Viavi Solutions Inc.

10/30/2025 | Press release | Distributed by Public on 10/30/2025 14:13

Quarterly Report for Quarter Ending September 27, 2025 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-Q, which we also refer to as the Report, which are not historical facts, are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. A forward-looking statement may contain words such as "anticipate," "believe," "can," "can impact," "could," "continue," "estimate," "expect," "intend," "may," "ongoing," "plan," "potential," "projects," "should," "will," "will continue to be," "would," or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. Forward-looking statements include statements, but are not limited to statements such as:
•Financial projections and expectations, including profitability of certain business units, synergies, benefits and other matters related to the acquisition of the high-speed ethernet, network security and channel emulation testing business of Spirent Communications plc, plans to reduce costs and improve efficiencies including through restructuring programs, the effects of seasonality on certain business units, the consolidation of the communication industry and continued reliance on key customers for a significant portion of our revenue, future sources of revenue, competition and pricing pressures, the future impact of certain accounting pronouncements, and our estimation of the potential impact and materiality of litigation;
•Sufficiency of our sources of funding for working capital, capital expenditures, contractual obligations, acquisitions, stock repurchases, debt repayments and other matters;
•Our expectations regarding demand for our products and services, including industry trends and technological advancements that may drive such demand, the role we will play in those advancements and our ability to benefit from such advancements;
•Our plans for growth and innovation opportunities;
•Our plans for continued development, use and protection of our intellectual property;
•Our strategies for achieving our current business objectives, including related risks and uncertainties;
•Our plans or expectations relating to investments, execution of capital allocation and debt management strategies, acquisitions, partnerships and other strategic opportunities;
•Our research and development plans and investments and the expected impact of such plans on our financial performance;
•Our expectations related to our products, including costs associated with the development of new products, product yields, quality and other issues;
•Our expectations regarding the impact of tariffs and our strategies for mitigating such impact;
•Our expectations related to future tax liabilities resulting from future tax legislation; and
•Our expectations related to macro-economic conditions, including the impact of inflation, fiscal tightening at central banks, changes in foreign exchange rates, the risk of increased tensions and trade actions, including global tariffs, ongoing geopolitical tensions including the conflict between Russia and Ukraine, the instability in the Middle East, on our business, operations and financial results.
Management cautions that forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements. These forward-looking statements are only predictions and are subject to risks and uncertainties including those set forth in Part II, Item 1A "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q and in other documents we file with the U.S. Securities and Exchange Commission. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. Forward-looking statements are made only as of the date of this Report and subsequent facts or circumstances may contradict, obviate, undermine or otherwise fail to support or substantiate such statements. We are under no duty to update any of the forward-looking statements after the date of this Form 10-Q to conform such statements to actual results or to changes in our expectations.
In addition, Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended June 28, 2025.
You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in "Risk Factors" and "Forward-Looking Statements."
Overview
VIAVI is a global provider of network test, monitoring and assurance solutions for telecommunications, cloud, enterprises, first responders, military, aerospace and railway. VIAVI is also a leader in light management technologies for 3D sensing, anti-counterfeiting, consumer electronics, industrial, automotive, government and aerospace applications.
To serve our markets we operate the following business segments:
•Network and Service Enablement (NSE); and,
•Optical Security and Performance Products (OSP).
During the first quarter of fiscal 2026, the NSE business grew year-over-year as a result of strong demand for lab and production and field products driven by the data center ecosystem as well as growth in aerospace and defense products. Our acquisition of Inertial Labs contributed $18.7 million of net revenue in the first quarter of fiscal 2026. OSP performance improved year-over-year primarily as a result of strength in Anti-Counterfeiting and Other products.
Our financial results and long-term growth model will continue to be driven by revenue growth, non-GAAP operating income, non-GAAP operating margin, non-GAAP diluted earnings per share (EPS) and cash flow from operations. We believe these key operating metrics are useful to investors because management uses these metrics to assess the growth of our business and the effectiveness of our marketing and operational strategies.
Looking Ahead
As we look forward to the second quarter of fiscal 2026, we expect NSE to be up driven mainly by the data center ecosystem as well as aerospace and defense and the acquisition of Spirent Communications plc's (Spirent) high-speed ethernet, network security and channel emulation testing business. Our long-term focus remains on executing against our strategic priorities to drive revenue and earnings growth, capture market share and continue to optimize our capital structure. We remain positive on our long-term growth drivers and will continue to focus on executing our strategic priorities over the long-term to:
•Defend and consolidate leadership in core business segments;
•Invest in secular trends to drive growth and expand total addressable market (TAM);
•Extend VIAVI technologies and platforms into lucrative adjacent markets and applications.
The U.S. administration has implemented and could implement further broad-based, updated global tariffs and the situation continues to be dynamic and evolving. As we operate in this challenging environment, we are focused on continuing to deliver our products and services to our customers. Given our global business, tariffs will result in additional cost for us and our suppliers. We are analyzing ways to optimize our operations and supply chain strategies, control costs and implement pricing actions to reduce the impact from tariffs.
Financial Highlights
First quarter fiscal 2026 results included the following notable items:
•Net revenue of $299.1 million, up $60.9 million or 25.6% year-over-year.
•GAAP operating margin of 2.5%, down 230 bps year-over-year.
•Non-GAAP operating margin of 15.7%, up 570 bps year-over-year.
•GAAP net loss of $21.4 million, up $19.6 million or 1,088.9% year-over-year.
•Non-GAAP net income of $33.1 million, up $20.7 million or 166.9% year-over-year.
•GAAP diluted EPS of $(0.10), down $0.09 or 900.0% year-over-year.
•Non-GAAP diluted EPS of $0.15, up $0.09 or 150.0% year-over-year.
A reconciliation of GAAP financial measures to Non-GAAP financial measures is provided below (in millions, except EPS amounts):
Three Months Ended
September 27, 2025 September 28, 2024
Operating Income Operating Margin Operating Income Operating Margin
GAAP measures $ 7.6 2.5 % $ 11.5 4.8 %
Stock-based compensation 13.4 4.5 % 12.7 5.3 %
Change in fair value of contingent liability 10.9 3.6 % (3.5) (1.5) %
Acquisition and integration related charges 3.9 1.3 % 0.6 0.3 %
Other charges unrelated to core operating performance(1)
0.6 0.2 % (0.5) (0.2) %
Amortization of inventory step-up 2.6 0.9 % - - %
Amortization of intangibles 8.4 2.8 % 4.4 1.8 %
Restructuring and related benefits (0.3) (0.1) % - - %
Litigation settlement - - % (1.3) (0.5) %
Total related to Cost of Revenues and Operating Expenses 39.5 13.2 % 12.4 5.2 %
Non-GAAP measures $ 47.1 15.7 % $ 23.9 10.0 %
Three Months Ended
September 27, 2025 September 28, 2024
Net (Loss) Income Diluted EPS Net (Loss) Income Diluted EPS
GAAP measures $ (21.4) $ (0.10) $ (1.8) $ (0.01)
Items reconciling GAAP Net Loss and EPS to Non-GAAP Net Income and EPS:
Stock-based compensation 13.4 0.06 12.7 0.06
Change in fair value of contingent liability 10.9 0.05 (3.5) (0.01)
Acquisition and integration related charges 3.9 0.02 0.6 -
Other charges (benefits) unrelated to core operating performance(1)
0.6 - (0.5) -
Amortization of inventory step-up 2.6 0.01 - -
Amortization of intangibles 8.4 0.04 4.4 0.02
Restructuring and related benefits (0.3) - - -
Litigation settlement - - (1.3) (0.01)
Non-cash interest expense and other expense(2)
4.8 0.02 1.1 0.01
Provision for income taxes 10.2 0.05 0.7 -
Total related to Net Income and EPS 54.5 0.25 14.2 0.07
Non-GAAP measures $ 33.1 $ 0.15 $ 12.4 $ 0.06
Shares used in per share calculation for Non-GAAP EPS 227.9 224.0
(1)Included in the three months ended September 28, 2024 is a gain of $0.9 million on the sale of assets previously classified as held for sale and other charges unrelated to core operating performance of $0.4 million.
(2)The Company incurred a loss of $3.8 million for the three months ended September 27, 2025 in connection with the extinguishment of certain 1.625% Senior Convertible Notes.
Use of Non-GAAP (Adjusted) Financial Measures
The Company provides non-GAAP operating income, non-GAAP operating margin, non-GAAP net income and non-GAAP EPS financial measures as supplemental information regarding the Company's operational performance and believes providing this additional information allows investors to see Company results through the eyes of management, and better to evaluate more clearly and consistently the Company's core operational performance and expenses and evaluate the efficacy of the methodology used by management to measure such performance. The Company uses the measures disclosed in this Report to evaluate the Company's historical and prospective financial performance, as well as its performance relative to its competitors. Specifically, management uses these items to further its own understanding of the Company's core operating performance, which the Company believes represents its performance in the ordinary, ongoing and customary course of its operations. Accordingly, management excludes from core operating performance items such as those relating to certain purchase price accounting adjustments, amortization of acquisition related intangibles, amortization expense related to acquisition related inventory step-up, stock-based compensation, legal settlements, restructuring, changes in fair value of contingent consideration liabilities, certain investing and acquisition related expenses and other activities and income tax expenses or benefits that management believes are not reflective of such ordinary, ongoing and core operating activities. The non-GAAP adjustments are outlined below.
Cost of revenues, costs of research and development and costs of selling, general and administrative: The Company's GAAP presentation of gross margin and operating expenses may include (i) additional depreciation and amortization from changes in estimated useful life and the write-down of certain property, plant and equipment and intangibles, (ii) charges such as severance, benefits and outplacement costs related to restructuring plans with a specific and defined term, (iii) costs for facilities not required for ongoing operations, and costs related to the relocation of certain equipment from these facilities and/or contract manufacturer facilities, (iv) stock-based compensation, (v) amortization expense related to acquired intangibles, (vi) amortization expense related to acquisition related inventory step-up, (vii) changes in fair value of contingent consideration liabilities, (viii) acquisition related transaction and integration costs related to acquired entities, (ix) significant legal settlements and other contingencies and (x) other charges unrelated to our core operating performance comprised mainly of other costs and contingencies unrelated to current and future operations, including transformational initiatives such as the implementation of simplified automated processes, site consolidations and reorganizations. The Company excludes these items in calculating non-GAAP operating margin, non-GAAP net income and non-GAAP EPS.
Non-cash interest expense and other expense: The Company excludes certain investing expenses, including accretion of debt discount, and other non-cash activities that management believes are not reflective of such ordinary, ongoing and core operating activities, when calculating non-GAAP net income and non-GAAP EPS.
Income tax expense or benefit: The Company excludes certain non-cash tax expense or benefit items, such as (i) the utilization of net operating losses (NOLs) where valuation allowances were released, (ii) intra-period tax allocation benefit and (iii) the tax effect for amortization of non-tax deductible intangible assets, in calculating non-GAAP net income and non-GAAP EPS.
Non-GAAP financial measures are not in accordance with, preferable to, or an alternative for, generally accepted accounting principles in the United States. The GAAP measure most directly comparable to non-GAAP operating income is operating income. The GAAP measure most directly comparable to non-GAAP operating margin is operating margin. The GAAP measure most directly comparable to non-GAAP net income is net income. The GAAP measure most directly comparable to non-GAAP EPS is earnings per share.
RESULTS OF OPERATIONS
The results of operations for the current period are not necessarily indicative of results to be expected for future periods. The following table summarizes selected Consolidated Statements of Operations items (in millions):
Three Months Ended
September 27, 2025 September 28, 2024 Change Percent Change
Segment net revenue:
NSE $ 216.0 $ 159.4 $ 56.6 35.5 %
OSP 83.1 78.8 4.3 5.5 %
Total net revenue $ 299.1 $ 238.2 $ 60.9 25.6 %
Amortization of acquired technologies $ 6.9 $ 3.3 $ 3.6 109.1 %
Percentage of net revenue 2.3 % 1.4 %
Gross profit $ 169.0 $ 136.1 $ 32.9 24.2 %
Gross margin 56.5 % 57.1 %
Research and development $ 56.0 $ 49.4 $ 6.6 13.4 %
Percentage of net revenue 18.7 % 20.7 %
Selling, general and administrative $ 104.2 $ 74.1 $ 30.1 40.6 %
Percentage of net revenue 34.8 % 31.1 %
Amortization of other intangibles $ 1.5 $ 1.1 $ 0.4 36.4 %
Percentage of net revenue 0.5 % 0.5 %
Restructuring and related benefits $ (0.3) $ - $ (0.3) NM
Percentage of net revenue 0.1 % - %
Loss on convertible note extinguishment $ (3.8) $ - $ (3.8) NM
Percentage of net revenue 1.3 % - %
Interest and other income, net $ 1.3 $ 3.2 $ (1.9) (59.4) %
Percentage of net revenue 0.4 % 1.3 %
Interest expense $ (7.4) $ (7.5) $ 0.1 (1.3) %
Percentage of net revenue 2.5 % 3.1 %
Provision for income taxes $ 19.0 $ 9.0 $ 10.0 111.1 %
Percentage of net revenue 6.4 % 3.8 %
Equity investment losses $ (0.1) $ - $ (0.1) NM
Percentage of net revenue - % - %
NM - Percentage change not considered meaningful
Net Revenue
Revenue from our service offerings exceeds 10% of our total consolidated net revenue and is presented separately in our Consolidated Statements of Operations. Service revenue primarily consists of maintenance and support, extended warranty, professional services and post-contract support in addition to other services such as calibration and repair services. When evaluating the performance of our segments, management focuses on total net revenue, gross profit and operating income and not the product or service categories. Consequently, the following discussion of business segment performance focuses on total net revenue, gross profit and operating income consistent with our approach for managing the business.
Three Months Ended September 27, 2025 and September 28, 2024
Net revenue increased by $60.9 million, or 25.6%, during the three months ended September 27, 2025 compared to the same period a year ago. This increase was primarily from lab and production and field products driven by the data center ecosystem, as well as growth in our aerospace and defense products. Our acquisition of Inertial Labs contributed $18.7 million of net revenue in the first quarter of fiscal 2026. OSP performance improved year-over-year driven by Anti-Counterfeiting and Other products.
Product revenues increased by $59.9 million, or 30.3%, during the three months ended September 27, 2025 compared to the same period a year ago, driven by volume increases in NSE and OSP.
Service revenues increased by $1.0 million, or 2.5% during the three months ended September 27, 2025, compared to the same period a year ago, driven by a volume increase in NSE.
Going forward, we expect to continue to encounter a number of industry and market risks and uncertainties. For example, uncertainty around the timing of our customers' procurement decisions on infrastructure maintenance and upgrades and decisions on new infrastructure investments or uncertainty about speed of adoption of 5G technology at a commercially viable scale. This may limit our visibility, and consequently, our ability to predict future revenue, seasonality, profitability and general financial performance, which could create period-over-period variability in our financial measures and present foreign exchange rate risks. The recent global tariffs implemented could increase our costs and impact our business.
We cannot predict when or to what extent these uncertainties will be resolved. Our revenues, profitability and general financial performance may also be affected by: (a) pricing pressures due to, among other things, a highly concentrated customer base, increasing competition, particularly from Asia-based competitors and a general commoditization trend for certain products; (b) strategic execution challenges arising from competition with larger and more well-resourced competitors; (c) product mix variability in our markets, which affects revenue and gross margin; (d) fluctuations in customer buying patterns, which cause demand, revenue and profitability volatility; (e) the current trend of communication industry consolidation, which is expected to continue, that directly affects our NSE customer base and adds additional risk and uncertainty to our financial and business projections; (f) the impact of ongoing global trade policies, tariffs and sanctions; and (g) regulatory or economic developments and/or technology challenges that slow or change the rate of adoption of 5G, 3D sensing and other emerging secular technologies and platforms.
Revenue by Region
We operate in three geographic regions, including the Americas, Asia-Pacific and Europe Middle East and Africa (EMEA). Net revenue is assigned to the geographic region and country where our product is initially shipped. For example, certain customers may request shipment of our product to a contract manufacturer in one country, which may differ from the location of their end customers.
The following table presents net revenue by the three geographic regions we operate in and net revenue from countries that exceeded 10% of our total net revenue (in millions):
Three Months Ended
September 27, 2025 September 28, 2024
Americas:
United States $ 106.7 35.7 % $ 73.0 30.6 %
Other Americas 22.1 7.4 % 15.7 6.6 %
Total Americas $ 128.8 43.1 % $ 88.7 37.2 %
Asia-Pacific:
Greater China $ 56.5 18.9 % $ 53.8 22.6 %
Other Asia-Pacific 35.6 11.9 % 32.1 13.5 %
Total Asia-Pacific $ 92.1 30.8 % $ 85.9 36.1 %
EMEA: $ 78.2 26.1 % $ 63.6 26.7 %
Total net revenue $ 299.1 100.0 % $ 238.2 100.0 %
Net revenue from customers outside the Americas represented 56.9% and 62.8% of net revenue, respectively, during the three months ended September 27, 2025 and September 28, 2024.
We expect revenue from customers outside of the United States to continue to be an important part of our overall net revenue and an increasing focus for net revenue growth opportunities.
Amortization of Acquired Technologies (Cost of revenues)
Amortization of acquired technologies within Cost of revenues increased $3.6 million or 109.1% during the three months ended September 27, 2025 compared to the same period a year ago. This increase is primarily due to the amortization of intangibles acquired through Inertial Labs, partially offset by certain intangibles becoming fully amortized.
Gross Margin
Gross margin decreased by 0.6 percentage points during the three months ended September 27, 2025 from 57.1% in the same period a year ago to 56.5% in the current period. The decrease was primarily driven by the increase in amortization of intangibles and amortization of acquisition related inventory step-up, partially offset by higher volume and favorable product mix.
As discussed in more detail under "Net Revenue" above, we sell products in certain markets that are consolidating, undergoing product, architectural and business model transitions, have high customer concentrations, are highly competitive (increasingly due to Asia-Pacific-based competition), are price sensitive and/or are affected by customer seasonal and mix variant buying patterns. We expect these factors to continue to result in variability of our gross margin.
Research and Development
Research and Development (R&D) expense increased by $6.6 million, or 13.4% during the three months ended September 27, 2025 compared to the same period a year ago. This increase was primarily due to higher variable expenses and incremental cost from the acquisition of Inertial Labs. As a percentage of net revenue, R&D expense decreased by 2.0 percentage points during the three months ended September 27, 2025 compared to the same period a year ago.
We believe that continuing our investments in R&D is critical to attaining our strategic objectives. We plan to continue to invest in R&D and new products that will further differentiate us in the marketplace.
Selling, General and Administrative
Selling, General and Administrative (SG&A) expense increased by $30.1 million, or 40.6%, during the three months ended September 27, 2025 compared to the same period a year ago. This increase was primarily due to the change in fair value of acquisition related contingent consideration, higher variable expenses and higher acquisition and integration related charges. As a percentage of net revenue, SG&A expense increased 3.7 percentage points during the three months ended September 27, 2025 compared to the same period a year ago.
Amortization of Intangibles (Operating expenses)
Amortization of intangibles within Operating expenses increased $0.4 million or 36.4% during the three months ended September 27, 2025 compared to the same period a year ago. This increase is primarily due to the amortization of intangibles acquired through Inertial Labs, partially offset by certain intangibles becoming fully amortized.
Restructuring
The Company's restructuring events are primarily intended to reduce costs, consolidate operations, integrate various acquisitions, streamline product manufacturing and address market conditions.
During the fourth quarter of fiscal 2024, management approved a restructuring and workforce reduction plan (the Fiscal 2024 Plan) across various functions intended to improve operational efficiencies and better align the Company's workforce with current business needs. The Company expects approximately 7% of its global workforce to be affected, impacting both segments and corporate functions. We estimate annualized gross cost savings of approximately $25.0 million excluding any one-time charges as a result of the restructuring activities initiated under the Fiscal 2024 Plan. The Company anticipates the Fiscal 2024 Plan to be substantially complete by the end of the second quarter of fiscal 2026.
The restructuring and workforce reduction plan initiated in the second quarter of fiscal 2023 (the Fiscal 2023 Plan) across various functions to better align the Company's workforce with current business needs and strategic growth opportunities was completed in the first quarter of fiscal 2025. The Fiscal 2023 Plan affected approximately 5% of the Company's workforce and resulted in an estimated annualized gross cost savings of approximately $25.0 million excluding any one-time charges.
As of September 27, 2025, our total restructuring accrual was $2.7 million.
During the three months ended September 27, 2025, the Company recorded restructuring benefits of $0.3 million related to the Fiscal 2024 Plan. During the three months ended September 28, 2024, the Company recorded restructuring charges of $0.2 million related to the Fiscal 2024 Plan and benefits of $0.2 million related to the Fiscal 2023 Plan.
We estimate future cash payments of $2.7 million under the Fiscal 2024 Plan, funded by operating cash flow.
Refer to "Note 13. Restructuring and Related Charges" for more information.
Loss on Convertible Note Extinguishment
During the three months ended September 27, 2025, the Company issued $100.9 million aggregate principal amount of 0.625% Senior Convertible Notes due 2031 (2031 Notes) to certain holders of the 1.625% Senior Convertible Notes (2026 Notes) in exchange for $97.5 million principal amount of the 2026 Notes. This exchange transaction was accounted for as an extinguishment which resulted in the write-off of unamortized debt discount and issuance costs of $1.1 million on the extinguished notes. Accrued interest of $0.7 million on the 2026 Notes was included in the exchange for the 2031 Notes. The total loss from the exchange was $3.8 million recorded as Loss on convertible note extinguishment in the Consolidated Statements of Operations.
Interest and other income, net
Interest and other income, net, was $1.3 million during the three months ended September 27, 2025 compared to $3.2 million during the same period a year ago. This $1.9 million decrease was primarily driven by a decrease in interest income due to lower average cash balances and lower yields compared to the prior period.
Interest Expense
Interest expense decreased by $0.1 million, or 1.3% during the three months ended September 27, 2025 compared to the same period a year ago. This change was primarily driven by a decrease in the accretion of debt discount on the 2026 Notes as a result of the debt extinguishment.
Provision for Income Taxes
We recorded an income tax provision of $19.0 million and $9.0 million for the three months ended September 27, 2025 and September 28, 2024, respectively.
The income tax provision for the three months ended September 27, 2025 primarily relates to income tax in certain foreign jurisdictions based on our forecasted pre-tax income or loss and a$9.7 millionprovision related to a revaluation of our deferred tax assets due to a change in the German corporate income tax rate. The income tax provision for the three months ended September 28, 2024, primarily relates to income tax in certain foreign jurisdictions based on our forecasted pre-tax income or loss.
The income tax provision recorded differs from the expected tax provision that would be calculated by applying the federal statutory rate to our income from continuing operations before taxes primarily due to changes in the valuation allowance for deferred tax assets attributable to our domestic and foreign income from continuing operations and the revaluation of our German deferred tax assets.
As of September 27, 2025, and June 28, 2025, our unrecognized tax benefits (net of Federal benefits) totaled $42.5 million and $42.4 million, respectively, and are included in deferred taxes and other non-current tax liabilities. We had $3.4 million accrued for the payment of interest and penalties as of September 27, 2025. The timing and resolution of income tax examinations are uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authorities may differ from the amounts accrued for each year. Although we do not expect that our balance of gross unrecognized tax benefits will change materially in the next 12 months, given the uncertainty in the development of ongoing income tax examinations, we are unable to estimate the full range of possible adjustments to this balance.
On July 4, 2025, the One Big Beautiful Bill Act (OBBBA), which included a broad range of tax reform provisions, was signed into law in the United States. We have considered the provisions of OBBBA, which did not have a material impact on our tax provision this quarter.
Operating Segment Information
Information related to our operating segments was as follows (in millions):
Three Months Ended
September 27, 2025 September 28, 2024 Change Percentage Change
Network and Service Enablement
Net revenue $ 216.0 $ 159.4 $ 56.6 35.5 %
Gross profit 136.1 97.1 39.0 40.2 %
Gross margin 63.0 % 60.9 %
Operating income (loss) $ 16.3 $ (7.3) $ 23.6 (323.3) %
Operating margin 7.5 % (4.6) %
Optical Security and Performance
Net revenue $ 83.1 $ 78.8 $ 4.3 5.5 %
Gross profit 43.5 43.6 (0.1) (0.2) %
Gross margin 52.3 % 55.3 %
Operating income $ 30.8 $ 31.2 $ (0.4) (1.3) %
Operating margin 37.1 % 39.6 %
Network and Service Enablement
NSE net revenue increased by $56.6 million, or 35.5%, during the three months ended September 27, 2025 compared to the same period a year ago, primarily driven by higher volume in Lab and Production, Aerospace and Defense and Fiber and Access Solutions, partially offset by lower volume in Wireless.
NSE gross margin increased by 2.1 percentage points during the three months ended September 27, 2025 to 63.0% from 60.9% in the same period a year ago primarily due to higher volume and favorable product mix.
NSE operating margin increased by 12.1 percentage points during the three months ended September 27, 2025 to 7.5% from (4.6)% in the same period a year ago primarily due to the aforementioned increase in gross margin.
Optical Security and Performance Products
OSP net revenue increased by $4.3 million, or 5.5%, during the three months ended September 27, 2025 compared to the same period a year ago. This increase was primarily driven by Anti-Counterfeiting and Other revenues.
OSP gross margin decreased by 3.0 percentage points during the three months ended September 27, 2025 to 52.3% from 55.3% in the same period a year ago primarily due to unfavorable product mix.
OSP operating margin decreased by 2.5 percentage points during the three months ended September 27, 2025 to 37.1% from 39.6% in the same period a year ago primarily due to the aforementioned decrease in gross margin.
Liquidity and Capital Resources
We believe our existing liquidity and sources of liquidity, namely operating cash flows, credit facility capacity, and access to capital markets, will continue to be adequate to meet our liquidity needs, including but not limited to, contractual obligations, working capital and capital expenditure requirements, contingent consideration obligations, financing strategic initiatives, funding debt maturities, and executing purchases under our share repurchase program over the next twelve months and beyond. However, there are a number of factors that could positively or negatively impact our liquidity position, including:
•Global economic conditions which affect demand for our products and services and impact the financial stability of our suppliers and customers;
•Changes in accounts receivable, inventory or other operating assets and liabilities which affect our working capital;
•Increase in capital expenditure to support the revenue growth opportunity of our business;
•Changes in customer payment terms and patterns, which typically results in customers delaying payments or negotiating favorable payment terms to manage their own liquidity positions;
•Timing of payments to our suppliers;
•Factoring or sale of accounts receivable;
•Volatility in fixed income and credit markets which impact the liquidity and valuation of our investment portfolios;
•Volatility in credit markets that impact our ability to obtain additional financing on favorable terms or at all;
•Volatility in foreign exchange markets which impacts our financial results;
•Possible investments or acquisitions of complementary businesses, products or technologies;
•Principal payment obligations of our 1.625% Senior Convertible Notes due 2026, our 3.75% Senior Notes due 2029 and 0.625% Senior Convertible Notes due 2031 (together the "Notes"), Term Loan B Facility maturing in 2032 and covenants that restrict our debt level and credit facility capacity;
•Issuance or repurchase of debt which may include open market purchases of our 2026 Notes, 2029 Notes and/or 2031 Notes prior to their maturity and repayment of Term Loan B facility maturing 2032;
•Issuance or repurchase of our common stock or other equity securities;
•Challenges in repatriating funds from certain foreign jurisdictions;
•Factors beyond our control that may impact timing of and/or appropriation of government funding for certain of our strategic research and development programs;
•Potential funding of pension liabilities either voluntarily or as required by law or regulation;
•Compliance with covenants and other terms and conditions related to our financing arrangements; and
•The risks and uncertainties detailed in Item 1A "Risk Factors" section of our Quarterly Report on Form 10-Q.
Cash and Cash Equivalents and Short-Term Investments
Our cash and cash equivalents and short-term investments mainly consist of investments in institutional money market funds and short-term deposits at major global financial institutions. Our strategy is focused on capital preservation and supporting our liquidity requirements that meet high credit quality standards, as specified in our investment policy approved by the Audit Committee of our Board of Directors. Our investments in debt securities and marketable equity securities are primarily classified as available for sale or trading assets and are recorded at fair value. The cost of securities sold is based on the specific identification method. Unrealized gains and losses on available-for-sale investments are recorded as Other comprehensive (loss) income and reported as a separate component of stockholders' equity. As of September 27, 2025, U.S. subsidiaries owned approximately 38.2% of our cash and cash equivalents, short-term investments and restricted cash.
As of September 27, 2025, the majority of our cash investments have maturities of 90 days or less and are of high credit quality. Nonetheless we could realize investment losses under adverse market conditions. During the three months ended September 27, 2025, we have not realized material investment losses but we can provide no assurance that the value or liquidity of our investments will not be impacted by adverse conditions in the financial markets. In addition, we maintain cash balances in operating accounts with third-party financial institutions. These balances in the U.S. may exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. While we monitor the cash balances in our operating accounts and adjust as appropriate, these cash balances could be impacted if the underlying financial institutions fail.
Senior Secured Asset-Based Revolving Credit Facility
On December 30, 2021, we entered into a credit agreement (the Credit Agreement) with Wells Fargo Bank, National Association (Wells Fargo), as administrative agent, and other lender-related parties. The Credit Agreement provides for a senior secured asset-based revolving credit facility in a maximum aggregate amount of $300.0 million and matures on December 30, 2026. The Credit Agreement also provides that, under certain circumstances, we may increase the aggregate amount of revolving commitments thereunder by an aggregate amount of up to $100.0 million so long as certain conditions are met. On October 16, 2025, we amended the Credit Agreement to reduce the commitment to $200 million to be in line with borrowing base availability and extend the maturity to October 2030.
As of September 27, 2025, we had no borrowings under this facility and our available borrowing capacity was approximately $181.0 million, net of outstanding standby letters of credit of $3.8 million.
Refer to "Note 11. Debt" for more information.
Convertible Notes
On August 20, 2025, the Company issued $100.9 million aggregate principal amount of the 2031 Notes in exchange for $97.5 million principal amount of the 2026 Notes and issued and sold $149.1 million aggregate principal amount of the 2031 Notes. The Company intends to use the proceeds to retire the remaining principal amount of the 2026 Notes upon maturity on March 15, 2026.
Concurrent with this transaction, the Company repurchased and subsequently retired 2.7 million shares of its common stock for $30.0 million under the 2022 Repurchase Plan.
Refer to "Note 11. Debt" for more information.
Term Loan B
On October 16, 2025, we entered into a Term Loan Credit Agreement with Wells Fargo, as administrative agent, and certain lender-related parties. The Term Loan Credit Agreement provides for senior secured $600 million maturing on October 16, 2032. The proceeds from the Term Loan Credit Agreement were used to finance a portion of the acquisition of Spirent's high-speed ethernet, network security and channel emulation testing business from Keysight Technologies, Inc., acquisition related expenses and will be used for general corporate purposes.
Refer to "Note 20. Subsequent Events" for more information.
Cash Flows for the Three Months Ended September 27, 2025
As of September 27, 2025, our combined balance of cash and cash equivalents and restricted cash increased by $120.0 million to $552.1 million from $432.1 million as of June 28, 2025.
During the three months ended September 27, 2025, Cash provided by operating activities was $31.0 million, consisting of net loss of $21.4 million adjusted for non-cash charges (e.g., depreciation, amortization, stock-based compensation and other non-cash items) totaling $62.3 million, including changes in deferred tax balances, and changes in operating assets and liabilities that used $9.9 million. Changes in our operating assets and liabilities related to an increase in inventory of $11.6 million related to demand changes, a decrease in deferred revenue of $10.7 million due to timing of support billings and project acceptances, a decrease in accrued payroll and related expenses of $9.1 million due primarily to variable pay and timing of payroll, an increase in other current and non-current assets of $0.5 million and a decrease in accounts payable of $0.5 million. These were partially offset by a decrease in accounts receivable of $17.4 million due to collections outpacing billings, an increase in accrued expenses and other current and non-current liabilities of $4.3 million and an increase in income taxes payable of $0.8 million.
During the three months ended September 27, 2025, Cash used in investing activities was $8.3 million, primarily resulting from $8.5 million used for capital expenditures, $0.7 million used for the acquisition of Inertial Labs partially offset by $0.9 million in proceeds from the sale of assets.
During the three months ended September 27, 2025, Cash provided by financing activities was $97.7 million, primarily resulting from $149.1 million in proceeds from the issuance of the 2031 Notes and $2.7 million in proceeds from the issuance of common stock under our employee stock purchase plan. These were partially offset by $30.0 million cash paid to repurchase common stock under our share repurchase program, $16.2 million in withholding tax payments on the vesting of restricted stock and performance-based awards and $7.8 million of debt issuance costs paid in the period.
Share Repurchase Program
During the three months ended September 27, 2025, we repurchased and subsequently retired 2.7 million shares of our common stock for $30.0 million pursuant to our 2022 Repurchase Plan. As of September 27, 2025, the Company had remaining authorization of $168.4 million for future share repurchases under the 2022 Repurchase Plan.
Refer to "Note 15. Stockholders Equity" for more information.
Contractual Obligations
There were no material changes to our existing contractual commitments during the first quarter of fiscal 2026.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as such term is defined in rules promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors, other than the guarantees discussed in "Note 18. Commitments and Contingencies."
Employee Equity Incentive Plan
Our stock-based benefit plans are a broad-based, long-term retention program that is intended to attract and retain employees and align stockholder and employee interests. Refer to "Note 16. Stock-Based Compensation" for more details.
Employee Defined Benefit Plans and Other Post-retirement Benefits
We sponsor significant qualified and non-qualified pension plans for certain past and present employees in the U.K. and Germany. The Company also is responsible for a defined benefit plan comprising of gratuity payments for present employees in India. These pension plans, with the exception of India, have been closed to new participants and no additional service costs are being accrued, except for certain plans in Germany assumed in connection with an acquisition in fiscal 2010.
The U.K. and India plans were fully funded while the German plans, which were initially established as "pay-as-you-go" plans, are unfunded. As of September 27, 2025, our pension plans were under-funded by $51.2 million since the post-retirement benefit obligation (PBO) exceeded the fair value of plan assets. Pension plan assets are managed by external third parties and we monitor the performance of our investment managers. As of September 27, 2025, the fair value of plan assets had decreased approximately 5.0% since June 28, 2025, our most recent fiscal year end.
We are also responsible for the non-pension PBO assumed from a past acquisition of $0.3 million.
In estimating the expected return on plan assets, we consider historical returns on plan assets, adjusted for forward-looking considerations, inflation assumptions and the impact of active management of the plan's invested assets. While it is not possible to accurately predict future rate movements, we believe our current assumptions are appropriate. Refer to "Note 17. Employee Pension and Other Benefit Plans" for more details.
Recently Issued Accounting Pronouncements
Refer to "Note 2. Recently Issued Accounting Pronouncements" regarding the effect of certain recent accounting pronouncements on our Consolidated Financial Statements.
Critical Accounting Estimates
Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), which require management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities. Our estimates are based on historical experience and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We believe that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates and such differences may be material.
Contingent Purchase Consideration
For contingent purchase consideration, the fair value of such earn-out liabilities are generally determined using a Monte Carlo Simulation that includes significant unobservable inputs such as the projected revenues of the acquired business over the earn-out period. The fair value of contingent consideration liabilities is remeasured at each reporting period at the estimated fair value based on the inputs on the date of remeasurement. The estimates used to determine the fair value of the contingent consideration liability are subject to significant judgment and given the inherent uncertainties in making these estimates, actual results are likely to differ from the amounts originally recorded and could be materially different.
Post-retirement benefit obligation (PBO)
A key actuarial assumption in calculating the net periodic cost and the PBO is the discount rate. Changes in the discount rate impact the interest cost component of the net periodic benefit cost calculation and PBO due to the fact that the PBO is calculated on a net present value basis. Decreases in the discount rate will generally increase pre-tax cost, recognized expense and the PBO. Increases in the discount rate tend to have the opposite effect. We estimate a 50-basis point decrease or increase in the discount rate would cause a corresponding increase or decrease, respectively, in the PBO of approximately $4.0 million based upon data as of June 28, 2025.
Viavi Solutions Inc. published this content on October 30, 2025, and is solely responsible for the information contained herein. Distributed via Edgar on October 30, 2025 at 20:14 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]