Good afternoon, my name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the VIAVI Solutions Fiscal Third Quarter 2025 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 during this time, simply press the star key follow by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. At this time, I would like to turn the conference over to Vibhu De Nair, Head of Investor Relations. Please go ahead.

Thank you, Audra. Good afternoon, everyone, and welcome to VIAVI Solutions' Fiscal Third Quarter 2025 earnings call. My name is Vibhu De Nair, Head of Investor Relations for VIAVI Solutions, and with me on the call today is Oleg Hyken, 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 tariff impact and guidance that we provide during this call, are valid only as of today. VIVE 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 reconciled these non-GAAP results to our preliminary GAAP financials and discussed 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 will 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 two cents sequentially. On a year-over-year basis, EPS was up nine cents. Moving on to our Q3 results by business segment. NSE revenue for the third fiscal quarter came in at 208.2 million dollars, which is slightly above the midpoint of our guidance range of 202 to 212 million dollars. On a year-over-year basis, NSE revenue was up 22.6%. NE revenue for the quarter was $188 million, which is an increase of 23.9% year-over-year as a result of strong demand by NEMS for our fiber lab and production products. The year-over-year NE revenue increase included the Inertia Lab's revenue, which was in line with our expectations. SE revenue was 20.2 million dollars which is an increase of 11.6 percent from the same period last year and is in line with our expectations. NSE gross margin for the quarter was 63.1 percent which is 1.7 percent higher on a year-over-year basis. NSE gross margin was 63.4 percent 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 percent which is a decrease of 90 basis points from the same period last year is a lot of product mix nse's operating margin for the quarter was 10.4 percent versus a 1.8 percent loss in the same quarter last year. NSC operating margin is significantly above our guidance range of six percent to eight percent driven by higher gross margin fall through as well as four million dollars government R&D grant in Europe. OSP revenue for the third fiscal quarter came in at 76.6 million dollars which is just above the high end of our guidance range of 74 to 76 million dollars on a year-over-year basis osp revenue was up 0.5 percent osp gross margin was 51.6 percent 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 is 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 Inertia Labs 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 Inertia Labs. 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 Spiron'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 dollars versus 3.2 million dollars 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 NSC, 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 $0.10 and $0.13. 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 diluted to our gross margin and negatively impacts 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 details at each of our businesses starting with nsc nsc revenue in fiscal q3 grew 23 percent year over year driven by recovery and growth occur 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 and production so 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 to 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 multi-year 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 SE business segment results were in line with our expectation. 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 is a risk that some of the previously approved pos and upcoming orders may get delayed or reduced in volume as customers re-approve POs to include tariffs or decide to take a wait-and-see approach. And on the gross margin side, we expect to absorb approximately three million dollars 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 position to realign our supply chain to further reduce the cherubs impact as they stand today within six months now turning to osp during the fiscal third quarter was being increased marginally on a year-over-year basis as a result of strength in anti-contrafeiting 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 and 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 Viavi 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 one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. We'll take your first question from Reuben Roy at Steeple.

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 pushouts, et cetera, or is this just more of a conservative, you know, 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 clearly we're now what third four weeks into the quarter since the the big changes and you know I'm starting to feel a bit better but you know clearly there is a number of POs that had to go back to be re-approved with the adders to compensate for the 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 and 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 poos 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 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. As a follow-up, But in terms of some of the, you know, some of your equipment that's shipped into the U.S., 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. You know, I'm just trying to figure out, you know, what the impact is. You know, how much are we talking about here?

Well, so I think I said, you know, if I look at it, you know, clearly, just looking trailing 12 months, it's roughly 15% of our revenue is subject to tariffs overall, right? It is coming into the U.S. 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 TRF 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 our production to even within the same contract manufacturers by different country of origin. So, but, you know, it takes, and 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-minimum.

Just one final one, then.

The tariffs don't change. Pardon me?

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. I would just understand how you're thinking about that. Should we think about the increased cost, I guess, as a longer-term headwind on margins the way you're- Well, let me take 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 there were some people who tried to play the game and said, hey, I'm not going to pay tariff. 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 um uh what we see in the industry is universally of all our peers and everybody's passing it on and i think you know probably call even the biggest customers are saying it is what it is it is the new normal and um 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 the three million dollars are embedded in our guidance right and that's the one kind of headwind but as oleg mentioned you know prospectively um the goal

is to pass it through to the customers and to offset the cost here and here we just basically did not want to argue on committed uh uh po's we do not want to go back and uncommit so that's just important we decided to take a high road on that one yep makes sense thank you guys thank you we'll move next to ryan koontz at needham and company great thanks for the question um oleg any particular technology domains you call out as you look forward obviously um you talked about the as you look forward over the next couple of quarters any any changes in behavior you're

hearing from the different customer segments and then secondarily follow up how's your 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. It'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 shifted to a number of projects. This quarter, we expect a bit of a pullback, but it's still going to be stronger than December quarter, and we expect another very strong quarter in September. So there we have some visibility, and the customers are coming in and placing a longer-term order. So we expect the, I would say, the data center ecosystem, which basically means for us fiber 11 production, is going to be very strong throughout the rest of this year. On the other segment is the airspace 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 RV 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 were 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 through the rest of the year we expect it to have 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 of a weighted average growth is the data center business which is a fiber lab and production and airspace and defense we expect the fiber field which is the instruments and fiber monitoring to be the kind of steady eddy recovery and you know gradual recovery trajectory and the wireless i think we expect you know clearly we're already seeing activity in the um uh field for field instrumentation and we've seen you know obviously that confirmed with uh some of the leading uh wireless nams uh confirming that you know 5g uh construction is resuming and we expect uh that to lead in the second half to recovery in our uh fiber in our wireless infrastructure and the honesty business i think it continues to perform well and you know uh and And, you know, 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, 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 is the stated dates are. You know, that's-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 Formida. 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 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 fairly steady for anti-counterfeiting but what we've seen now the anti-counterfeiting has stabilized and we actually seen upsides in the 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 lower production it didn't happened 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 further going forward than it was in the last 12 months and the 3d sensing i mean you guys all see the news and actually been pretty strong i mean the uh we i would even say the q3 was stronger than we thought and generally um our june quarter is a seasonally weaker quarter and then the stronger demand comes in um 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 some follow-up. Last quarter, we saw some strength return to the NSE business as the service providers 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, et cetera. I'm wondering first, do you think there was any sort of pull forward of demand by the service providers in either Q2, either 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 provider, 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 instrument well that was uh 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 uh very much in in line and i would say um it's uh getting back to normal i I mean, it's not something that you're seeing big growth. I think it's a low single digits, kind of a quarter on quarter, but that's generally, I think the pattern, maybe one quarter will be stronger and the next quarter maybe 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, We expect that probably some of that will probably push out into the September quarter because if you don't place your orders early on and you place it later and it takes a long time for 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 would 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 a general expectation of some some pause and some slow down in the next quarter related to just waiting to see what's happening well so i mean it's very so in uh osp business uh there is no impact because you have a long-term forecast and you execute and there is very de minimis uh tariff impact in that business because we have factories in different geographies that produce for those uh geographies so we don't have an impact there it's really on the nsc side and within that it's a service providers who take the longest to reapprove pos with adders i mean when you look at the 11 production data centers i mean the turnaround has been pretty quick i mean they say yep it is what it is that's the tariff where here's the po back so i would say the um if any segment that's gonna push out and you may see some slippage of revenue, that would be more for the service provider segment rather than the 11 production, which is semi-companies, the equipment vendors, data centers, and the module integrators.

Got it. Thank you.

Great.

Our next question comes from Michael Genovese at Rosenblatt Securities.

Great. So just back on the terrace for a minute here. Do you have, you know, 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 budgets and uh you gotta i have not you they spend what they get in any given quarter and the only thing we've seen is like okay they had to we had to put an adder and they uh just had to re-approve it that's about it um i have not seen anybody who's saying hey i'll take everything now because i don't want to meet um uh it's just which you know you think you would see it because you know but it's not the case okay um and then um just on the on the total inventory for the company and i think it went up about 25 percent quarter over quarter was that you buying in front

of the tariffs or something else going on no that that is the incremental inventory from the inertia labs uh 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 uh last question for me is just an update um and color on the uh the the the aviation no air business which business story military yeah what about it just just just the color update on 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's parts of the business that are more like mature with a slow growth like the, I would say the mission critical communication like two-way radios and avionics that go slower. but the area that's really driving significantly higher growth is the whole P&T, positioning, navigation, and timing. And that is all about drones. 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 sapojo at northland capital markets hey good afternoon um two questions and really both trying to quantify a couple things that we've been talking about here um 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 um the june quarter you know if i were to put that around 20 25 percent of of any revenue would i be too far off there um 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 in production well i think this one is uh so the june quarter we expect some pullback from the march quarter because we we ship into a lot of big projects so there was a big significant increase uh december or march quarter then june quarter is there some pullback and we expect september quarter to be another um uh increase in the shipment so i'd say today um 25 maybe on nsc is probably a little too much, but 20% is probably more like it.

On any.

On any. No, NFC. On NFC. NFC. Yeah. Okay, so that's on that. And what was your second part? You were talking about the push, 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. And so that gets me a little bit higher, closer to maybe 10 or 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. You know, so if you had a typically seasonally March quarter, the June quarter would be exactly what you would expect it to be up. So, I mean, you know, it's, it's, it wasn't a seasonal, I don't know if that pattern will maintain, but clearly, if it isn't, we may have to redefine what's seasonal.

Understood. But, you know, we will settle on five to ten.

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

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

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

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

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