production, and field products driven by the data center ecosystem, plus strength in aerospace and defense.

The mix inside NSE has changed in a way that reduces dependence on traditional telecom spending. On the Q2 fiscal 2026 call, CEO Oleg Khaykin said the business had moved from roughly 45% service provider, 40% data center, and 15% aerospace and defense to closer to 40% service provider, 45% data center, and 15% aerospace and defense. He added that the service provider business was steady and showing slight recovery, but the faster growth in data center and defense changed the percentages. That is an important distinction. VIAV is not simply waiting for carrier capex to recover. It is redirecting the center of gravity.

OSP is smaller but still meaningful because it brings higher-margin optical technologies and end-market diversity. In fiscal Q1 2026, OSP revenue was $83.1M, up 5.5% YoY, with 52.3% gross margin and 37.1% operating margin. In fiscal Q2 2026, OSP revenue was $77.8M, up 9.7% YoY, with 50.8% gross margin and 33.4% operating margin. Management said the Q2 increase was primarily driven by anti-counterfeiting and other products, while 3D sensing demand was in line with seasonal expectations.

At the company level, product revenue remains the dominant model. In fiscal 2025, product revenue was $912.0M, or 84.1% of total revenue, while service revenue was $172.3M, or 15.9%. That matters because product-heavy businesses can produce stronger operating leverage when demand turns up, but they also feel mix shifts and order timing more sharply. VIAV’s recent margin expansion shows the upside of that structure when higher-growth categories start carrying more weight.

Flagship Product Analysis

VIAV does not have a single consumer-style flagship product. Its flagship franchise is a family of network test, validation, and fiber monitoring tools inside NSE, especially those tied to high-speed data center and optical network buildouts. Management repeatedly highlighted demand for lab and production products supporting high-performance semis, optical modules, network equipment manufacturers, and field instruments used to build and optimize the fiber links between data centers.

That franchise is gaining relevance because AI infrastructure is not just a chip story. It is also a measurement story. Faster optical links, denser fiber, and tighter latency requirements create more points where customers need to test, validate, and monitor performance. On the Q2 call, Khaykin said hyperscalers and service providers are using VIAV’s fiber field instruments to build, operate, and optimize next-generation fiber networks that interconnect data centers. He also said data center operators are directly investing in fiber monitoring and measurement systems to ensure service-level performance.

Another important product cluster is resilient PNT, or position, navigation, and timing, strengthened by the Inertial Labs acquisition. Khaykin described demand being driven by applications that operate in the absence of GPS signals, including drones and autonomous systems across air, land, sea, and undersea use cases. That gives VIAV exposure to defense modernization and mission-critical timing, which are less tied to telecom cycles and often carry higher barriers to entry.

OSP’s flagship capabilities are less visible but still valuable. Anti-counterfeiting products and optical processing technologies support government, industrial, and sensing applications. In Q2 fiscal 2026, OSP growth was driven mostly by recovery in anti-counterfeiting and other products. This business is not the headline growth engine, but it acts like a second motor on the aircraft. It does not set the speed, yet it helps stabilize the flight.

Innovation & Competitive Advantage

VIAV’s competitive edge comes from specialization rather than scale. The company operates in niches where customers care about precision, reliability, installed workflows, and domain expertise. That is especially true in telecom test, optical validation, fiber assurance, and resilient timing. These are not commodity boxes. They sit inside customer labs, production lines, field deployments, and mission-critical networks where failure is expensive and switching costs are real.

The innovation case is strongest in data center and defense. VIAV has highlighted 800G and 1.6T optical transceiver testing in industry materials, and management said the data center ecosystem now includes semis, modules, systems, and field instruments. Khaykin also said the company has visibility on base demand from these activities up to three quarters ahead, versus only one to one-and-a-half quarters historically. That is not a guarantee, but it is a meaningful improvement in a business known for short visibility.

The Spirent asset acquisition strengthens this moat. VIAV closed the acquisition of Spirent’s high-speed ethernet, network security, and channel emulation business lines from Keysight in 2025, and management said the acquired business should add about $200M of annual revenue run-rate, above the original assumption of about $188M. In Q2 fiscal 2026, revenue from Spirent was $43M, slightly below management’s expectation of $45M-$55M because of timing, but the strategic fit remains clear: broader product breadth in a faster-growing test market.

There is also a quiet advantage in reuse. Management said the same fiber tools developed for traditional service providers are now finding adoption among hyperscalers. That means VIAV can leverage existing product know-how into a richer customer set without inventing an entirely new platform from scratch. In capital equipment, that kind of adjacency is usually more profitable than chasing novelty for its own sake.

Operations & Supply Chain

VIAV’s operating model mixes manufacturing discipline with portfolio reshaping. In fiscal Q2 2026, operating cash flow was $42.5M versus $44.7M in the prior-year quarter, while CapEx was $5.6M versus $8.2M. The lower CapEx and solid cash generation support flexibility, but working capital timing still matters. Management explicitly said Q2 cash flow was affected by working capital timing.

The company is also actively cleaning up the capital structure. During Q2 fiscal 2026, VIAV exchanged about $100M of 1.625% convertible notes due March 2026 for 7.9M shares at $17.88 per share, leaving about $50M of principal to be paid in cash. It also prepaid $100M of the $600M Term Loan B in January 2026. That sequence shows a clear capital allocation priority: debt management first, buybacks second. Management said no shares were repurchased during the quarter because capital was directed toward debt reduction.

The restructuring plan approved on January 23, 2026 is another operational lever. VIAV expects about 5% of its global workforce to be impacted, with approximately $32M of restructuring charges and about $30M of annual savings once completed. Management said the majority of charges should be recognized by June 2026 and the plan should be substantially completed by December 2026. Some of the savings will be reinvested into higher-growth areas such as data center and aerospace and defense.

Supply chain and order timing remain relevant risks. Management said some government orders were pushed from the December quarter into the March quarter because of timing issues, and the 10-K discusses exposure to supply chain constraints, tariffs, sanctions, and trade restrictions. In a business selling to telecom, defense, and global industrial customers, logistics and procurement friction are part of the terrain, not an exception.

Market Analysis

VIAV sits inside a large communications equipment and network infrastructure market, but its real opportunity is narrower and better. Third-party market research cited in the context pegs the global telecom equipment market at $695.72B in 2026, rising to $942.76B by 2031 at a 6.27% CAGR. Enterprise network equipment spending is projected at $115B in 2025. VIAV does not need to win broad market share across that ocean. It needs to keep winning in the high-value channels where testing, assurance, observability, and optical validation are mandatory.

The strongest near-term demand pocket is AI data center infrastructure. Management tied Q2 growth to the data center ecosystem, including high-performance semis, optical modules, systems, and field instruments. Industry context also points to rising demand for 800G and 1.6T testing, coherent optical transport growth, and fiber densification. Those trends fit VIAV’s product set almost perfectly. This is one of those rare cases where the company’s tool kit lines up with the market’s pain points instead of chasing them from behind.

Telecom remains a mixed market. Carrier spending has been uneven, and VIAV has cited weaker wireless infrastructure test demand. Yet service provider demand was described as stable in Q2 fiscal 2026, with some opportunistic demand from cable operators transitioning to new DAA architecture and Access 4.0. That means telecom is no longer the growth hero, but it also is not the collapse case embedded in older VIAV narratives.

Defense and aerospace provide a second structural tailwind. Management said resilient PNT demand is being driven by autonomous systems and GPS-denied applications. That market is attractive because qualification cycles are long, customer requirements are stringent, and budgets are less correlated with enterprise IT swings. When a company can sell both to hyperscalers chasing latency and to defense customers chasing resilience, it has a more balanced demand stack than the average communications equipment vendor.

Customer Profile

VIAV’s customer base is broad and technically demanding. The company sells to telecom and datacom service providers, cloud operators, semiconductor and network equipment vendors, government agencies, utilities, and armed forces. Named customers in the business context include AT&T, Verizon, Nokia, Ericsson, Cisco, and Deutsche Telekom. That list matters because it shows VIAV is embedded with large, sophisticated buyers that tend to standardize around proven vendors.

Within NSE, the customer profile is shifting toward higher-growth buyers. Khaykin said the data center ecosystem now represents about 45% of the mix, with service providers a little under 40% and aerospace and defense around 15%. He also said about a third of field instrument revenue is now coming from data center. That implies the customer base is moving from traditional telecom operators toward hyperscalers, data center operators, and adjacent infrastructure builders.

OSP serves a different customer set, including anti-counterfeiting, 3D sensing, aerospace, automotive, and industrial applications. That diversification matters because it reduces dependence on any one procurement cycle. It also means VIAV is exposed to both recurring infrastructure validation needs and specialized optical applications. The result is a customer portfolio that is still cyclical, but less one-dimensional than it was several years ago.

Competitive Landscape

VIAV competes against larger and better-resourced companies in several categories. In network test, monitoring, and assurance, relevant competitors include Keysight, Anritsu, EXFO, NetScout, Radcom, Rohde & Schwarz, and certain adjacent offerings from Cisco, Juniper, Nokia, and Ericsson. In optical and photonics-related categories, competitors include Coherent, Lumentum, Corning, AFL, Yokogawa, and others. The company’s own filings also cite pricing pressure, especially from Asia-based competitors.

That sounds intimidating, but VIAV’s niche is more defensible than a generic peer list implies. It competes where customers need specialized test and assurance solutions rather than broad networking platforms. The company’s installed expertise in lab, production, and field environments, plus its optical processing capabilities, gives it a narrower but stickier lane. The Spirent asset purchase also improves competitive scale in high-speed Ethernet and network security testing, where breadth matters.

The main competitive risk is not that VIAV lacks good products. It is that larger rivals can outspend it or that software-centric architectures reduce demand for legacy hardware tools. The 10-K specifically notes that virtualized networks and software solutions can lower barriers to entry and weaken demand for some hardware categories. That is why the company’s move toward data center validation, observability, and mission-critical timing is so important. It needs to stay on the side of the market where complexity is rising, not commoditizing.

Macro & Geopolitical Landscape

The macro backdrop for VIAV is mixed but workable. On one side, AI infrastructure spending, fiber densification, coherent optical upgrades, and defense modernization are supportive. On the other, telecom capex remains uneven, and global supply chains for photonics and communications hardware remain exposed to tariffs, sanctions, and regional trade friction. VIAV’s 10-K explicitly flags tariffs, sanctions, trade restrictions, and geopolitical events as risks.

The company is also exposed to government procurement timing. Management said some government orders slipped from the December quarter into the March quarter because of fewer ordering days. That is a reminder that even healthy demand can arrive in lumpy batches. Investors should treat quarter-to-quarter timing noise as part of the business model, especially in defense and public sector channels.

The good news is that VIAV’s end-market mix is more resilient than a pure telecom supplier. Hyperscaler data center spending and defense demand are being driven by secular needs, not just GDP growth. If macro conditions soften, those categories can still slow, but they usually do not stop on a dime. That makes VIAV better positioned than communications equipment names still chained mainly to carrier budget cycles.

Balance Sheet Health

Income Statement Strength

Estimates Outlook

Valuation Assessment

Target Prices & Recommendation

Closing

VIavi Solutions(VIAV) is a better business today than its old reputation suggests. Fiscal Q2 2026 showed real momentum with $369.3M in revenue, 19.3% non-GAAP operating margin, and strong growth in data center and aerospace and defense. The company is also reshaping itself operationally, with a restructuring expected to deliver about $30M in annual savings and a capital allocation posture focused on debt management.

The investment debate is no longer about whether VIAV can grow outside telecom. The facts say it can. The debate is how much of that pivot is already in the stock. With a fair value estimate of $36, the answer is that a lot of progress is priced in, but not all of it. That leaves VIAV in the middle lane: a credible company with improving fundamentals, but a stock that deserves patience more than chase-the-breakout enthusiasm.

For moderate-risk investors with a medium-term horizon, Hold is the right call. If the stock pulls back toward the buy levels while the data center mix, defense demand, and earnings trajectory stay intact, the risk-reward would improve materially. Until then, VIAV looks more like a disciplined watchlist name than an all-clear bargain.