Earnings call transcript: Viavi Solutions Q2 2025 results beat estimates

Viavi Solutions Inc (NASDAQ:VIAV) reported its Q2 FY2025 earnings, showcasing a strong performance with earnings per share (EPS) of $0.13, surpassing analysts’ expectations of $0.10. The company’s revenue reached $270.8 million, exceeding the forecast of $259.99 million. Following the earnings announcement, Viavi’s stock surged 20.52% in after-hours trading, reflecting positive investor sentiment. According to InvestingPro data, 8 analysts have recently revised their earnings expectations upward, suggesting growing confidence in the company’s prospects. The stock currently trades above its InvestingPro Fair Value, indicating potential valuation concerns.

Key Takeaways

• Viavi Solutions posted a 6.4% year-over-year increase in revenue.
• EPS exceeded forecasts by $0.03, marking a significant beat.
• The stock rose 20.52% after earnings, highlighting strong market confidence.
• The company shipped its first 1.6 terabit fiber product, indicating innovation in product offerings.
• Acquisition of Inertial Labs enhances positioning in the PNT market.

Company Performance

Viavi Solutions demonstrated robust performance in Q2 FY2025, with notable increases in both revenue and EPS compared to the previous year. The company’s strategic focus on innovation and market expansion appears to be paying off, as evidenced by the strong financial results. In particular, the demand for fiber and aerospace products contributed to the revenue growth, helping Viavi maintain a competitive edge in the industry.

Financial Highlights

• Revenue: $270.8 million, up 6.4% YoY and 13.7% sequentially.
• EPS: $0.13, an increase of $0.07 sequentially and $0.02 YoY.
• Operating margin: 14.9%, up 490 basis points sequentially and 170 basis points YoY.
• Total (EPA:TTEF) cash and short-term investments: $512.8 million.
• Cash flow from operations: $44.7 million.

Earnings vs. Forecast

Viavi Solutions’ EPS of $0.13 exceeded the forecast of $0.10 by 30%, while revenue of $270.8 million surpassed the expected $259.99 million by approximately 4.2%. This marks a significant earnings beat, reflecting the company’s ability to outperform market expectations consistently.

Market Reaction

Following the earnings release, Viavi’s stock price jumped 20.52%, reaching $12.12 in after-hours trading. This surge indicates strong investor confidence in the company’s growth trajectory and strategic initiatives. The stock’s performance is particularly notable against its 52-week high of $12.91, suggesting potential for further gains.

Outlook & Guidance

For Q3 FY2025, Viavi Solutions projects revenue between $276 million and $288 million, with NSE revenue expected around $207 million and OSP revenue approximately $75 million. The company anticipates continued recovery momentum throughout fiscal 2025, with a focus on expanding its market presence in Europe by mid-calendar 2025.

Executive Commentary

CEO Oleg Haykin expressed optimism about the company’s strategic direction, stating, "We are very positive on that business. And then the third element here, traditionally we played in kind of layer 1, layer 0, and now we’re going to layer 2 to layer 7." CFO Ilan Daskal highlighted the role of mergers and acquisitions in the company’s growth strategy, saying, "M and A continues to be part of our overall capital allocation model."

Risks and Challenges

• Supply chain issues could impact product delivery timelines.
• Market saturation in the telecom sector may limit growth.
• Macroeconomic pressures, such as inflation, could affect operational costs.
• Competition in the fiber optics market remains intense.
• Dependence on the North American market for wireless recovery poses a regional risk.

Q&A

During the earnings call, analysts inquired about the trends in fiber monitoring with hyperscalers and the recovery of the wireless market in North America. Executives also addressed the strategic rationale behind the Inertial Labs acquisition and the dynamics of the 3D sensing market.

Full transcript - Viavi Solutions Inc (VIAV) Q2 2025:

Lisa, Conference Operator: Well, good day, everyone, and welcome to the VIAVI Solutions Fiscal Second Quarter 20 25 Earnings Call. Just a reminder, this call is being recorded. I would now like to hand the call over to Ms. Vabuti Nayar. Please go ahead, ma’am.

Thank you, Lisa. Good afternoon, everyone, and welcome to VIAVI Solutions’ fiscal 2nd quarter 2025 earnings call. My name is Vaghuti Nayyar, Head of Investor Relations for VIAVI Solutions. With me on today’s call is Oleg Haykin, 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 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 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 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 will make the recording available on our website by 4:30 p. M.

Pacific Time this evening. With that, I would like to turn the call over to Ilan. Ilan?

Ilan Daskal, CFO, VIAVI Solutions: Thank you, Vibhuti. Good afternoon, everyone. Now I would like to review the results of the Q2 of fiscal year 2025. Net revenue for the quarter was $270,800,000 which is above the high end of our guidance range of $255,000,000 to $265,000,000 Revenue was up 13.7% sequentially and on a year over year basis was up 6.4%. Operating margin for the 2nd fiscal quarter was 14.9%, significantly above the high end of our guidance range of 11.4% to 13.4%.

Operating margin increased 490 basis points from the prior quarter and on a year over year basis was up 170 basis points. EPS at $0.13 was also above the high end of our guidance range of $0.09 to 0 point 1 $1 and was up $0.07 sequentially. On a year over year basis, EPS was up $0.02 Moving on to our Q2 results by business segment. NSE revenue for the 2nd fiscal quarter came in at $199,900,000 which was above the high end of our guidance range of $184,000,000 to $192,000,000 This was mainly driven by strong order pace from service providers and NEMS for field instruments, in addition to the recovery across many of our product segments. On a year over year basis, NSE revenue was up 11.3%.

10E revenue for the quarter was $179,000,000 which is up 15.1% year over year as a result of strong demand by service providers and NEMS for both lab and field instruments. SE revenue was $20,900,000 and declined 13.3% from the same period last year, driven mainly by enterprise customers’ conservative spend. NSE gross margin for the quarter was 64.8%, which is 140 basis points higher on a year over year basis. NE gross margin was 64.5%, which is an increase of 200 basis points from the same period last year as a result of higher volume and product mix. SE gross margin was 67.5%, which is a decrease of 140 basis points from the same period last year due to lower revenue.

NSE’s operating margin for the quarter was 8.7%, which is a 510 basis points increase on a year over year basis and came in significantly above our guidance range of 3.8% to 5.8%, driven by higher gross margin fall through. OSP revenue for the 2nd fiscal quarter came in at $70,900,000 which is slightly below the low end of our guidance range of $71,000,000 to $73,000,000 On a year over year basis, revenue was down 5.3%, primarily due to weaker demand for 3 d sensing products. OSP gross margin was 50.6 percent, down 150 basis points from the same period last year and was primarily driven by lower volume and product mix. OSP’s operating margin was 32.4%, which is a decrease of 400 basis points on a year over year basis as a result of lower gross margin fall through. Moving on to the balance sheet and cash flow.

Total cash and short term investments at the end of Q2 was $512,800,000 compared to $497,900,000 in the Q1 of fiscal 2025. Cash flow from operating activities for the quarter was $44,700,000 versus $20,400,000 in the same period last year. CapEx for the quarter was $8,200,000 versus $5,800,000 in the same period last year. During the quarter, we did not purchase any shares of our stock as we prioritized our capital allocation towards M and A with the acquisition of Inertial Labs. Fully diluted share count for the quarter was 224,800,000 shares, up from 223,500,000 shares in the prior year and versus 224,000,000 shares in our guidance for the 2nd fiscal quarter.

Moving on to our 3rd fiscal quarter guidance. For NSE, we are expecting a stronger seasonality trend across most segments. For OSP, we expect softer demand for 3 d sensing products. We anticipate demand for anti counterfeiting products to start stabilizing as the end customers continue to work down their inventories. For the 3rd fiscal quarter of 20 expect revenue in the range of $276,000,000 $288,000,000 Operating margin is expected to be about 14%, plus or minus 100 basis points, and EPS to be between $0.10 $0.13 We expect NSE revenue to be approximately $207,000,000 plus or minus $5,000,000 with an operating margin of 7%, plus or minus 100 basis points.

Our revenue guidance for NSE includes a high single digit $1,000,000 from Inertial Labs, which is in line with our previous communication of $50,000,000 annual revenue run rate. OSP revenue is expected to be approximately $75,000,000 plus or minus $1,000,000 with an operating margin of 33%, plus or minus 100 basis points. Our tax expenses for the Q3 are expected to be around $9,000,000 plus or minus $500,000 as a result of jurisdictional mix. We expect other income and expenses to reflect a higher net expense of approximately $4,200,000 as a result of lower interest on cash on hand used for the Inertial Labs transaction. Lastly, the share count is expected to be around 226,100,000 shares.

With that, I will turn the call over to Oleg. Oleg?

Oleg Haykin, President and CEO, VIAVI Solutions: Thank you, Ilan. During the December quarter, our revenue and EPS came above the higher end of our guidance range. As we mentioned in prior call, many of NSE traditional end markets have stabilized and are showing signs of gradual recovery as we enter calendar 2025. Now let’s look at in more detail at each of our businesses starting with NSE. NSE revenue in fiscal Q2 grew year over year driven by recovery and growth across many of our product segments.

We expect this momentum to continue through the remainder of fiscal 2025. A bit more color on individual product segments. Fiber field saw solid demand from service providers and AMPs particularly in fiber monitoring systems in support of fiber network build out. We expect this momentum to continue. As we mentioned in our prior call, we are also seeing signs of stabilization and green shoots in our wireless business, driven mostly by the resumption of 5 gs deployment in North America.

We expect the gradual recovery to continue during the first half of calendar twenty twenty five. Fiber11 production demand was up significantly in the December quarter, driven by growth in lab fiber and optical transport. We also shipped our first 1.6 terabit fiber product and saw continued demand for our 800 gig products which should drive significant growth for the remainder of fiscal 2025. Our Aerospace and Defense business segment continued its robust year on year growth driven by growth in our mission critical products, including communications, avionics and PNT, which stands for positioning, navigation and timing. Earlier this week, we closed the acquisition of Inertia Labs, which strengthens VIAVI’s position in the PNT space by complementing our industry leading resilient timing technology with positioning and navigation solutions.

Our expanded P and C portfolio positions us well in the high growth markets such as alternative navigation and autonomous air, land and sea vehicles. Lastly, SE was down year on year, primarily driven by lower enterprise customer spend. Looking ahead for NSE, we expect a seasonally stronger Q3 across the broad base of our product portfolio with continued recovery momentum for the remainder of fiscal 2025. Now turning to OSP. During the fiscal Q2, OSP declined on a year over year basis, primarily due to lower demand for 3 d sensing products.

We expect fiscal Q3 to be roughly flat year over year characterized by seasonally weaker 3 d sensing. We continue to monitor inventory levels of anti counterfeiting products and we currently expect to reach demand supply equilibrium within the next two quarters. To summarize our near term outlook, we expect Q3 to be seasonally stronger and recovery momentum to continue through the rest of fiscal 2025. In conclusion, I would like to welcome employees of Inertia Labs to VIAVI and thank the VIAVI team for managing through the challenging environment over the past 2 years. Lastly, I would like to thank our customers and shareholders for their continued support.

With that, I will now turn it all back to the operator for the Q and A.

Lisa, Conference Operator: We’ll go first to Reuben Roy, Stifel.

Reuben Roy, Analyst, Stifel: Hi. Thank you for letting me ask some questions. Oleg, nice to see the turn as you sort of highlighted on the last call. I guess if we could drill down into some of the moving parts here, starting with the field demand for fiber monitoring. Can you talk a little bit about that?

Is that still mostly telco service providers? Are you starting to see some hyperscalers get involved with fiber monitoring?

Oleg Haykin, President and CEO, VIAVI Solutions: Well, it’s a combination. I mean clearly on a broad base, it’s the telcos because they’re as they build out their fiber networks. I mean it’s just really the volumes game, right? Because there’s so many telcos and so many of them are building out fiber, but also there is cable providers, but they’re also building out fiber. So clearly that’s driving.

But the new segment emerging is really the hyperscalers who are kind of not your father’s data center operators. They’re actually putting very sophisticated fiber monitoring interfaces onto their data centers to monitor all the fiber going in and going out of their network. And part of it is really protecting the 1,000,000,000 of dollars they’re putting into those data centers and making sure that the connectivity, latency and performance of their fiber interconnect is on par with the performance inside the data center. And that is a new phenomena because traditionally data center operators really didn’t care, they just took whatever the connection they got. And today, I would say the hyperscalers have gotten extremely well educated on the performance and strength and weaknesses of the traditional fiber connections they’ve been getting and they’re taking it they’re taking matter into their own hands and actually paying and deploying this thing so they can hold any of their service providers accountable for the service level agreements that they are signing with them.

Reuben Roy, Analyst, Stifel: Interesting. Thank you. And then on the lab side, congrats on the 1.6 T shipment. But if we look at 800 gig, can you talk about your visibility there? Clearly, you’re talking about momentum through the end of fiscal 2025, but kind of how

Ilan Daskal, CFO, VIAVI Solutions: are you thinking about that

Reuben Roy, Analyst, Stifel: business, the 800 gig shipments throughout the rest of the calendar year? And can you give us a little bit of an idea of how big you think that could get as part of the any business?

Oleg Haykin, President and CEO, VIAVI Solutions: Well, the reason I say fiscal, because we generally don’t like to go beyond 1 at most two quarters. I mean, clearly, 800 gig is the workhorse that everybody is buying today and the volume is growing pretty rapidly. 1.6 terabit is really what is entering the R and D labs at semis, NAMS and module developers. And that’s probably going to be hitting production maybe towards the end of the calendar year. So we think the 800 gig will be the volume driver for this year, calendar year and the 1.6 starting to maybe gain momentum towards the end.

And there’s still 400 gig shipping as well. So and that’s across the board of I’d say traditional semis, module developers and NAMs. And then on top of it, we are seeing very strong demand from module builders, the factories, production testing in Asia that is largely in support of the kind of, I’d say, 408 100 gig for Dumpfik actually growing 800 gig module demand to support the AI data center infrastructure.

Reuben Roy, Analyst, Stifel: Great. Thank you, Oleg. If I could just sneak one in for Elon on the comment around capital allocation and the M and A with the Inertial acquisition and successful closure. Maybe you can just give us an update on what your appetite for further M and A might be going forward? Is there still room for additional M and A as you look out into calendar 2020 5?

Or how are you thinking about capital allocation here?

Ilan Daskal, CFO, VIAVI Solutions: Yes. Thanks, Ruben, for the question. So obviously, M and A continues to be part of our overall capital allocation model. We believe that we have more bandwidth to kind of raise additional funding if we kind of find the right opportunity for us. We are very kind of focused in terms of our EPS growth for the short, mid and long term, and that’s a major driver for us in our decision making process.

And it’s less about the funding, more about the specific opportunity and the EPS specifically.

Oleg Haykin, President and CEO, VIAVI Solutions: Yes. And I’d say if we look at our M and A potential target funnel, nobody is in there that is a bunch of PowerPoint presentations. All of the deals that we are considering and evaluating are highly profitable with the margin profile that is accretive to our overall thing. Clearly, in the end, the price, there’s got to be the right price because I know one thing we are very cognizant is the we have multiple options how to deploy our cash and we believe in paying the right price for the right deal.

Tim Savageaux, Analyst, Northland Capital Markets: Great. Thanks guys.

Ilan Daskal, CFO, VIAVI Solutions: Sure. Thanks Ruben.

Lisa, Conference Operator: Next (LON:NXT) up is Andrew Spinella, UBS.

Andrew Spinella, Analyst, UBS: Hi. Thank you. I was wondering if we could talk about the upside in the quarter and wondering if when you look at it, how much of it came from your cyclical uptick in your SP businesses? And I’m talking specifically about NSE versus maybe how much of the contribution came from sort of your secular growth drivers in some of the other businesses?

Oleg Haykin, President and CEO, VIAVI Solutions: Well, so I mean, it’s a good question, Andrew. So I mean, the I would say, maybe I would say probably a third to a half kind of came in from the kind of tide that rises all the boats, the service provider started to come back, crossing the T’s, dotting the I’s, the fiber spend. We actually saw very interesting wise, the greenfield and wireless was buying wireless field instruments, which basically tells you right away somebody is planning to start doing major 5 gs deployment restart in the next two quarters. So that is what I would call a gradual recovery and continued recovery. And the rest came really from our diversification efforts into Fiber Lab and Production, Aerospace and Defense segments where we’ve seen really good revenue growth and a substantial margin expansion that the volume has driven both of those segments.

Andrew Spinella, Analyst, UBS: Got it. And I guess just a follow on to that. I think I’m trying to understand, obviously, the AI demand is driving some pretty substantial growth rates in some of the end markets that you serve. And I’m trying to correlate that with your Fiber Lab business to try to understand what’s the potential upside in that business? How much of that 50% of your growth in this quarter that came from secular came from Fiber Lab?

And just anything you can do to help me understand how big that business is that’s exposed to the 30%, 40% growth rates and how big can it get?

Oleg Haykin, President and CEO, VIAVI Solutions: Well, so there’s 2 segments to that business. 1 is, we sell advanced test equipment to the developers. So if you are developing next generation chipsets or processor, the 400 gig, 800 gig, 1.6 terabit, bandwidth, you need those tools to aid you in the development and debugging. If you’re developing modules, you need those that equipment and if you’re developing systems, you need that equipment. And then there is a whole other market.

So I’d say this one, I mean, it’s growing. I mean, I wouldn’t be surprised if it doubles or triples over the next 3 to 4 years because what’s different here is when the telecoms were driving migration node to node, it would be about 6 years, 6 to 8 years between going, let’s say, 100 gig to 400 gig, 400 gig to 800 gig. Now today, the really evolution of technology nodes is not driven by telecom. It’s driven by datacom. So as a result, you’re seeing every 2, 3 years there is a new technology node.

So your product cycles are just as big and they’re happening much faster. So seeing that business doubling, tripling is fairly realistic. And then there is a whole other part is the production piece. So again, when you were doing telecom, you only deployed so many modules. Well, when you’re putting fiber optic modules in the data centers, you have orders of magnitude more modules.

So the demand for spectrum analyzer, power meters and fiber, the inspection, all these kind of things that is purely a function of how many units need to be shipped. And what was interesting is when it was a 400 gig, we did not see much demand because a lot of it was bought by the or installed by telecom service providers. And when their business tanked about 2 years ago, all of that capacity shifted to hyperscalers. Well, as you know, bringing out 800 gig and then over the just over the horizon 1.6 terabits, Well, it’s the data center operators who are driving the deployment of that production capacity. And that’s happening at a much faster turnover pace instead of like kind of 6 year horizon over 2, 3 year horizon.

So again, there is a doubling or tripling, I mean, whichever the volume growth you’re going to see. So we are very positive on that business. And then the third element here, traditionally we played in kind of layer 1, layer 0, and now we’re going to layer 2 to layer 7. So we’re also expanding the market that we’re addressing within all of these applications. So we feel that business unit will be a major growth driver for us in years to come.

Tim Savageaux, Analyst, Northland Capital Markets: Thank you.

Lisa, Conference Operator: The next question is from Ryan Koon, Needham and Company.

Ryan Koon, Analyst, Needham and Company: Great, thanks. And terrific color on different product areas, Oleg. Wanted to drill down on wireless, if you could. This is a pretty quick rebound here and we’ve heard some recently some pretty optimistic signals from Ericsson (BS:ERICAs), Nokia (HE:NOKIA) as well that are pretty aligned. But if you drill down there, do you think in terms of the operators, is this driven by capacity additions via small cells or rebranding of spectrum or is it new services around the 5 gs core?

Anything you can share there on the wireless front?

Oleg Haykin, President and CEO, VIAVI Solutions: So I mean, so actually that correlates very well with the what you heard from Ericsson and so on. So but before you so you get maybe orders or indication that there is going to be a restart of 5 gs deployment. What we saw, I mean is the placement for field instruments and that’s usually the first thing you do because you got to equip all of your techs with equipment before you kick off a campaign. And what I believe is happening, it’s really all about cost, cost, cost and it’s really accelerating conversion of a 4 gs spectrum to 5 gs spectrum because it’s our understanding you’re seeing anywhere between 90% to 80% drop in cost per bit when you convert the spectrum. And if you want to grow the available bandwidth to your customer base, one of the cheapest things to do is just accelerate conversion of 4 gs into 5 gs.

And the instruments that we are seeing and if I look at the what kind of software downloads and codes and use cases that we provision with those instruments, it indicates to me it’s a lot more about reclassifying spectrum from 4 gs to 5 gs. And it also kind of feeds our belief that millimeter wave is pretty challenging to do on a mass scale and the easiest way to create bandwidth is really re purposing your 0 to 7 gigahertz spectrum. That’s just our view of this thing.

Ryan Koon, Analyst, Needham and Company: Yes, that’s great. And then And then by

Oleg Haykin, President and CEO, VIAVI Solutions: the way, North American phenomena only And I believe Europeans will jump on it as well because they have exactly same problem. They’re all under massive cost pressure and that is one of the easiest ways to lower cost of your bandwidth.

Ryan Koon, Analyst, Needham and Company: Yes, great point. Just a quick follow-up if I could around your acquisition of Inertial Labs. How do you see that product fitting into your portfolio? Is it very much a standalone business unit? Is there much adjacency or synergy with the rest of your commercial activities?

And maybe just you’ve had a couple of weeks at the helm there and how do you what’s been the feedback

Oleg Haykin, President and CEO, VIAVI Solutions: from our customers? Well, we just closed this deal 2 days ago, but we’ve been obviously working with them for a while. So this has been a conscious diversification for us to be less reliant on the highly volatile telecom service provider. And taking our if I look at our core competencies, it’s really communications engineering, algorithms, advanced truly advanced system design. And when we looked at our skill set and say, well, where is there richer postures using this know how?

Well, it’s aerospace and defense. And the technology we have is actually generations ahead of what the traditional mill aero players service the market with today. And we think, hey, we can take it and we really could leapfrog pretty much everybody in that space and we’ve shown it with our resilient timing actually. Our and these products are unlike the traditional book ship business in the test and measurement, while it’s a very attractive margin business, you have to every quarter, a big chunk of it is a book ship business. Whereas the what we are talking about here in aerospace and defense P and T, it’s a design win driven business.

Once you win module subsystem or a product inside a larger system with a Tier 1 OEMs, you’re done. And when they go into production, they just pull all the business. So it’s a much lower cost of growing revenue and profitability from point of view of go to market. So you’re still leveraging your engineering know how and competence, but at a much lower go to market. And I think longer term that gives us a very nice operating margin expansion and the gross margin expansion.

And with the so when we acquired Jackson Labs couple of years ago, we acquired the T in P and T. With the acquisition of Inertia Labs, we added P and T positioning and P and N, positioning and navigation. So now we can effectively deliver the whole alternative navigation modular system to any system integrator out there. And in particular the high growth drones and the alternative navigation solutions demand is where we are playing into.

Ryan Koon, Analyst, Needham and Company: That’s great. Thanks so much for that color.

Tim Savageaux, Analyst, Northland Capital Markets: Sure.

Lisa, Conference Operator: Next up is Meta (NASDAQ:META) Marshall, Morgan Stanley (NYSE:MS).

Meta Marshall, Analyst, Morgan Stanley: Great. Thanks and congrats on the quarter. Maybe just as a first question, you had been kind of more optimistic about seeing some of this demand kind of return in fiscal Q3 or calendar Q1. So was this you just started to see some of those orders earlier than expected or starting to see it stronger than you expected? And then maybe the second question is just kind of the recovery path that you see for the SE business and some of that business returning?

Thanks.

Oleg Haykin, President and CEO, VIAVI Solutions: Sure. So I mean so I was looking and kind of measuring temperature of even starting in the summer and really September quarter, just the tone of the likes of AT and T, Verizon (NYSE:VZ), T Mobile and all the other operators has been shifting towards, hey, we’re going to increase build outs of our fiber. And what we saw is Run for the Hills has kind of became market share grab shift mindset within those operators. And that was really the first inkling that, hey, we’re going to start seeing things finally turning around after 2 years. And then this kind of dialogues, they started in September quarter and they accelerated into December quarter.

And of course, now you see it’s pretty much again has become a competitive play where nobody wants to be left behind. I mean, you saw T Mobile is getting into fiber, Verizon is getting back into fiber. AT and T is accelerating fiber builds. Well, MSOs, the cable operators are looking at it and said, hey, wait a second, they’re coming after my bread and butter, which is a broadband. So they’re now being forced to start doing at least something in the interim before DOCSIS 4.0 shows up.

And of course, by doing all of that, the wireless was not far behind. So when we saw the change in all these kind of dynamics happening, we said okay, that’s a beginning of the change in the mindset that we’re seeing with service providers. But we didn’t see the money yet materializing. And then in the Q3 in the fiscal Q2, which is December quarter, we saw people putting money where their mouth was. And it continuing into Q3, which is normally we generally see as a weaker quarter, because everybody doesn’t set their budgets until the end of February.

Well, that’s continuing into this quarter. So the mere fact that we’re not seeing the seasonal dip in the service provider, it continues to move. It’s clearly telling us it’s not a one time blip. And one thing was really kind of the last thing is we were kind of doom and gloom up until about September on the wireless space. We didn’t think much is going to happen until middle of next year.

Well, the indication that people starting placing significant orders for wireless field instruments, you only do that if you are 1 to 2 quarters away from doing a mass deployment or restarting your 5 gs. And we also know what kind of software download you have in those instruments and that pretty much gives you a clear indication what kind of work people are planning to do. So in that respect, we feel and I will just emphasize it’s North American. I mean, we’re not talking yet about Europe and it’s North America. I’m feeling much more optimistic on the North American landscape.

And if I look at traditionally, Europeans were about 3 to 6 months behind and I do think it will spread to Europe probably by the middle of the year. So we’ll provide kind of the next wave of recovery. So that’s on the NAMS. On SE, well, it’s a story of good news and maybe good news, but not so good news, right. So the good news is our AIOps is absolutely everybody and their brother wants it and there’s a lot of interest.

The not so good news, it’s taking time to get through the teething pain and deploy it and be able to deliver all the use cases that customers want. So as a result, there is a disconnect between the velocity of engagement and how quickly we can turn it into revenue. I think throughout this year we’ll resolve most of these kind of early teething pains and catch up on the development of all the use cases. And we feel this is going to be a major driver for the FC business unit growth. The second part in there is the private networks.

That business is doing really well kind of especially private mission critical networks. It’s growing off of a small base, but it’s doing very well and we’re seeing a lot of both kind of industrial and sovereign interest in building their private security networks. And the 3rd piece is the enterprise and I think that is a piece that I think is I mean with exception maybe security, the rest of it is not spending as much money. So I think that will be probably the last piece to recover in that business. But we do think calendar 2025 will be the year where this business, I mean they already turned the quarter from point of view of technology development and redeveloping product portfolio.

The next step for them is to start putting points on the board by growing quarter on quarter.

Meta Marshall, Analyst, Morgan Stanley: Great. Thanks.

Lisa, Conference Operator: And next up is Tim Savageaux with Northland Capital Markets.

Tim Savageaux, Analyst, Northland Capital Markets: Hey, good afternoon and congrats

Oleg Haykin, President and CEO, VIAVI Solutions: on

Tim Savageaux, Analyst, Northland Capital Markets: the results from me as well. And you touched on some of this, but I’ll maybe see if I can fill in some blanks here. In terms of the carrier strength and I note your U. S. Or North America revenue was quite strong sequentially in the quarter and you kind of touched on it.

The strength there in fiber monitoring and carriers being principally U. S. Based, just want to confirm that. And also whether that’s really concentrated

Ilan Daskal, CFO, VIAVI Solutions: with

Tim Savageaux, Analyst, Northland Capital Markets: the real big guys, the AT and Ts and Verizons of the world or if you’re seeing any broader base to that strength in the U. S. And fiber access and fiber fields?

Oleg Haykin, President and CEO, VIAVI Solutions: So the fiber monitoring, ironically, it’s the countries outside of U. S. Are the big user of fiber monitoring. They always believed in monitoring their fiber network. In North America, we are now seeing some, I would say, Tier 1 players are starting to consider.

They’re rolling it out in several markets. And if that trend catches on, it’s going to be a significant boost to growth in that business. But what also in North America, it’s really the hyperscaler, it’s the who is who in the big social media, AI and all that. They are viewing fiber monitoring as an integral part of building out. If you’re going to spend 100 of 1,000,000,000 of dollars building out data centers, you should spend at least $100,000,000 to make sure that they are connected to something that works.

And they are finding that the weak link is the interconnect between the data centers. It’s the because they usually use a third party to connect all the data centers. And there is already very quick bifurcation between those who can and those who can’t. And there is some really next generation fiber service providers who are really putting in state of the art fiber links where you monitor even dark fiber. So you can turn it on at a drop of a hat and provide the SLA agreement that is needed.

And then of course there is the your father’s fiber network who is like, okay, we’ll send the truck and we’ll connect and that’s just not what those players require. So we actually view it as a the smart money and the smart engineers are deploying it. Of course, it’s self serving. We believe they should be doing it, but it’s also putting major investment in quality of service and quality of performance that the networks are able to deliver. So I think North America is the early stages of deploying where we do see North America is also fiber monitoring, it’s really more handheld and they use fiber monitoring when they build out networks, but then they kind of leave it alone.

But we believe you should be using it when you build it out and then also when you’re managing it because it actually enables you to automate and reduce the cost of managing the network.

Tim Savageaux, Analyst, Northland Capital Markets: Okay, great. And then you did see a bit of an uptick in Europe, at least sequentially in the quarter as well. You’ve indicated you really haven’t seen the carriers come back and I guess that’s both fiber field and wireless. So should we assume that network equipment manufacturers driving that or any other factors?

Oleg Haykin, President and CEO, VIAVI Solutions: So clearly Europe is pretty strong for us with NAMS, although a big chunk of it is wireless NAMS and they have not been that strong. I mean, we hope that the recovery in the field wireless maybe in 1, 2 quarters as they start shipping equipment into the networks, the infrastructure test equipment will also pick up. And of course the fiber NAMs in Europe are quite strong. And Europe there is a run rate demand that is fairly consistent. But we know that generally Europe is about 1 to 2 quarters behind the U.

S. I mean they when U. S. Went into a tailspin September of 2020 was it 22, Europe probably took about 1 or 2 quarters behind. So we think by middle of the year, I think Europe should start picking up as well.

And there it’s very much all about continuation of deploying fiber and 5 gs. And if that happens that kind of will be the 2nd wind to our field instrumentation telecom business that would come in because Europe is, I mean, equally big to the North American market.

Tim Savageaux, Analyst, Northland Capital Markets: Got it. And last one for me. In terms of the discussion about seasonality and I think what you’re saying is you’re seeing better than seasonal. So backing out inertial, it looks like your NE segment would be flattish to maybe down a very little bit where you might normally see, I don’t know what, some maybe a mid single digit, low to mid single digit seasonal decline typically and you’re not sort of seeing that this year given the recovery in demand. Is that basically right?

Oleg Haykin, President and CEO, VIAVI Solutions: Yes, that’s basically right. Although I wouldn’t even say decline, I think it’s flat to maybe even single digit, I mean, low single digit growth. And then on top of it, you had the International Labs. So that’s why we feel, I mean, the mix changes within that revenue. I mean, that’s why, I mean, some of the margin, I mean that even though top line is flat to maybe slightly even up, the margins are a little weaker because the mix there is in some segments there is a lower margin profile than what we did in the December.

And I would say also, Q1 is when we accrue most of our statutory expenses for the year. So that’s clearly, I’d say the biggest drag, but also some of the mix will be different. So volumetrically, I mean, we feel NSE is going to see pretty strong well, I would say a seasonally strong Q3 because generally we drop anywhere between 5% to maybe even sometimes 10% Q2 and Q3 and here we are flat to slightly even maybe up.

Tim Savageaux, Analyst, Northland Capital Markets: Great. Thanks very much. Sure.

Lisa, Conference Operator: We’ll take the next question from Mehdi Hosseini, Susquehanna.

Tim Savageaux, Analyst, Northland Capital Markets: Hi, Sebastian filling in for Mehdi. Oleg, it looks like the 3 d sensing is being weaker this quarter, but it is seasonally stronger in the second half. Could you touch maybe on what you’re seeing in terms of ASP and Dynamics?

Oleg Haykin, President and CEO, VIAVI Solutions: And where does that go

Tim Savageaux, Analyst, Northland Capital Markets: from there? How much contributes to your OSP guide of $75,000,000 in the Q3 of 2025? Thank you.

Oleg Haykin, President and CEO, VIAVI Solutions: So, usually if you look at the 3 gs sensing, the September December quarters are bigger and the March June are smaller. So I would say when we say seasonally weaker, I mean, we had a more demand in the September quarter and some of it might have been pulled in from the December quarter. Plus there is also some annual ASP reduction that kind of lowered the revenue, but the volumes were pretty healthy. So on the second half of the fiscal year, it’s pretty much in line with seasonality in 3 d sensing. I mean that’s they’re just fundamentally fewer units being built in the second half than first half.

And on the I think on 75, we kind of always break up core business and the 3 d sensing. We I think we have a pretty healthy anti counterfeiting and industrial business and that more than offset the decline in the 3 d sensing. And but we’re also doing one thing, I don’t know if Yvonne mentioned it, is we are actually taking proactive measures to lower our internal inventories. So we are shipping intake counterfeiting demand from our inventories. So even though the volumes go up, we are not running the factories of full bore.

So we’re not picking up the extra absorption. So as a result, we’ll end up with lower inventories, we’ll free up more cash, but we are not picking up maybe another 1, 2, 3 percentage points of operating profit that we would do otherwise. And it’s a conscious measure to really accelerate demand supply balancing because we’re seeing also channel inventories are declining and we want to get it to by the middle of the year that we’re now in supply demand balance and becomes much easier to forecast and plan our production after that.

Ilan Daskal, CFO, VIAVI Solutions: Yes. The inventory balance is a slight headwind to margin, but we consciously took that approach.

Oleg Haykin, President and CEO, VIAVI Solutions: Cash is cash. Yes.

Tim Savageaux, Analyst, Northland Capital Markets: Got it. Very helpful. Thank you. Sure.

Lisa, Conference Operator: And everyone, at this time, there are no further questions. I’d like to hand the call back to Ms. Vaburi Nayar for any additional or closing remarks. Thank you, Lisa. This concludes our earnings call for today.

Thank you for joining everyone. Have a good afternoon. Once again everyone, that does conclude today’s conference. Thank you for your participation. You may now disconnect.

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