Viavi Solutions Inc.

After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. At this time, I would like to turn the conference over to Vibhuti Nair, Head of Investor Relations. Please go ahead.

Thank you, Audra. Good afternoon, everyone, and welcome to Viabi Solutions, fiscal third quarter, 2025 Earnings Call. My name is Raghu Dinaier, Head of Investor Relations for VIAVI Solutions, and with me on the call today is Oleg Hykin, our President and CEO, and Ilan Daskal, our CFO. Please note, this call will include forward-looking statements about the company's financial performance. These statements are subject to risks and uncertainties that could cause actual results do differ materially from our current expectations and estimation. We encourage you to review our most recent annual report and SEC filings, particularly the risk factors described in those filings. The forward-looking statements, including tariff impact and guidance that we provide during this call, are valid only as of today. VIAVI undertakes no obligation to update these statements. Please also note that unless we state otherwise, all results discussed on this call, except revenue, are non-GAAP. We reconcile these non-GAAP results to our preliminary GAAP financials and discuss their usefulness and limitation in today's earnings release. The release, as well as our supplemental earnings slides, which include historical financial tables, are available on VIAVI's website at www.investor.viavisolutions.com. Finally, we are recording today's call, and we'll make the recording available on our website by 4.30 p.m. Pacific time this evening. Now, I would like to turn the call over to Ilan. Ilan?

Thank you, Vibhuti. Good afternoon, everyone. Now I would like to review the results of the third quarter of fiscal year 2025. Net revenue for the quarter was $284.8 million, which is above the midpoint of our guidance range of $276 to $288 million. Revenue was up 5.2% sequentially, and on a year-over-year basis was up 15.8%. Operating margin for the third fiscal quarter was 16.7%, above the high end of our guidance range of 13 to 15%. Operating margin increased 1.8% from the prior quarter, and on a year-over-year basis was up 7.4%. EPS at 15 cents was also above the high end of our guidance range of 10 to 13 cents, and was up 2 cents sequentially. On a year-over-year basis, EPS was up 9 cents. Moving on to our Q3 results by business segment. NSE revenue for the third fiscal quarter came in at $208.2 million, which is slightly above the midpoint of our guidance range of $202 to $212 million. On a year-over-year basis, NSE revenue was up 22.6 percent. NE revenue for the quarter was $188 million, which is an increase of 23.9 percent year-over-year as a result of strong demand by NEMS for our fiber lead and production products. The year-over-year NE revenue increase included the inertial leads revenue, which was in line with our expectations. SE revenue was $20.2 million, which is an increase of 11.6% from the same period last year, and is in line with our expectations. NSE gross margin for the quarter was 63.1%, which is 1.7% higher on a year-over-year basis. NE gross margin was 63.4%, which is an increase of 190 basis points from the same period last year, mainly driven by higher volume and favorable product mix. SE gross margin was 59.9%, which is a decrease of 90 basis points from the same period last year product mix. NSE's operating margin for the quarter was 10.4% versus a 1.8% loss in the same quarter last year. NSE operating margin is significantly above our guidance range of 6% to 8%, driven by higher gross margin falls through, as well as $4 million government R&D grant in Europe. OSP revenue for the third fiscal quarter came in at $76.6 million, which is just above the high end of our guidance range of $74 to $76 million. On a year-over-year basis, OSP revenue was up 0.5%. OSP gross margin was 51.6%, up 150 basis points from the same period last year, and was primarily driven by higher volume and favorable product mix. OSP's operating margin was 33.9%, which is at the high end of our guidance range of 32% to 34%, and it's 40 basis points lower on a year-over-year basis. Moving on to the balance sheet and cash flow. Total cash and short-term investments at the end of Q3 were $400.2 million compared to $512.8 million in the second quarter of fiscal 2025. The lower cash and investments balance at the end of this quarter is mainly attributed to the payment of the inertial LEFS acquisition. Cash flow from operating activities for the quarter was $7.8 million versus $19.5 million in the same period last year. The lower operating cash flow this quarter was mainly related to the acquisition of inertial LEFS. During the quarter, we did not purchase any shares of our stock as we prioritized our capital allocation towards M&A with the agreement to acquire Spirant's high-speed Ethernet and network security business lines. Although we plan to finance this transaction with additional debt, we will continue our financial discipline and intend to target less than four times gross leverage and well below three times net leverage over the long term. The fully diluted share count for the quarter was 226.9 million shares, up from 224.6 million shares in the prior year, and versus 226.1 million shares in our guidance for the third fiscal quarter. CapEx for the quarter was $6.8 million versus $3.2 million in the same period last year. Moving on to our fourth quarter guidance. We continue to assess the potential impact of global tariffs on the overall demand and timing of orders. Overall, we expect fiscal fourth quarter revenue to remain about flat relative to the strong third quarter revenue. For NSE, we are taking a more prudent outlook in view of tariff-related timing of customer orders. For OSP, we expect strength in anti-counterfeiting business, offsetting some seasonal weakness in 3D sensing demand. For the fourth fiscal quarter of 2025, we expect revenue in the range of $278 and $290 million. Operating margin is expected to be 13.5% plus or minus 1%, and EPS to be between 10 cents and 13 cents. We expect NSP revenue to be approximately $208 million plus or minus $5 million with an operating margin of 5% plus or minus 1%. OSP revenue is expected to be approximately $76 million plus or minus $1 million with an operating margin of 37% plus or minus 1%. Our tax expenses for the fourth quarter are expected to be about $8 million, plus or minus $500,000, as a result of jurisdictional mix. We expect other income and expenses to reflect a net expense of approximately $5 million, and the share count is expected to be around 227.4 million shares. Our guidance includes a tariff impact of about $3 million on orders that are already booked. This is expected to be dilutive to our gross margin and negatively impact our EPS by approximately one cent. With that, I will turn the call over to Oleg.

Oleg? Thank you, Ilan. The March quarter was unseasonably strong, continuing a strong recovery and growth momentum that we saw in fiscal Q2. The quarter revenue came in above the midpoint of the guidance, with EPS above the high end of the guidance. Higher volume and richer revenue mix were the primary drivers for stronger EPS. Looking in more detail at each of our businesses, starting with NSC. NSC revenue in fiscal Q3 grew 23% year over year, driven by recovery and growth across many of our product segments. Field instruments business segment continued to see gradual recovery, driven by the demand for fiber field instruments and fiber monitoring systems. Service providers and hyperscale data center operators drove the demand as they build out and upgrade their networks. We are particularly encouraged to see the embrace and adoption of fiber monitoring by hyperscalers. We expect this trend to continue through calendar 25. Fiber Lab in production saw another strong quarter driven by 800 gig and 1.6 terabit data center ecosystem, which includes semis, optical modules, systems, and hyperscalers. We expect 800 gig and 1.6 terabit optical infrastructure and emerging technologies such as co-packaged optics to continue driving strong demand for the rest of calendar 25. Our aerospace and defense business segment continued its strong growth momentum. We expect the position, navigation, and timing business, strengthened by the acquisition of Inertia Labs, to be a strong multiyear growth driver for our aerospace and defense business segment. The wireless business segment saw the same dynamics as in fiscal Q2. A stronger demand for 5G field instruments, offset by continued weakness in the infrastructure test products. We believe that the demand for wireless field instruments is a leading indicator for the resumption of 5G network build-out, leading to gradual recovery for the overall wireless segment. And lastly, the SCE business segment results were in line with our expectations. Looking ahead, we expect Q4 to be roughly flat to fiscal Q3. Normally, we would expect a seasonally stronger Q4, but feel it's prudent to take a more conservative outlook due to recently imposed U.S. tariffs. Specifically, on the revenue side, there's a risk that some of the previously approved POs and upcoming orders may get delayed or reduced in volume as customers reapprove POs to include tariffs or decide to take a wait-and-see approach. And on the gross margin side, we expect to absorb approximately $3 million in tariffs from the previously committed orders and reciprocal tariffs on imported U.S. materials. Overall, we currently expect the tariffs to have a low single-digit impact on our operating margins. Given our global footprint, we are in the position to realign our supply chain to further reduce the tariffs impact as they stand today within six months. Now turning to OSP. During the fiscal third quarter, WASP increased marginally on a year-over-year basis as a result of strength in anti-counterfeiting and other products. We expect fiscal Q4 to be roughly flat quarter-on-quarter and up year-on-year, characterized by seasonally weaker 3D sensing offset by strength in anti-counterfeiting in other businesses. As communicated previously, we are starting to see a demand-supply equilibrium emerge in anti-counterfeiting business. In conclusion, I would like to thank the VIVE team for their continued dedication and strong performance, and our customers and shareholders for their continued support. With that, I will now turn it back to the operator for Q&A.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. We'll take your first question from Reuben Roy at Stiple.

Thank you. Hey, Oleg. Maybe we'll start with the tariff discussion. And if you could maybe drill down a little bit into the revenue side of the equation. So you mentioned that you have some concerns that some approved POs may get delayed. Are you actually seeing delays today? Any push outs, et cetera, or is this just more of a conservative take near term?

Well, you know, I tell you, on the first draft of our notes, I had canceled. I've removed canceled because actually nobody has canceled the order. So that's one thing. Furthermore, we're seeing actually people accepting the increases and just adding it to their order. So that's a positive. So, but I feel, you know, uh, clearly we're now what, uh, third, four weeks into the quarter since the, uh, the big changes and, you know, I'm starting to feel a bit better, but, you know, clearly, uh, there is a number of POs that had to go back to be re-approved, uh, with the adders to compensate for the, um, tariffs. And at this time, we are seeing some of them coming back. And so far, nobody has canceled. Nobody has reduced the size of the order and they're accepting the tariff increases. But, you know, I think it's probably prudent to be conservative because, you know, the people who are responding the earliest are usually the ones who really need the product. And there's always a group of customers who said, you know what, if I can always wait another month, maybe things will change again. And as we've seen in the first week, the tariffs fluctuated all over the place. And I mean, some, I mean, we basically stopped all shipments into US and we kind of took the POs and we held on to them to see until things stabilize. So I think, you know, there's still, it's no longer as volatile as it was in the first two weeks. but I think it's probably prudent to be a bit more conservative. And, you know, I do think there's going to be some set of customers who will delay placing orders, and that may just result in the revenue slipping into the fiscal first quarter of next year. So that's why we are being a bit cautious on the revenue guidance for this quarter.

Okay. Thank you. Zathal, In terms of some of your equipment that's shipped into the US, is there a way to think about how much of that revenue is sourced from China or other areas that we might have to worry about high tariffs? You mentioned you could potentially move in six months. I'm just trying to figure out what the impact is. How much are we talking about here?

Also, I think I said, if I look at it, clearly, just looking trailing 12 months, it's roughly 15% of our revenue is subject to tariffs overall, right? It is coming into the US. Clearly, China, given the magnitude of the tariffs, is the most pronounced thing. And we said that today roughly 3% of the revenue is the tariff impact, and we can reduce it significantly within the next, say, six months or more like three to six months because we can just reroute and move the production to even within the same contract manufacturers by different country of origin. So, but, you know, it takes some, we're already working on it. We're already moving things around. So I think within six months, the tariff impact will be fairly de minimis.

Okay. Just one final one then.

The tariffs don't change. Farming?

Right. That's a big if. Yeah, I had a quick follow-up for Elon, I guess, on the cost side of the equation. So the $3 million on the higher costs, you know, a lot of folks have been talking about passing through costs. You know, I would just like to understand, you know, how you're thinking about that. Should we think about the increased costs, I guess, as a longer-term headwind on margins?

Well, let me take it. I'll try it. Yeah, I'll take it. So we made a conscious effort, all the POs that we accepted and committed to, we're going to eat the tariff. And that's about $3 million, as we mentioned. Everything else that POs came in but haven't been confirmed and everything is incoming is getting a universal tariff adder. And it's a non-negotiable and so far we have not seen any issue with people not accepting it. So I think, you know, there were some people who would try to play the game and say, Hey, you know, I'm not going to pay a sheriff. I said, well, it's kind of like if you buy a product on Amazon and you refuse to pay the tax, you don't get the product. So I think what we see in the industry is universally all our peers and everybody's passing it on. And I think, you know, probably the call, even the biggest customers are saying it is what it is. It is the new normal. And I think today we are identifying tariffs. Obviously, as things stabilize and go on, it'll just become part of the price.

Yes, Ruben. Okay, got it. The $3 million are embedded in our guidance, right? And that's the one kind of headwind. But as Oleg mentioned, you know, prospectively, the goal is to pass it through to the customers and to offset the cost.

And here we just basically did not want to argue. On committed POs, we did not want to go back and uncommit. So that's just a – we decided to take a high road on that one.

Yeah, makes sense. Thank you, guys. Thank you.

We'll move next to Ryan Koontz at Needham & Company.

Great, thanks for the question. Oleg, any particular technology domains you'd call out as you look forward? Obviously, you talked about the third quarter strength across fiber and wireless and optical. As you look forward over the next couple of quarters, any changes in behavior you're hearing from the different customer segments? And then secondarily, follow-up, how's your exposure looking across fiber? data center and AI, and can you comment on that opportunity? Thanks.

So I would say it's a great question. So increasingly when I say fiber lab and production, that's pretty much think of it today as a code word for data center, because the days when fiber core and telecom drove the business, are over today, disproportional. I mean, today I'd say majority of it goes to fund the data center, and the new nodes are being pushed by the data center. That's your leading SAMIs, it's your leading fiber optic module manufacturers, leading NAMs, and the top data centers. I mean, that's pretty much the whole ecosystem that's driving it. The March quarter was a very strong growth quarter on quarter for that business. we've uh shifted to a number of projects this quarter um you know we expect some a bit of a pullback but it's still going to be stronger than december quarter and we expect another very strong quarter um in september so there we have some visibility and the customers are coming in and uh placing a longer term order so we expect the um i would say The data center ecosystem, which basically means for us fiber lab and production, is going to be very strong throughout the rest of this year. On the other segment is the aerospace and defense. With the acquisition of Inertia Labs and some of our earlier acquisition of Jackson Labs and our whole play in P&T, we continue to win big programs. And as those things start going into production, it's a very different business from the rest of the Abbey where we do a book ship. This one is all about design wins. And I tell you, I'm just blown away. You're looking some of the programs we're winning, uh, where, you know, the size of the program is bigger than the temp for our test and measurement business. And that's why I think as these things start materializing and going into production. it's going to be a very strong grower. But even this year, it's already quarter on quarter, and for the rest of the year, we expect it to be posting pretty strong growth. So I would say two businesses that are going to be really standouts and kind of driving the growth, awaited average growth, is the data center business, which is fiber lab and production, and aerospace and defense. We expect the fiber field, which is the instruments and fiber monitoring, to be the kind of steady Eddie recovery and you know gradual recovery trajectory and the wireless. I think we expect you know clearly we're already seeing activity in the field for field instrumentation and we've seen you know obviously that confirmed with some of the leading wireless NAMs confirming that you know 5G construction is resuming and We expect that to lead in the second half to recovery in our wireless infrastructure. And on SE business, I think it continues to perform well. And I think there's a lot of great opportunities for us later in the year.

Great. Really helpful. Are there any commentary you can make about the process and where you are with regards to the divestiture? from the Keysight acquisition?

So I would always kind of just, given that Keysight is in a driving seat on this one, it all depends on there. They provided an update that they believe is going to be during their July quarter. So basically any time between now and the end of July is what the stated dates are. We just leave it at that.

Great. Appreciate the thoughts. Thanks so much.

We'll move next to Mita Marshall at Morgan Stanley.

Hi, this is Mary on for Mita. I just wanted to go back to your comments on the OSP business. Is there anything else that you would add in terms of some of the headwinds or tailwinds on the OSP business as we think about the second half of the calendar year? Thank you.

Well, I think it's a kind of premature to talk about second half of the calendar year, but generally it's a stronger half for the 3D sensing. And it's kind of, you know, fairly steady for anti counterfeiting, but we've seen now the anti counterfeiting has stabilized and we actually seen upsides in the um in the first half of the calendar year and it just leads us to believe that a lot of the inventory has been burned off in the channel and we were expecting actually during the march quarter to burn off some inventory and run uh lower production um it didn't happen because the demand came in stronger so we actually did both managed to get the best of both worlds we burned down the inventory And we ran a higher utilization that's giving us a better gross margin for that segment. So we expect the intake counterfeiting to be in a much healthier shape going forward than it was in the last 12 months. And the 3D sensing, I mean, you guys all see the news, and actually it's been pretty strong. I mean, I would even say the Q3 was stronger than we thought. Generally, our June quarter is a seasonally weaker quarter, and then the stronger demand comes in in the second half of the calendar year.

Great. Thank you.

We'll go next to Andrew Spinola at UBS.

Hi. Thank you. I wanted to ask, sort of follow up, you know, Last quarter, we saw some strength return to the NSE business as the service provider started to spend again. This quarter looked pretty strong, and then the guide is for a little bit of slowdown next quarter. I think we were hoping that there was a real return to spending by the service providers that maybe it wasn't indicative of a head fake, and it was a return to growth that would hopefully be followed in Europe and beyond in six months, etc., I'm wondering first, do you think there was any sort of pull forward of demand by the service providers in either Q2, either, you know, both Q2 and Q3, or do you think that this trend of a return to spend is intact and we should hope to see it continue going forward?

Well, I mean, first of all, I don't think there was any pull in because that's not how they operate. And, you know, if you think about it seasonally with service providers, March quarter is one of the weakest quarters, and it was almost on par with the December quarter. So the demand was actually quite healthy, right? But then there's another one with service providers is the wireless field instruments. Well, that was, it continued to be pretty strong from December quarter as well. So it leads us to believe that, you know, we're starting to see the resumption of a 5G build out. So that, in other respect, I would say, the service provider field instrumentation and kind of demand is very much in line. And I would say it's getting back to normal. I mean, it's not something that you're seeing big growth. I think it's a low single digits, kind of a quarter one quarter, but that's, and it's generally, I think the pattern, maybe one quarter will be stronger. The next quarter may be a little bit weaker, but it's trajectories in the right direction. And I would say, generally we would see significant drop from december quarter to the march quarter so if you kind of think about it the march quarter was roughly flat to december quarter in that business that is actually significant growth and we also assume for next quarter kind of a more prudent approach in terms of tariffs etc we expect that probably some of that will um probably push out into the september quarter because If you don't place your orders early on and you place it later, it takes a long time. If you revise your PO, it has to recirculate and collect all the signatures. By the time it gets in, you may not have enough weeks in the quarter to build the product, so you probably will push out into the next quarter.

Yeah, it's overall last quarter, this quarter, next quarter. It's about timing, the dynamic of timing of orders. We don't see any change in our thinking in terms of the end markets that we operate.

Got it. So the best way to think about the fourth quarter guide is sort of, you're just assuming across the board, everyone is just going to be a little slower, pull back a little bit. It's not that you're seeing weakness in one specific part of the business because of the tariffs and others are stronger. It's just the general expectation of some pause and some slowdown in the next quarter related to just waiting to see what's happening.

Well, so, I mean, it varies. So in a OSP business, there is no impact because you have a long-term forecast and you execute and there is very de minimis tariff impact in that business because we have factories in different geographies that produce for those geographies. So we don't have an impact there. It's really on the NSC side. And within that, it's the service providers who take the longest to re-approve POs with adders. I mean, when you look at the lab and production data centers, I mean, the turnaround has been pretty quick. I mean, they say, yep, it is what it is. That's a tariff. Here's the PO back. So I would say if any segment that's going to push out and you may see some slippage of revenue, that would be more for the service provider segment rather than the lab and production, which is semi-companies, the equipment vendors, data centers, and the module integrators.

Got it. Thank you.

Our next question comes from Michael Genovese at Rosenblatt Securities.

Great. So just back on the tariffs for a minute here. Do you have manufacturing exposure to places where tariffs There's a risk. I mean, I know people don't think tariffs are going to go up, you know, and those full rates in Southeast Asia and Taiwan would be implemented, but that's still on the table and a possibility. So, you know, I know you said they don't behave to pull things forward, but do you have any customers that are exposed more to those regions than China and would want to pull things forward for that reason?

You know, I have not seen any customers that are pulling products forward because in the end, they all have their quarterly budget. And you got to, I have not, they spend what they get in any given quarter. And the only thing we've seen is like, okay, we have to put an adder and they just have to re-approve it. That's about it. I have not seen anybody who's saying, hey, I'll take everything now because I don't want to wait. It's just, Which, you know, you think you would see it because, you know, but it's not the case.

Okay. And then just on the total inventory for the company, I think it went up about 25% quarter over quarter. Was that you buying in front of the tariffs or something else going on?

No, that is the incremental inventory from the Inertia Labs acquisition that closed end of January. If you back out their inventory, actually our inventory was slightly down. Quarter over quarter.

Okay, perfect. And then last question for me is just an update and color on the aviation no air business. Which business, sorry?

A military aviation. Airspace and defense. Yeah.

What about it? Just the color update on how that market is.

Oh, yeah. So, no, I mean, listen, that business is doing very well. It's got very healthy quarter and quarter growth. I mean there there's parts of the business that are more like mature with a slow growth like the. The I would say the mission critical communication like two way radios and avionics. They go slower, but the area that's really driving significantly higher growth is the whole PNT or just positioning, navigation and timing. And that is all about. it's all about anti-spoofing, anti-jamming of GPS and things like that. So that's the business that has very strong quarter-on-quarter growth.

Okay, thanks very much.

Thank you.

And next we'll go to Tim Savageau at Northland Capital Markets.

Hey, good afternoon. Two questions and really both trying to quantify a couple of things that we've been talking about here. First, in terms of the overall size of the fiber lab and production business, which is a real growth area for you guys. And I think you're talking about growing into the June quarter. If I were to put that around 20, 25% of any revenue, would I be too far off there? Any color on that would be interesting. And And then I want to take a shot at quantifying the degree of your prudence. But why don't we follow up with that and start with lab and production?

Well, I think this one is so the June quarter, we expect some pullback from the March quarter because we ship into a lot of big projects. So there was a big, significant increase. December or March quarter, then June quarter is there some pullback and we expect September quarter to be another increase in the shipment. So I'd say today 25% maybe on NSC is probably a little too much, but 20% is probably more like it.

On any?

On any. No, NSC. NSC. NSC. Yeah. Okay, so that's on that. And what was your second part? You were talking about how much? I think probably anywhere from $5 to maybe $10 million is a reasonable number to take a hedge, slip out.

Right, yeah. That was going to be my follow-up, which is normally you might even see high single-digit sequential growth on a seasonal basis.

Yeah.

And so that gets me a little bit higher, closer to maybe kind of 15.

Well, you've got to also remember what is seasonal. I mean, seasonally, March quarter is down. Here we actually had a March quarter up, right? So, I mean, it's a different kind of compare. So if you had a typically seasonally March quarter, the June quarter would be exactly what you would expect it to be up. I mean, you know, it was an aseasonal. I don't know if that pattern will maintain, but clearly if it is, we may have to redefine what's seasonal.

Understood. But, you know, we'll settle on 5%.

And I think it's really the data center is what probably broke the traditional seasonality. But even then, I mean, look at the field instruments. They were roughly flat quarter on quarter, which is like, in that particular space as you could consider growth.

Great. Appreciate it. Thanks very much. All right. Thank you.

And there are no further questions at this time. I will turn the conference back over to Viv Hootie for closing remarks.

Thank you, Audrey. And thank you, everyone. This concludes our earnings call for today. Have a good evening. Bye-bye.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.