Viavi Solutions Inc.

Good afternoon. My name is Hillary, and I'll be your conference operator today. At this time, I would like to welcome everyone to the VIAVI Solutions Fiscal Third Quarter 2026 Earnings Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please type star 1 on your telephone keypad to raise your hand. At this time, I would like to turn the conference over to Vibhuti Nair, Head of Investor Relations. Please go ahead.

Thank you, Hilary. Good afternoon, everyone, and welcome to VIAVI Solutions Fiscal Third Quarter 2026 Earnings Call. My name is Vibhuti Nair, Head of Investor Relations for VIAVI Solutions. And with me on today's call is Oleg Hykin, our President and CEO, and Ilan Daska, 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 to differ materially from our current expectations and estimations. 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 the guidance that we provide during this call, and our expectations regarding the end markets and acquired business 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 today's call, except revenue, are non-GAAP. We reconciled these non-GAAP results to our preliminary GAAP financials and discussed their usefulness and limitations 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. With that, I would like to now turn the call over to Ilan.

Thank you, everybody. Good afternoon, everyone. Now I would like to review the results of the third quarter of fiscal year 2026. Net revenue for the quarter was $406.8 million, which is above the high end of our guidance range of $386.4 million. Revenue was up 10.2% sequentially and on a year-over-year basis was up 42.8%. Operating margin for the third fiscal quarter was 21%, above the high end of our guidance range, of 19.2 and 20.2%. Operating margin increased 170 basis points from the prior quarter and on a year-over-year basis was up 430 basis points. EPS at 27 cents was also above the high end of our guidance range of 22 to 24 cents and was up 5 cents sequentially. On a year-over-year basis, EPS was up 12 cents. Moving on to our Q3 results by business segment. NSE revenue for the third fiscal quarter came in at $321.5 million, which is above the high end of our guidance range of $304 and $316 million. Revenue from Spire and product lines was $54.2 million, which was in line with our expectations and included few opportunities that were pushed out from the prior quarter. On a year-over-year basis, NSE revenue was up 54.4%, primarily driven by the acquisition of Spirant product lines. We also saw strong demand for our lab and production and field products, driven by the data center ecosystem, as well as for our aerospace and defense products. NSC gross margin for the quarter was 65.3%, which is 220 basis points higher on a year-over-year basis, and was primarily driven by higher volume and favorable product mix. NSC's operating margin for the quarter was 17.2%, an increase of 680 basis points on a year-over-year basis. NSC's operating margin was also above the high end of our guidance range of 15% to 16% as a result of a higher fall through. OSP revenue for the third fiscal quarter came in at $85.3 million, also above our guidance range of $82 to $84 million. On a year-over-year basis, OSP revenue was up 11.4%, primarily driven by strong demand for 3D sensing and anti-counterfeiting and other products. OSP gross margin was 50.3%, down 130 basis points on a year-over-year basis, and it was mainly due to unfavorable product mix. OSP's operating margin was 35.3%, an increase of 140 basis points on a year-over-year basis. OSP's operating margin was in line with our guidance range of 34.8% to 35.8%. Moving on to the balance sheet and cash flow. Total cash and short-term investments at the end of Q3 were $508 million, compared to $772.1 million in the second quarter of fiscal 2026. Cash flow from operating activities for the quarter was a use of $26.3 million versus $7.8 million that we generated in the same period last year. The cash flow was mainly impacted by the earn-out payments to inertial levs, timing of working capital, and employee variable costs. CapEx for the quarter was $5.9 million versus $6.8 million in the same period last year. During the quarter, we successfully paid $49 million in cash for the remaining principal of the convertible notes due in March 2026, and we issued about 1.8 million shares for the conversion premium above par. We also prepaid during the quarter $150 million of the term loan B. We currently have $450 million remaining for that loan. The prepayment is in line with our capital allocation priorities. During the quarter, we did not purchase any shares of our stock as we prioritized our capital allocation towards debt management. The fully diluted share count for the quarter was 249.5 million shares, up from 226.9 million shares in the prior year, and versus 245 million shares in our guidance for the third fiscal quarter. Moving on to our guidance for the fourth quarter of fiscal 2026. We expect the fourth fiscal quarter revenue for VIAVI to be up sequentially driven by continued strength in many of our end markets across NSC and OSP. For NSC, we expect quarter-over-quarter revenue to be higher as a result of continued strong demand for our level production and field products, driven by the data center ecosystem, as well as for our aerospace and defense products. For OSP, we expect quarter-over-quarter revenue to be higher driven by strength across all of the product lines. For the fourth fiscal quarter of 2026, we expect VIAVI revenue in the range of $427 and $437 million. We expect NSE revenue between $340 and $348 million. OSP revenue is expected to be in the range of $87 and $89 million. Operating margin for VIAVI is expected to be 22.7% plus or minus 50 basis points. NSC operating margin is expected to be 18.7% plus or minus 50 basis points. OSP operating margin is expected to be 38.4% plus or minus 40 basis points. And EPS is expected to be between 29 cents and 31 cents. Our tax expenses for the fourth quarter is expected to be about $10 million, plus or minus $500,000, as a result of jurisdictional mix. We expect other income and expense to reflect a net expense of approximately $12 million, and the share count is expected to be around 256 million shares. With that, I will turn the call over to Oleg. Oleg?

Thank you, Ivan. The results of the third quarter of fiscal 26 exceeded our expectations and came in above the high end of our guidance. The strong year-on-year and quarter-on-quarter performance was driven by strong growth in many of our end markets. NSC revenue in Q3 grew approximately 54% year-over-year, primarily driven by strong demand from the data center ecosystem and aerospace and defense customers. The data center ecosystem, which includes high-performance semis, optical modules, NAMs, and hyperscalers, draws strong demand for 11 production and field instruments in support of AI data center build-out. We're seeing strong demand across all data center segments, scale-up, scale-out, and scale-across. Acceleration of industry investment in ever greater communication speeds and chip-to-chip interconnect technologies are the principal drivers of strong demand for our optical transport, silicon photonics, and communication protocol and high-speed Ethernet test equipment. The Q3 growth was also helped by recently acquired Spirant high-speed Ethernet product lines, which gave us access to a large installed base of enterprise customers. HSE performance came in line with our expectations. Given strong and growing customer demand, we expect the data center ecosystem revenue momentum to continue through the calendar 2026. Our aerospace and defense business also saw another strong quarter-on-quarter growth, driven by continued growth demand for our positioning, navigation, and timing products. We expect this trend to continue through the calendar year. The service provider business, which includes field instruments, wireless, and service enablement, was in line with seasonality. As you may recall, the service provider business is seasonally weaker during the March and September quarters and seasonally stronger during the June and December quarters. Some notable on the service provider dynamics during the March quarter included early orders from cable operators relating to the new DAA architecture, and continued weak but stable demand for wireless test products. We do not expect recovery and growth in the near term for wireless business. Now, turning to OSP. OSP saw strong year-on-year growth driven by strong demand for 3D sensing and anti-counterfeiting products. Looking ahead to Q4, we expect NSC revenue to be up quarter-on-quarter driven by continued strong and growing demand from the data center in aerospace and defense customers in seasonally stronger service provider spend. We expect OSP to be up also quarter on quarter, joined by strength across all product lines. In conclusion, we expect our data center in aerospace and defense and markets to be strong drivers for the foreseeable future. I would like to thank the VIAVI team for its continued strong innovation and execution and thank our customers and shareholders for their continued support. With that, I will now turn it back over to the operator for Q&A.

Thank you. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you'd like to ask a question, please press star one to raise your hand. To withdraw your question, please press star one again. If you were muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Ruben Roy from Stifel. Your line is now open.

Great. Thank you. Hi, Oleg and Ilan. Congrats on the momentum here in the business. I guess to start, Oleg, maybe we could just drill into the data center momentum. And if you think about sort of the first half of the year and what you're seeing here with the beat here in the March quarter and the guidance for June, Can you detail out sort of a little more detail around the drivers by production field and maybe just kind of what you're seeing in terms of visibility from your customers? Obviously, a lot going on with AI infrastructure networks and that type of thing, but just trying to get to a little more detail around lab production and field and how you see that sort of trending from here as you look ahead.

Sure. Well, I mean, the, you know, on the lab side, it's your classical, you know, optical transport and BCIE express test products. So you develop all these new AI chips for inference or the training. It requires, as you can imagine, very high speeds for all the ports and the overall traffic. So, I mean, everybody who is working on any kind of product out there that's going to go into these next generation systems, be it for AI training or AI inferences, is buying our optical transport and our protocol test solution. So that's primarily lab, but also exactly same equipment is being bought by NAMS for building optical switches and all the other gear that goes into the systems. and um and that's kind of on the lab side on the production um we are seeing um very a lot of momentum on this whole co-packaged optic area and that plays extremely well to the traditional viavi strength with the you know the old jds uniface products that go into the production line where you are measuring uh spectral performance the optical performance of all the various optics, but it's also we're selling now a lot of that equipment to the semiconductor vendors as they develop their integrated packaged optic solution. So, I mean, it's pretty much everything we do in that area relating to the advanced silicon for both training and inference applications and all the optical gear that goes into the data centers is playing a big perfectly aligned to our portfolio. Now on the field instrumentation side, as all these data setters come up, they are putting a lot of investment into ensuring peak performance And I tell you, I mean, I've never seen so much demand for our fiber monitoring solutions. I mean, I'd say these data centers are buying more equipment than regular service providers for the whole big network. So that is obviously drying the whole field instrument side of the business. I mean, it's now approaching close to, I'd say, 40%, 45%. Pretty soon, probably maybe 50% of the field instruments is actually driven by the data center. So in that respect, it's a very good alignment between what the market needs and what we actually have.

That's great detail. Thanks, Oleg. I guess for a follow-up on that, you had started to see some hyperscaler activity around 800 gig, I would assume, last year, some of these things that you're talking about. and answer the question, and on the call today, things like 1.6T, co-packaged optics, they're actually just starting, it seems like. Is that the right way to think about it? And I guess the question for that is... Go ahead. I was just going to ask the question. It would be, you know, sort of in terms of your mix here, you know, is it... I would assume it's still more weighted towards some of the older generation technology, or is that the wrong way to think about it? And, you know, kind of how do you think 1.6T and some of these new products layer in, I guess, is the question.

Yeah, it's all. I mean, the 800 is still very much a high-volume driver, but a lot of the new development is using our 1.6. By the way, we released 1.6 a year and a half ago. So you just see – actually, ironically, it was initially the NAMs, the optical – you know, equipment vendors who deployed it first in development, and now it's spreading to the semis and the whole co-packaged optics. So, yeah, I mean, 1.6 is ramping in a lab, and we're also having some of the early production products uh to the um module vendors uh but uh you know there's no like one way or the other it's actually both of these are in um one is ramping into volume the other one continues to be strong in the volume thank you for your question your next question comes from the line of Mehdi Hassani from SIG your line is now open yes uh thanks for taking my question Oleg

Congrats on execution. I want to get a bigger picture and looking more longer term. I see your midpoint of your June quarter guide implying annualized earning of $1.20, which is much higher than the prior peak from FY22. And with that as a context, how should we think about companies earning power over the next one or two years? And I'm not asking for a guide. I just want to get a better picture of how the new vector, the demand vectors that are materializing are going to enable you with longer-term earning power and how to follow up.

It's a great question. So I think clearly know uh i would say our nsc business is now getting very close to 20 operating profit it's all volume driven so for every incremental dollar in nse i mean you're getting about what 40 to 45 cents um dropping to the to bottom line uh elon can give you a lot more detail on that So clearly that's driving up the operating margin. Our OSP has always had pretty high operating margin, but also with the higher revenue, it's now going from like it was in the mid-60s to 70s. Now it's moving to high 80s to maybe low 90s. Well, that gets you a couple of percentage points higher gross margins. which then obviously drops right down to the couple percentage points higher operating margin. So already at the blended average, we are like we're at 23, 24%. And as NSE keeps getting stronger, you know, that will keep moving into the mid 20s and maybe higher. So in that respect, there is a tremendous operating leverage that comes with volume. And, you know, also, you know, we've been able to weather pretty well any kind of the price increases due to components and component shortages. And, you know, as we probably will try to pass some of that increases to our customers, that will be an additional mitigation of the cost, which will probably give us a little bit more expansion on the gross margin. So clearly, combination of keeping up with the price increases and passing it on, maintaining healthy gross margins, volume growing, driving significant operating leverage, and Fundamentally, you know, it scales very nicely from this point on. I mean, as our fixed costs fully covered, every incremental dollar is, what, about 40%, 45%?

Yeah, so for modeling, maybe. So on the NSE side, it's around, you know, today the 40% level. And obviously, you know, the top line, you know, we assume will continue to drive as it continues to grow. So when you think about the operating leverage and the operating income for NFC and the company, I mean.

And I'll say last but not the least, you know, we've talked a lot about our NOLs. Well, guess what? Now that we are, you know, generating a lot of profit and a lot of it falls in the U.S. jurisdiction because of where our IP and R&D is, I mean, all that incremental profit comes in at virtually zero tax in the North America.

This quarter, for example, you know, the effective tax rate is about 12%, so definitely another benefit there.

Okay. I mean, the only little catch wind you have is, you know, with the converts, you get a little bit dilution as your price, stock price goes up. So, you know, you've got to factor a bit higher share count in your calculations.

Okay, and as my second question of follow-up, I want to come back to scaling. Right now, again, midpoint of the June quarter implies about a 25% growth from the prior peak from mid-22. And back then, 5G wireless was a big factor. I'm under the assumption that wireline, especially as we roll out 1.6 and subsequent to that 3.2, offers a bigger TAM. And given that setup, yeah, you have been able to scale revenue through acquisition, organic growth. But where do we go from here? Is there any way you can help me understand the growth from here, especially catalyzed by 1.6 and 3.2?

Well, so I think the intensity of our equipment increases as you're going to higher speeds for both not only the networking speed or bandwidth, but also with a chip-to-chip interconnect. And then on top of it, you throw in things like co-packaged optics or near-packaged optics and all that. So actually, you're not only growing with the market, you're also having broadening of areas where our equipment is being bought. I mean, for example, when you start making manufacturing multimode and hollow core fiber, you now, before we never really sold into the manufacturing lines, Now the level of complexity in these products requires our instruments. So we're now seeing opportunities emerging where we'll be selling into the production environment on things like fiber manufacturing, right? things like people making co-packaged optics or integrated optics well now you are selling optical equipment into the lab that before you only used for you know maybe fiber optic modules now they need to characterize and design these optical components and then all these optical components need to be tested in like multiple insertions because the yield is so critical when you build this whole module. I mean, if you have one device is bad, you throw away the entire, once it's completely sealed, you can't rework it. So you have to test every component that goes into the module. Then you test it again once you mount it. And only at the end, you put an ASIC onto the module. So in that respect, it drives a tremendous amount of test requirements in the manufacturing process.

I completely understand. I think your book tour at OSC in March was illustrative of these increased test insertion points. But I guess back to my question, could these opportunities help you with a $500 million of a quarterly revenue? And I'm not asking for a specific timing, but is a $500 million of a quarterly revenue a realistic target?

Oh, I think it's entirely realistic. I mean, look, I think this quarter we are at midpoint is what around 232. I mean, so it's moving in that direction. Remember, it's not only it's I'd say it's early on. We're seeing a lot of early demand in this truly as a lot of that next generation optical equipment and components come into being. I mean, you look at some of these new high power Ethernet switches and they embedding like optical photonic integrated circuits into substrates and all that. So the scope of the market is expanding tremendously. And let's not forget our aerospace and defense business. It's also growing very nicely. So we don't talk much about it, but that business is also driving the wave. And last but not the least, wireless will not be down forever. Eventually, we do need to... you know, to consume all the data and all the air through our wireless devices. So I think eventually either the service providers or some other money will come in to take the wireless infrastructure and make it AI RAM, which will rebound the spend in that market. And today our wireless business is down about 40, 45%, depending on the quarter. And that alone could drive, you know, 20 to $30 million additional quarterly revenue.

And maybe I assume just to make sure that we are level setting kind of the expectations here. I assume first you referred on the 500 to the NSCP, so not total VIAVI, but it's also not about- No, I think he's talking about total VIAVI. So that's what I wasn't sure. But in any case, this is not necessarily kind of immediate next fiscal year. This is over kind of the next kind of up cycle. Yeah.

Thank you for your question. Your next question comes from the line of Ryan Coons from Needham. Your line is now open.

Great. Thanks for the question. Terrific results, guys. Just excellent. Maybe just a quick clarification on the data center customer mix there. It sounds pretty broad and diversified, but as you think about the different types, the semis, the opticals, the NEMs, the operators, can you give us maybe an order of kind of which one of those customer segments is driving them, are the biggest within the data center mix today?

You know, it's fairly well, you know, it varies quarter by quarter. I mean, let's put it this way. The actual data centers are buying quite a bit. I mean, so I'd say if you only just take the one single segment, I would say it'd be you know hyperscalers would be a big um biggest bucket because they not only buy equipment for data centers but they also run their own r d developing their own um processors and um modules and the outputs right so and within the hyperscalers I'd say there is, you know, the ones who are much more into doing their own stuff are actually much bigger and then some that are not so big. But it's percolating across, right? And the next big bucket would be the modules, module makers and the system makers, right? People making optical modules and optical systems. And I would say the next bucket is the silicon vendors. And I mean, that's I mean, I haven't really looked at it, but it's a fairly even balanced distribution.

That's great, Kalar. Thank you, Oleg. Maybe switching gears to Spirant, obviously they're a big part of your success here in data center as you build that momentum. Can you maybe talk about the synergies you're seeing with that business as it relates to both the product side of the house as well as the sales side?

I would say the, I mean, clearly they come with a pretty big established customer base. I would say we are really upgrading the performance, hardware performance of their products, which makes them much more competitive, but they have a very good, you know, established reputation and the, I would call it application hardened software for all kinds of ethernet traffic. So in a way it's a good combination, accelerating our hardware development to the ever higher speeds and bringing their software and combining together. I'd say the first truly integrated product that we're gonna have between them and us is 3.2 terabits, but we are doing very well already leveraging our 800 gig position with their 800-gig Ethernet test and obviously expanding it to our customers who they did not have, but also getting access into their customers, which drives broader discussion and more strategic discussion around not only high-speed Ethernet, but all the other products that we bring into the mix.

That's great. Sounds like the cross-selling is already beginning there. And maybe just some of the emerging, if I could get one last one in here around emerging product areas. Obviously, defense is one. You know, how would you characterize where you are in winning share for this P&T with the growth in all the drones? And would you touch on maybe what you're doing in wireless in the satellite arena, if you see that as an emerging opportunity for LEOs? Thank you.

Sure. So, you know, the positioning, navigation, timing, actually a lot of what the revenue, what we're seeing today and driving today, most of it was actually designs that were won before we acquired them. But we're now starting to see even things coming, ramping up ever since we acquired it. But if I look at the funnel of wins in the last, let's say, 12 months, as these things kick in, that momentum will continue to rise. drive that business. So it's all goodness. And it's, you know, clearly drones is a big one, but pretty much anything autonomous. I mean, whether it's air, land, sea or undersea vehicles is creates a great pool. And we are now winning some of the U.S. tier ones. I mean, traditionally, they were very strong with tier twos and a lot of international. And I would say in the past, year, we have really, as we brought in a lot of the kind of discipline regarding around the implementing ITAR and various secure access systems, we are now being considered by US tier one players, and we are starting to play in much bigger leagues in that respect. So that was the aerospace defense. Your satellite question, wireless. Well, you know, as I tell my wireless team, when the market is awful, you know, focus on the next generation. And it's 6G, it's NTN and all these kind of applications. And we are very heavily involved with, you know, kind of the 5G plus. 5G++, 6G, and a lot of it is really focusing on the two types of communication, the AI RAN, which is basically running AI traffic through the advanced wireless network, and the ground-to-satellite communication. So this is what a lot of our advanced wireless applications are focused on today.

Terrific. Thanks, Oleg. Congrats again.

Thank you for your question. Your next question comes from the line of Andrew Spinola with UPS. Your line is now open.

Thank you. I wanted to ask on the component shortages and some of the supply constraints, I'm just wondering if during the quarter you were able to meet all of the supply or all of the demand, rather, or if the supply constraint limited you. And as a part, sort of like an addendum to that question, We're starting to see a lot of long-term supply agreements in other areas in this industry to meet the hyperscaler demand and sort of increases in visibility a couple years out. So I'm wondering what your visibility is like. Have you started to enter into any long-term supply agreements with some of your bigger customers? What's evolving on that side? Thanks.

Thank you, Andrew. Well, I mean, I don't think we, you know, we don't have the volumes to enter into long-term supply agreements. And remember, test and measurement, usually it's, you're leading a lot of the volume markets, so you have to buy the latest and greatest. So what's more important for you is not necessarily supply agreement, but the early access. It means you're accessing alpha silicon or beta silicon well before it's released. So you can develop the products there are available even before the qualified silicon is released to market. So that is where we focus on. In terms of the availability, you know, in testing measurement, you generally pay the highest ASP of their price distribution. So it's never a problem to get it. You just got to make sure you give them, you get enough notice. So when you, I would say, if we say supply shortage would not be because we would not get the material. We just didn't get, you know, we'd get an upside order with too little lead time to get it in. But generally, you know, you pay more money, you always get the product. So and the nice part about being at a bleeding edge of the test and measurement, you know, people need the product that works and, you know, pricing is secondary in that respect. Now, as you get into more mature products like field instruments, you know, handhelds, yeah, their cost is very important, and there we generally maintain inventory. I mean, we got a lot of a headache from my cfo and our audit committee a few quarters back because we went in and put some product on the shelf because we anticipated the shortage coming in and today we look pretty smart as a result of it and nobody's complaining so in the end i mean you gotta manage your supply chain and last thing you want to do is be a penny wise and pound foolish and i mean if you don't pay then don't complain nobody's going to give you any um availability so far we have I mean, clearly there is a supply shortage, especially memories. I mean, listen, I think memory is going to be a deficit for the next till 2030, according to some of the studies I've seen. But given our volume requirements, it's not such a big deal. I think having a product available ahead of everybody else and having early access is probably what's more important.

And I can add to that also, if you look at our balance sheet for March, you will see on the inventory level, you know, it's up single digit million. The majority of it was to secure some additional components for the upcoming.

And I mean, and we look two, three, four quarters out and we make some bets because it's not the issue if we don't get the product, it's really the lead time and making sure we give adequate notice to the vendors.

I appreciate that color. I want one follow-up. I wanted to ask, you talked about incremental margins earlier on the call of 40 to 45%. I think that makes a lot of sense. It looks like that's what's in your numbers for Q4 in your guide. And I'm trying to think about how to think about fiscal 27. And so my assumption is that you've got the 40 to 45% incrementals on the core business as you scale. But what I'm really asking about is you announced last quarter, I think it was about $30 million restructuring. I think you acknowledged some of that will probably get reinvested. But I'm wondering at this point if you could give us any color on, you know, maybe how much of that is going to drop to the bottom line, how much of that is going to be reinvested. And frankly, you know, my assumption would be a good chunk of that is going to hit the bottom line. So maybe incrementals in fiscal 27 are closer to 50%. So I wonder if you'd comment on that.

Well, maybe I'll start and Ilan will give you the details. So we're going to implement most of it by the end of our fiscal year, so the June quarter, and there's some remainder that probably will go through the end of the calendar year. And I think Ilan, what is it, roughly a third of it gets reinvested.

Yeah, and Andrew, the 40% fall through that we see right now, you know, probably and there is a good reason to assume that it can go higher. Specifically, if you think about the second half of the fiscal year next year, meaning 27, there is still, you know, the seasonality that Oleg mentioned in the prepared remarks. So if you think about the September quarter, you know, usually it's a down quarter for us, et cetera. And we need all the restructuring to materialize, and that will take also until the end of the calendar year, this calendar year. So the increase in the fall through from the 40% level It's fair to assume that you know with the with the top line kind of growth will be more visible in the second half of the fiscal year of next fiscal year, meaning it's the first half of the calendar year of 27.

So one thing I just want to clarify. When Elon says September quarter is a seasonally down quarter for us for service provider segment, that's what it is. So if you think about it in the old days before we had this whole data center and aerospace and defense, If you look at the old VI, it's like March and September quarter would be the down quarters because that's the type of spending that of service providers. By the way, that pattern is still there, except now it's on a much smaller scale. But because of the aerospace and defense and our data center business is growing so strongly, it's more than offset. But you still have that underneath it. You have that up and down. So you would see like a much bigger jump between March and June quarter because you have a tailwind from service providers. Conversely, you'll have a smaller increase in the September quarter because you have a headwind from the service providers. Then in December, you'll have a tailwind again. So, I mean, this thing is still there. It's just becoming more and more muted from impact on overall VIB. Right.

And on a quarter-on-quarter kind of trajectory overall, December is stronger versus September, and September is still more muted relative to June.

That's right.

That's right.

Understood. Thanks for taking my questions.

Thank you for your question. Your next question comes from the line of Michael Genovese from Rosenblatt Securities. Your line is now open.

Hey, thanks. Exciting times, guys. Congratulations for being right in the middle of it. I keep hearing now, as we go to more silicon photonics and more co-package optics, that the bottlenecks to the whole thing are moving to the packaging from the foundry players and to the test and measurement for the electronics, the optics, the engines, and the ASICs. It seems like there's so much testing to be done with co-package optics. So my first question is, you know, do you agree that testing is a bottleneck? And if so, you know, how will you address that over time to, you know, to take advantage of that?

I'll say, amen, brother. You're absolutely right. So, I mean, you know, the, you know, the whole test, you know, packaging used to be kind of a backend afterthought. It is now the system. It's now strategic assets. So you look at companies like, you know, well, I don't want to name names, but all the leading semiconductor companies, the packaging expertise package is now the system. and you're looking at integrating glass substrate you're looking putting photonic integrated circuits next to the electronic into integrating circuits embedded into the this whole coax chip one wafer on substrate right you're building this really complex thing and then if you look at you're putting now all these co-packaged optics on a periphery of the chip This thing is starting to look more and more like a brick. And some of them weigh, I mean, we're talking about kilos of weight, right? So to me, that's like music to my ears because, you know, as you probably know, I started in this industry. I ran Amcor. So it was like, you know, it's like all the ride in the danger field. You got no respect. Well, now. the respect is like hugely. And I mean, we are seeing now our technologies and our capabilities are being dragged into the straight into this whole value chain of testing from the individual optical components to wafer-level packaging to the heterogeneous integration packaging, all the way down to being integrated into major test platforms. And that's like a whole new business that we did not even have. And then, last but not the least, this whole rack-mounted systems that are being built as custom tests by leading players, we're supplying a lot of the guts and a lot of hardware that goes into those systems. So as I was saying, you know, my thing is like from the old JDS Uniphase days, we still have all these products, and now there's a whole new life being injected into those products. And that's something we didn't even think about, I would say, three quarters ago.

Great. And then just as a follow-up, just, you know, with newer things like OCS, where I think you're probably going to have very high market share for testing, and then for co-package optics, I mean, are these in the numbers at all yet? Or is this all in the future, I assume? And I guess maybe my question would be, you know, how do you define the foreseeable future when you're saying that you feel great about the foreseeable future? Like, how far out is that?

I would say in the current numbers, it's kind of the early sales. But I'd say foreseeable future, you're probably, you know, you're talking two to three quarters when it starts ramping up. The future is not that far off. But what we're selling right now is the early inning.

Right. Just to clarify the foreseeable future question, I mean, in the press release, you said something like, We feel great about, you know, growth into the foreseeable future. So is that multiple years that we're talking about?

No, no, no. I mean, generally, we as a practice don't want to go beyond end of the calendar year. So when I say foreseeable future, it's like next three quarters.

Perfect. Again, congrats.

Sure. Thank you.

Thank you for your question. Your next question comes from the line of Tim Savageau from Northlands Capital Market. Your line is now open.

Hey, good afternoon, and congrats on some pretty spectacular results. It's a pretty simple question to start with. We'll actually have confirmation on the question, and maybe it'll get a little more complex from there. So Spiron was 54.2 in the quarter. Is that right? Correct. That's correct. Okay. So I guess the simple question is, what do you expect for next quarter for Spiron?

So Spiron, you know, benefited from a few orders that we mentioned already in the last quarter that got pushed out to this quarter. So this quarter, that's, you know, that's the reason that it's a little bit stronger than seasonality. We still expect, you know, on an annual basis, calendar annual basis, A similar run rate of, you know, around about the 200 million that we said with a split of around 45%, 55%. So that takes you, if you normalize everything, still back to, you know, just shy of the 50 million, maybe 48 million for the June quarter.

Okay. Well, that's a good answer because that speaks to higher levels of organic growth in your NFC business, which I see approaching 40% here in Q4, the way I'm dicing things up here, and over 30% for the year. So I guess I'll try to tie the last question to this one and say, when we see this type of environment for the foreseeable future, Do you think you can see those type of organic growth rates, 30, 40% for, you know, call it organic NFC, continue over the next couple, three quarters?

Well, you know, I mean, one thing about percentages, it's very hard to maintain same percentage. I mean, because, you know, 30% on one number is... is much smaller than 30% or a much bigger number. But I think if you look at growth in the absolute dollars, I mean, that's what we're striving to try to maintain.

And I'll add also, you know, all I just mentioned earlier, you know, the service providers, which is part of the core NSC.

Yeah.

And so if you think again, the seasonality, so September, you know, traditionally does not enjoy the same growth rate if you bundle everything together. So I'm not sure that, you know, our assumption is exactly, I mean, right? I mean, it's over.

I think you're talking about year on year. Year on year. When you have a quarter, same quarter, same dynamics. Yeah. I would say, I don't think you could say like a 40%, but I think still a high number should be realistic because 40% on 400 million is one number, 40% on 200 million is a very different number, right?

Oh, I got it. Although I'd say consensus probably has you at high single digits right now, given what you reported. So you could probably do a little bit better than that, maybe double that or more. For the full year of 27. I'm just making extemporaneous comments. I'm not asking you to guide anything. You've been very helpful in giving the breakdown, at least some. I'll ask for either one of two ways, which is kind of the data center defense and service provider breakdown, if we can get an update there, and or growth rates in those categories. estimated for what you saw here in fiscal Q3?

Well, I tell you, if everybody spends what they claim they're going to spend, I mean, we still got a lot of growth to go on, right? So, I mean, if you take those assumptions, I think we're, I mean, the momentum, I'd say we're still in the fairly early segment of the ramp.

MESSAGE RECEIVED THERE, WOULD YOU SAY DATA CENTER, AND, AGAIN, THIS KIND OF WITH AND WITHOUT ASPIRANT CONFUSES THING, I ASSUME WITH DATA CENTERS SOLIDLY MORE THAN 50% OF NSC REVENUE. BUT WHAT I WAS LOOKING FOR IS HOWEVER YOU WANT TO BREAK IT DOWN. I THINK YOU SAID, YOU KNOW, 45, 15. YEAH.

I THINK RIGHT NOW THE DATA Yeah, I think right now the data center is, I mean, the exit velocity this year is inching to the high 40s. The service provider are inching towards mid-30s, and airspace and defense is a little over 15%. So I wouldn't be surprised if data center in a not-too-distant future gets up to about 50% of our NSC revenue.

Got it. Thanks.

Okay.

Thank you for your question. Your next and final question comes from the line of Andrew Spinola with a follow-up from UPS. Andrew, your line is now open.

Thank you. I just wanted to ask a higher level question about your drone business, your module business from Inertial. How is that business performing today? Obviously, there's a lot of demand and new programs in that space. And I'm just wondering what you're seeing in terms of opportunities. How is that business positioned? Do you have all of the approvals and the ability to sell into all of the customers? How should we think about that opportunity over the medium term?

Well, that's a good question, Andrew. I mean, so, you know, you can judge from it. mere fact uh elon said that we just paid out you can look at our balance sheet we paid out a pretty big earn now it means these guys have exceeded every uh forecast that they've given us and as i tell you i've in my career i've made about close to 40 acquisitions there's been only two of them have exceeded their first year forecast okay uh this is the only one at viavia and i mean they that business is doing extremely well and uh and they make products anything from the basic sensors that go into the inertial navigation system to fully blown um inertial navigation system that it does the sensor fusion of you know gnss the um you know location the ground speed the um you know uh lidar and all these other things so uh and you know we're engaged with pretty much every drone you know munitions subsystem vendor of interest out there both in us as well as in the rest of the world now clearly there's a clear guidelines what constitutes controlled versus not controlled when you a sensor and it's within a certain level of accuracy, for that you need export approval. If you are making a product that's more commercial, let's say you're doing a surveillance drone or agricultural drone or something for mining industry, those things are deemed to be commercial. So we have a very clear boundaries and how we define the products, how we grade them, and obviously how we price them. So all these things are some products that you can only export through the U.S. government export license. Others you can just sell as a commercial product.

And just one follow up on that. It sounds like there's particularly strong growth in demand for lower cost drones and i'm just wondering without knowing that market all that well with with the inertial modules or some of those gyroscopes or sensors that that inertial cells would they be applicable for the the lower end drones with for that opportunity when you say lower end drones if you're talking something like uh three thousand dollars then no if you're talking something like thirty thousand dollars then yes Okay, perfect. Thank you all.

Okay, sure.

There are no further questions at this time. I will now turn the call back to Vibhuti Nair for closing remarks.

Thank you, Hillary. This concludes our earnings call for today. Thank you for joining everyone and have a good afternoon.

This concludes today's call. Thank you for attending. You may now disconnect.