VIAVI (VIAV) Q1 2026: Data Center Revenue Surges to 40%, Redefining Segment Mix
VIAVI’s Q1 marked a strategic inflection, as data center ecosystem revenue climbed to near parity with legacy service provider business, materially diversifying the company’s risk profile. The Spirent acquisition accelerates this pivot, with higher-margin, faster-growing Ethernet and network security lines now integrated. Investors should watch for ongoing margin leverage and the timing of a wireless recovery as the new portfolio mix takes hold.
Summary
- Data Center Mix Shift: Data center ecosystem revenue now rivals service provider, de-risking volatility.
- Margin Expansion: Operating leverage and higher-margin Spirent products fuel profit improvement.
- Portfolio Realignment: Wireless remains a laggard, but new segment mix positions VIAVI for resilience.
Performance Analysis
VIAVI delivered a standout Q1, with revenue and operating margin both exceeding guidance, and a YoY revenue jump led by the Network and Service Enablement (NSE) segment. NSE, now 72% of total revenue, posted a 35% YoY gain, driven by robust demand from the data center ecosystem and aerospace and defense. The data center buildout, including high-speed optical modules and advanced Ethernet test solutions, proved a powerful catalyst, while aerospace and defense extended its growth streak on positioning and navigation demand. OSP (Optical Security and Performance) contributed 28% of total revenue, with anti-counterfeiting and 3D sensing products stabilizing but facing margin pressure from mix and costs.
Cash flow from operations more than doubled YoY, and the balance sheet was fortified by a convertible note refinancing and a $600M term loan to fund the Spirent acquisition. The acquired Spirent business, with a $200M annualized run rate, is accretive to both revenue and margin profile, and will be fully integrated into the NSE segment. Share repurchases continued, with $30M deployed in Q1. The company’s improved segment mix and higher-margin contribution from Spirent suggest further operating leverage as integration progresses.
- Segment Diversification: Data center ecosystem now approaches 40% of revenue, up from 30% last year, while service provider drops to 45%.
- Operating Margin Upside: Q1 margin expanded 570 basis points YoY, reflecting volume and favorable mix.
- Capital Allocation: Spirent acquisition and note refinancing strengthen long-term growth and capital structure.
VIAVI’s financial momentum is now underpinned by structural changes in its revenue base, with less dependence on the cyclical service provider segment and greater exposure to secular data center and defense tailwinds.
Executive Commentary
"The data center ecosystem, which includes high performance SAMIs, optical modules, and NAMs, drove strong demand for lab and production products in support of the AI data center build out... we are now also seeing a growing demand for our traditional field instruments by hyperscalers as they build out and operate their new AI data centers. We expect this strong momentum to continue well into fiscal 2026."
Oleg Hykin, President and CEO
"The acquisition of these business lines is expected to add about $200 million of annual revenue run rate which is above our prior estimate... We purchased approximately 2.7 million shares of our stock for about $30 million. We have almost $170 million remaining under our current authorized share repurchase program."
Ilan Baskal, Chief Financial Officer
Strategic Positioning
1. Data Center Ecosystem Ascendancy
Data center ecosystem, which includes lab, production, and field products for AI and hyperscale buildouts, is now nearly equal in size to the legacy service provider segment. VIAVI’s CEO projects data center could surpass service provider revenue by year-end, fundamentally altering the company’s risk and growth profile. This shift is driven by rapid technology cycles (two to three years per generation) and higher-margin, project-driven sales.
2. Spirent Acquisition Integration
The Spirent acquisition brings high-speed Ethernet, network security, and channel emulation lines with a $200M annual run rate and higher-than-corporate-average margins. Integration is expected to further expand operating margins through scale and procurement leverage. Spirent’s business is heavily weighted to the data center and enterprise ecosystem, accelerating VIAVI’s pivot toward secular growth drivers.
3. Aerospace and Defense Growth
Aerospace and defense, now 15% of revenue, continues to grow on strength in positioning, navigation, and timing (PNT) solutions sold to both defense and commercial drone markets. VIAVI offers a full stack from components to complete inertial navigation systems, serving autonomous vehicles across air, ground, and sea. This segment provides a stable, high-value counterbalance to more volatile telecom spending.
4. Wireless Remains a Drag
Wireless product demand remains soft, with major carriers delaying investment in RAN (radio access network) upgrades. Management notes that wireless is likely the last segment to recover, but expects AI-driven investment and pent-up demand to eventually pull through, offering optionality for future upside.
5. OSP Margin Compression and Stabilization
OSP’s gross and operating margins declined YoY due to unfavorable mix and higher manufacturing costs, but pricing pressure in 3D sensing appears to have stabilized. Growth is now expected to come from unit volumes and new applications, such as automotive LiDAR and increased adoption of facial recognition modules in Asia.
Key Considerations
VIAVI’s Q1 signals a structural portfolio shift, with strategic moves that reduce exposure to legacy telecom cyclicality and increase leverage to secular AI, cloud, and defense trends. The integration of Spirent, margin expansion, and cash flow improvement are central themes for investors tracking the company’s transformation.
Key Considerations:
- Segment Mix Realignment: Data center and aerospace now represent 55% of revenue, up from 50% prior year, diluting service provider volatility.
- Margin Expansion Potential: Spirent’s higher gross margin profile and scale benefits should drive further operating leverage as integration matures.
- Wireless Optionality: Wireless remains a drag, but a cyclical recovery could provide substantial incremental earnings power.
- OSP Stabilization: Pricing pressure in 3D sensing has largely abated, with future growth tied to unit volume and new applications.
- Capital Allocation Discipline: Continued share repurchases and prudent refinancing underpin management’s confidence in long-term cash generation.
Risks
VIAVI remains exposed to cyclical swings in carrier capex, especially if wireless recovery is further delayed or if data center buildouts slow due to macro or tech cycle shifts. Integration risks from the Spirent acquisition could impact margin realization, and OSP remains vulnerable to smartphone and consumer electronics demand. Rising interest expense from new debt and foreign exchange volatility are additional watchpoints. Management’s forward-looking statements hinge on continued momentum in secular growth drivers, which are not immune to industry or macro shocks.
Forward Outlook
For Q2 2026, VIAVI guided to:
- Revenue of $360M to $370M, including $45M to $55M from Spirent
- Operating margin of 17.9% plus or minus 60 basis points
- EPS of $0.18 to $0.20
For full-year 2026, management signaled:
- Continued strength in data center and aerospace, with OSP expected to be seasonally lower in Q2
- Spirent’s contribution to be slightly accretive to margins and EPS, with greater benefit as integration advances
Management highlighted the growing resilience of the portfolio and expects the data center segment to surpass service provider revenue by year-end, further reducing cyclicality risks.
Takeaways
VIAVI’s Q1 marks a pivotal transition toward a more diversified, higher-margin, and less cyclical business model.
- Data Center Momentum: The shift to data center and defense revenue is not only accelerating growth but also stabilizing earnings and reducing dependence on legacy telco cycles.
- Integration Leverage: Spirent’s high-margin profile and complementary capabilities are set to drive further operating leverage, with integration synergies expected to expand in coming quarters.
- Wireless Upside Optionality: A recovery in wireless would provide outsized earnings upside, but current guidance remains conservative on this front.
Conclusion
VIAVI’s Q1 2026 results showcase a company mid-pivot, gaining resilience and margin leverage through strategic realignment around data center, defense, and high-value test solutions. The Spirent acquisition accelerates this shift, positioning VIAVI for sustainable growth and reduced cyclicality, while wireless recovery remains a future catalyst to watch.
Industry Read-Through
VIAVI’s results reinforce a broad industry pivot away from legacy telecom cyclicality toward secular AI, cloud, and defense tailwinds. The rapid product cycle in the data center ecosystem—now two to three years versus six to eight for traditional telco—signals accelerating innovation and margin potential for test and measurement peers. The stabilization of 3D sensing ASPs and growing automotive LiDAR adoption offer read-throughs for optical component suppliers. Wireless infrastructure recovery remains a sector-wide wildcard, while the success of portfolio realignment and integration will be instructive for other diversified hardware and test equipment vendors seeking to de-risk legacy exposure.