VIAVI (VIAV) Q2 2026: Data Center Revenue Mix Climbs to 45%, Accelerating Countercyclical Growth
VIAVI’s Q2 showcased a decisive shift in business mix, with data center ecosystem revenue now comprising 45% of NSE segment sales, up from 40% last quarter. This transition, driven by hyperscaler and AI data center demand, is supporting countercyclical growth and margin expansion even as legacy service provider exposure declines. Management’s forward guidance signals continued strength across data center, aerospace, and defense, with restructuring set to further concentrate investment in high-growth verticals.
Summary
- Data Center Ecosystem Now Dominates Revenue Mix: Segment shift to 45% data center, reducing legacy telco exposure.
- Restructuring Targets Stagnant Segments: Cost savings to be redirected into high-growth data center and defense programs.
- Countercyclical Momentum Persists: March quarter guide anticipates sequential growth, bucking typical seasonal declines.
Performance Analysis
VIAVI delivered Q2 revenue at the high end of guidance, up 36.4% year-over-year and 23.5% sequentially, reflecting robust demand in next-generation data center and aerospace/defense verticals. The Network and Service Enablement (NSE) segment, which now represents the majority of revenue, grew 45.8% YoY, fueled by both organic demand and contributions from the Spirent and Inertia Labs acquisitions. Data center-related sales were the primary growth engine, while service provider exposure continued to shrink as a percentage of the mix.
Operating margin expanded 440 basis points YoY to 19.3%, exceeding the top end of guidance and demonstrating improved operating leverage as higher-margin products scale. Optical Security and Performance (OSP) also contributed, with revenue up 9.7% YoY, driven by anti-counterfeiting solutions. Cash generation remained healthy with $42.5 million in operating cash flow, though share count increased due to note conversions. The company prepaid $100 million of term debt, reinforcing financial discipline. Notably, no buybacks were executed this quarter, as capital was prioritized for debt reduction and business reinvestment.
- Data Center Demand Drives Top-Line Outperformance: AI and hyperscaler buildouts led to record field and production instrument sales.
- Margin Expansion Reflects Mix Shift: Higher fall-through in NSE and OSP offset minor cost inflation.
- Disciplined Capital Allocation: Debt prepayment and workforce restructuring signal a focus on long-term margin and growth.
The company’s business model is rapidly evolving—data center and aerospace/defense now comprise 60% of NSE, reducing cyclicality and supporting countercyclical revenue growth into Q3 despite typical seasonal headwinds.
Executive Commentary
"Our diversification and investment strategy over the past five years focus on data center and aerospace and defense P&T applications, has positioned us well to ride strong growth in both of these markets. We have exited calendar 2025 with robust bookings and revenue momentum and anticipate these trends to continue through the calendar year."
Oleg Khaykin, President and Chief Executive Officer
"We expect approximately 5% of our global workforce to be impacted and estimate to incur approximately $32 million of restructuring charges in connection with this plan. Upon completion of this initiative, we expect annual savings of about $30 million, which will mainly benefit our operating expenses. We intend to reinvest a portion of these savings with higher growth areas of our business."
Ilan, Chief Financial Officer
Strategic Positioning
1. Data Center Ecosystem: Core Growth Engine
VIAVI’s revenue mix now tilts decisively toward the data center ecosystem, which includes lab, production, and field instruments supporting AI and hyperscaler infrastructure. Demand is driven by rapid node transitions (1.6T and 3.2T optics), increased fiber monitoring, and direct deployment of field tools by hyperscalers. Management noted that field instrument sales to data centers have grown from single digits to roughly a third of the field business, reflecting a structural change in customer requirements and procurement behaviors.
2. Aerospace and Defense Momentum
Positioning, navigation, and timing (PNT) solutions for autonomous systems and drones are fueling VIAVI’s defense growth, with resilient PNT (alternative GNSS) in high demand. The company is also seeing new opportunities in precision timing for data centers, as next-gen speeds require tighter synchronization. This vertical now comprises about 15% of NSE, with management expecting continued momentum as drone and defense automation proliferate.
3. Service Provider and Telco: Managed Decline
Legacy service provider revenue now represents less than 40% of NSE, down from over 80% several years ago. While this segment remains stable and may provide a tailwind in Q4, management is clear that future growth will be driven by data center and defense, not telco. The mix shift reduces exposure to budget-driven cyclicality and positions VIAVI for more stable, high-margin growth.
4. Capital Allocation and Restructuring
The company’s recently announced restructuring will impact 5% of the workforce, with $30 million in annual savings targeted for reinvestment in high-growth areas. Debt prepayment and a pause on buybacks underscore a disciplined approach, with capital flowing toward technology and market expansion rather than legacy businesses.
Key Considerations
VIAVI’s Q2 marks a clear inflection point as the company accelerates its pivot away from legacy telco toward higher-growth, less cyclical markets. Investors should focus on the durability of this mix shift and management’s ability to sustain countercyclical growth through investment cycles.
Key Considerations:
- Secular Data Center Demand: AI and hyperscaler buildouts are driving multi-quarter visibility, with management citing up to three quarters of backlog clarity for the first time.
- Restructuring to Fund Growth: Workforce reductions and cost savings will be reinvested in data center and defense, not legacy segments.
- Mix-Driven Margin Expansion: Higher-margin products in data center and defense are supporting operating leverage and offsetting inflationary pressures.
- Organic and Inorganic Growth: Acquisitions like Spirent and Inertia Labs are contributing, but organic demand remains the primary driver.
Risks
VIAVI’s increased concentration in data center and defense exposes the business to industry-specific investment cycles and procurement delays. While visibility has improved, any slowdown in hyperscaler capex or defense budgets could affect growth. Integration risks from recent acquisitions and potential execution missteps in restructuring also warrant attention. Legacy telco remains a drag, though less material each quarter.
Forward Outlook
For Q3 2026, VIAVI guided to:
- Revenue of $386 to $400 million
- Operating margin of 19.7%, plus or minus 50 basis points
- NSE revenue of $304 to $316 million; OSP revenue of $82 to $84 million
- EPS of $0.22 to $0.24
For full-year 2026, management did not provide explicit annual guidance but emphasized:
- Continued strength in data center and defense verticals
- Restructuring savings to benefit operating expenses and enable reinvestment
- Tax rate expected in the mid-teens due to mix shift toward U.S. profits
Takeaways
VIAVI’s business model transformation is unlocking countercyclical growth, with data center and defense now accounting for 60% of NSE sales. Margin expansion is sustainable as higher-value products scale, and disciplined capital allocation supports reinvestment in core growth areas.
- Revenue Mix Shift: Data center and defense now drive the majority of growth and profitability, reducing exposure to legacy telco cycles.
- Operational Discipline: Restructuring and debt reduction provide flexibility to invest in secular growth markets.
- Investor Focus: Watch for sustained demand from hyperscaler and defense customers, and monitor the pace of reinvestment versus cost savings realization.
Conclusion
VIAVI’s Q2 2026 results confirm a successful pivot to secular growth markets, with data center and defense momentum supporting countercyclical revenue and margin gains. Execution on restructuring and capital allocation will be critical to sustaining this trajectory as the business model continues to evolve.
Industry Read-Through
VIAVI’s results and commentary highlight the accelerating demand for fiber monitoring, lab, and production tools across the AI data center buildout, signaling a robust multi-year investment cycle for optical and test equipment suppliers. Hyperscaler vertical integration and direct procurement of field tools are reshaping the value chain, with knock-on effects for legacy telco suppliers and adjacent technology vendors. Defense automation and resilient PNT adoption are also set to drive sustained demand for advanced timing and navigation solutions, offering a tailwind for peers exposed to these domains.