Viavi Solutions Inc. (VIAV) Q4 2025 Earnings Call Transcript

Good afternoon. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to the VIAVI Solutions Fiscal Fourth Quarter and Full Year 2025 Earnings Call. Today's conference is being recorded. All lines have been placed on mute to prevent any backward noise. After the speaker's remarks, there will be a question and answer session. At this time, I would like to welcome and turn the conference over to Vibhuti Nair, Head of Investor Relations. Please go ahead.

Thank you, Bella. Good afternoon, everyone, and welcome to VIAVI Solutions' fourth quarter and fiscal 2025 earnings call. My name is Vibhuti Nair, Head of Investor Relations for VIAVI Solutions, and with me on today's call is Oleg Saikin, 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 the 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 supplementary 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.

Thank you, Vibhuti. Good afternoon, everyone. Now I would like to review the results of the fourth quarter of fiscal year 2025. Net revenue for the quarter was 290.5 million dollars which is at the the high end of our guidance range of 278 to 290 million dollars. Revenue was up two percent sequentially and on a year-over-year basis was up 15.3 percent. Operating margin for the fourth fiscal quarter was 14.4 percent at the high end of our guidance range of 12.5 percent to 14.5 percent. Operating margin decreased 230 basis points from the prior quarter and on a year-over-year basis was up 350 basis points. EPS at 13 cents was also at the high end of our guidance range of $0.10 to $0.13 and was down $0.02 sequentially. On a year-over-year basis, EPS was up $0.05. Moving on to our Q4 results by business segment. Given Viavi's revenue growth and recent acquisition, the service enablement revenue as a percent of total revenue is lower and led us to combine network enablement and service enablement into one reportable segment network and service enablement or NSE. The ongoing reportable two segments will be NSE and OSB. NSE revenue for the fourth fiscal quarter came in at $209.1 million dollars which is above the midpoint of our guidance range of 203 to 213 million dollars on a year-over-year basis nse revenue was up 14.8 percent as a result of strong demand for fiber lab and production products mainly driven from the data center ecosystem as well as growth in aerospace and defense products including the acquisition of inertia labs nse gross margin for the quarter was 62.2%, which is 10 basis points higher on a year-over-year basis. NSC's operating margin for the quarter was 4.7%, an increase of 290 basis points on a year-over-year basis. NSC operating margin was slightly lower than the midpoint of our guidance range of 4% to 6%, mainly as a result of fiscal year-end employee variable costs, as well as higher R&D expenses. OSP revenue for the fourth fiscal quarter came in at $81.4 million, which is above the high end of our guidance range of $75 to $77 million, and was up 16.6% on a year-over-year basis. The increase in revenue for the quarter was primarily a result of strength in anti-counterfeiting and other products. OSP gross margin was 54.7%, up 170 basis points from the same period last year, and was primarily driven by higher volume and favorable product mix. OSP's margin was 39.4%, which is above our guidance range of 36 to 38%, and is an increase of 460 basis points on a year-over-year basis as a result of a higher fall through. Moving on to the full year results of fiscal year 2025. For the full fiscal year, revenue was $1,084,000,000, which is up 8.4% on a year-over-year basis. The revenue growth was mainly driven by strong demand for lab and production and field products, primarily from the data center's ecosystem. This was partially upset by a declining spend for wireless cable and cable products by NEMS and service providers. We also saw growth in our aerospace and defense products, including the acquisition of inertial For OSP, we saw growth in our anti-counterfeiting and other products as the industry's inventory levels normalized. Operating margin for the full year was 14.2%, up 270 basis points from fiscal year 2024, and was driven by higher revenue and favorable product mix, resulting in a higher fall-through. Full-year EPS was $0.47, up $0.14 from the prior year. Moving on to the balance sheet and cash flow. Total cash and short-term investments at the end of Q4 were $429 million, dollars compared to 400.2 million dollars in the third quarter of fiscal 2025. Cash flow from operating activities for the quarter was 23.8 million dollars versus 26.2 million dollars in the same period last year. During the quarter we did not purchase any shares of our stock. For the full year we purchased 2 million shares for about 16.4 million dollars. We have almost $200 million remaining under our current authorized share repurchase program. In fiscal year 2025, we prioritized our capital allocation towards M&A with the acquisition of Inertia Labs and the pending acquisition of Spiron's high-speed Ethernet, network security, and channel emulation business lines. The fully diluted share count for the quarter was 227 million shares up from 224.2 million shares in the prior year and versus 227.4 million shares in our guidance for the fourth fiscal quarter. CapEx for the quarter was 5.5 million dollars versus 3.8 million dollars in the same period last year. CapEx for the full fiscal year was 27.8 million dollars versus 19.5 million dollars in the prior year. Moving on to our first quarter guidance. Historically, Q1 is a softer quarter relative to Q4. However, we expect the first fiscal quarter revenue to be slightly up sequentially. For NSC, we expect first fiscal quarter revenue to be slightly up relative to the prior quarter, which reflects a seasonally strong quarter, driven mainly by data center ecosystem as well as aerospace and defense, and offset by continued weakness in wireless. For OSB, we also expect quarter over quarter revenue to be slightly higher, driven by seasonally stronger 3D sensing products. For the first fiscal quarter of 2026, we expect revenue in the range of 290 and 298 million dollars. Operating margin is expected to be 15 percent plus or minus 40 basis points and EPS to be between 13 cents and 14 cents. We expect NSE revenue to be approximately 211 million dollars plus or minus 3 million dollars with an operating margin of 5.8% plus or minus 40 basis points. OSP revenue is expected to be approximately $83 million plus or minus $1 million with an operating margin of 38.3% plus or minus 20 basis points. Our tax expenses for the first quarter are expected to be around $8.5 million plus or 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 228.6 million shares. Our guidance does not include financial performance from our announced acquisition of certain Spirance business lines. And we currently estimate the transaction to close by the end of September. During the fourth quarter, we successfully priced and allocated a $600 million term loan B, which will be used to fund the transaction at close, as well as general corporate purposes. The term loan B will close concurrently with the transaction. Over the long term, we target a four times gross leverage and below three times net leverage.

With that, I will turn the call over to Oleg. oliv thank you ilan fiscal 25 ended on a strong note with viavi revenue and eps coming at the high end of our guidance nsc revenue in fiscal q4 grew approximately 15 year over year primarily driven by strong demand from the data center ecosystem and aerospace and defense customers more specifically fiber 11 production so another strong quarter driven by continued strong and growing demand from the data center ecosystem. We further extended our leadership in this segment with the launch of the second generation 1.6 terabit test solution. We expect the strong demand from the data center ecosystem to continue well into calendar 26. Our aerospace and defense business saw another strong quarter of growth driven by high demand for our positioning, navigation, and timing product. We expect this trend to continue throughout fiscal 26. Field Instruments business continued on its gradual trajectory recovery trajectory driven by leading service providers fiber deployment and growing demand from the data center ecosystem. Furthermore, we expect the gradual recovery to accelerate during this fiscal year driven by anticipated stronger fiber cap expand by leading north north american service providers wireless business continues to remain a mixed bag while we have seen we have been seeing healthy demand for wireless field instruments the recovery in the infrastructure test continues to get pushed out due to the business weakness at leading wireless nams we expect the infrastructure test demand to remain sluggish in the medium term. And lastly, service enablement results were in line with our expectations. Looking ahead, we expect NSC revenue to be slightly up quarter-on-quarter driven by continued strong demand from the data center ecosystem and the aerospace and defense customers. This is stronger than the traditional seasonality in the first quarter. Our diversification and growth in the data center ecosystem system and aerospace and defense businesses is offsetting and mitigating the traditional revenue seasonality driven by service provider demand dynamics. Now turning on to OSP, OSP saw strong year-on-year growth driven by recovery in anti-counterfeiting and other products. We expect fiscal Q1 to be slightly up quarter on quarter, mostly driven by seasonally stronger demand for 3D sensing products. During the fourth quarter, some of our revenue was subject to newly imposed tariffs. However, we were able to largely mitigate our initial concerns over the tariffs and are comfortable in our ability to continue to manage the ongoing impact of tariffs. After two years of decline, fiscal 25 was a growth year for VIAVI. Our diversification strategy into the data center ecosystem and aerospace and defense, combined with the stabilization and beginning of recovery in our traditional businesses drove the growth. We expect this strategy to continue driving our growth in fiscal 26. In conclusion, I would like to thank the Viavi team for their strong execution and successfully navigating the volatile and macroeconomic environment during this past quarter. Additionally, I would also like to thank our customers and shareholders for their continued support. With that, I will now turn it back over to the operator for questions and answers.

At this time, I would like to remind everyone in order to ask a question, press star and send the number one on your telephone keypad. We do request for today's session that you please limit to one question and one follow-up. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Ruben Roy with Stiffel. Your line is now open. Please go ahead.

Thank you. Hi, guys. Oleg, first question on the – and nice to see the results and the guidance, by the way. But first question on the guidance. So the just reported quarter, there were some tariff impacts. And I just wanted to start with the revenue side of the tariff impacts with some of the POs that got sent back, et cetera. How did that progress? And is some of that accounted for in the guidance for September, you know, relative to the strength that you're seeing in Data Center and Aerospace Defense? Maybe you could just parse that out for us. Thank you.

Sure. Well, I mean, first of all, the impact is only mostly on the North American sales, but we also have some impact from Chinese tariffs when we send some material to some of our factories in China. Overall, I mean, the whole tariff impact is around one and a half million dollars which we have more than mitigated and um at this point in time uh the tariffs are fully built in into our uh pricing and um you know uh also the um supply chain realignment to minimize the tariffs so i think at this point you know uh provided nothing has changed in the last 24 hours I mean, really, if we take Europe, Thailand, and, you know, China tariffs somewhat fixed at this point in time, we feel we are fairly comfortable. We've got it all mitigated.

Great. Thank you for that. And then I guess a little bit of a longer term question just on the data center strength and 1.6 T test, you know, it sounded like from your prepared remarks that, you know, this is something that you've got some visibility into continuing well into next year maybe just talk about the competitive dynamics that you're seeing at this point and you know sort of customer conversations uh relative to 1.6 t i mean it seems like that's you know something that's still on the come as we think about you know next year and even even the year after so you know just wondering if you can talk about yeah thank you well i mean um 1.6 t is what you kind of lead with right that's our kind of leading-edge products where we engage in advanced development and things like that.

The bulk of revenue today is 800 gig and 400 gig, right? So that's what's shipping today in production and a lot. But I think 1.6 is gets you in the door and kind of locks up all the follow-on activity as the business scales. And I think demand is just crazy from what we're seeing in it that's why we talk about data center ecosystem because it's the leading semiconductor vendors it's the leading optical module developers it's all the equipment manufacturers and developers right and then last but not the least all the production capacity in the world in China Thailand Vietnam that is building these optical modules optical switches receptacle products. So it's pretty much playing up and down the entire value chain. And you generally get an anchor and you win with the leading edge, with the, you know, kind of leading edge performance. So, I mean, we have just released our, in the June quarter, our second generation 1.6 terabits. Much of our competition just barely released their first generation. So So we feel very good about our performance in that space. And we continue to invest aggressively and broaden our reach. But also, I mean, the data center ecosystem is not just kind of the lab equipment, production test equipment. It's also becoming what I would call the smart buyer. They've gone from thinking, you know, network management as kind of an afterthought, And now they realize fiber is very critical to their performance. It needs to be managed aggressively and actively. And we're now seeing data centers are actually becoming leading customers for a lot of our what I call field instrumentation or fiber monitoring equipment that we traditionally sold into the carriers and service providers. And that percentage has been rising quarter over quarter. And that's actually a very positive thing because it's, I mean, they view network performance as core to their business model. And, you know, they're not the types that are being penny wise and pawn foolish. And they believe in investing significantly into monitoring and optimizing network performance. So we feel pretty good about this. That's why I'm going to use a lot more the data center ecosystem because that pretty much captures a whole new segment that is growing very rapidly for us, and I wouldn't be surprised that in a couple of years it will be a bigger market than the traditional service provider business.

Great detail. Thank you, Alec.

Your next question comes from the line of Ryan Koontz with Needham. Please go ahead.

Ryan. And thanks for the question, and congrats on the quarter. I guess within NSC, could you unpack a little bit about what's going on in the end markets there across broadband, optical, and wireless in the quarter, and then how you're thinking about that going into FY26?

Well, so I would say it's pretty much fiber, fiber, and more fiber, right? and and within NSC there is the you know I said there's a data center ecosystem so that's your semis module systems and production so that's all pulling in a volume today 400 gig 800 gig and on the advanced development 1.6 cherubits shifting to service providers I would say cable I think is being pushed out by maybe a one to two quarters, you know, given all the other dynamics going on with their upgrades. But it's very much a fiber and I would say what we are seeing is it's a lot of the what I call kind of specialty fiber companies that are focusing on data center interconnect and the hyperscale data center operators themselves that are now also popping up on the horizon. And of course, there is the major fiber interconnect and fiber service providers, like the big North American Europeans that are rolling out their steady state deployment. And if I also then overlay the aggressive pronouncements, the number of North American fiber players been making about accelerating investment, we actually starting to see this verbiage migrating into the supply chain management and operations, and we already have a number of customers engaging on, you know, significant order growth in the coming one, two quarters. So that's why we're feeling much more positive that across the board from the traditional, you know, network carriers, you know, rolling out fiber to the home all the way to the specialists who are optimizing their networks for hyperscale data center interconnect and AI data center interconnect all the way to the data centers on that field space. It's looking pretty promising. I would say cable is probably gonna be maybe some of it in December and then March quarter. I think they're clearly plans. They just kind of being pushed out due to some of the financial dynamics of these operators. and I would say wireless is the only kind of laggard in our portfolio. I was thinking December quarter seeing nice pickup in the field instruments that expansion is coming. So far it's been really much about network optimization and getting more from what they've got. We haven't seen that much new deployment and does our infrastructure test, you know, which goes into the major NAMs has been somewhat anemic and I would have expected it to be picking up in the June quarter. It doesn't seem like it's really moving that fast and I think we probably got another couple quarters of sluggishness until it starts materializing. Hope that helps.

Great, yeah, that's really helpful and good to hear. As a follow-up on that, as you mentioned in your prepared remarks and given guidance, 1Q is going to be off from typical seasonality. How should we think about the rest of the year compared to regular seasonality?

Well, you know, as I say, three quarters does not make a trend. Although, you know, We saw a much stronger March quarter, because usually, if you look at kind of traditionally, historically, the September quarter and the March quarter have been down quarters. Because, you know, if you purely follow the service provider spend, they, you know, they kind of release their budgets at the end of February, and then it just kind of goes through the year. and so usually some of them end their fiscal year in June, some ended in December, and there's usually were stronger June and December quarters, right? Interesting wise, when we look at the data center ecosystem, it's almost counter cyclical. They have a stronger demand. It seems to be in the March quarter in September, they digest some of the deliveries in the June and December. So in the way, this thing has kind of upset it, But also with the data center now becoming a buyer for field instruments, that further mitigates that thing. So for us, the only kind of cyclical thing left that I see is our optical business where, you know, you follow the cyclicality of 3D sensing for the consumer. And there's a cyclicality for anti-counterfeiting with certain parts of the year stronger versus the other. So I'd say, are we going to, is our cyclicality over? I don't think so. I think it's just going to be more muted and more balanced. And if I look at the aerospace and defense, it's a design wind-driven business. So once you win platform and customer goes in production, it's actually fairly predictable, linear orders that come in for these major programs. So I do expect all these new businesses are growing for us. We probably would see less volatility quarter on quarter than has been in the past when we were heavily exposed to the service providers.

Great. Thank you.

Your next question comes from the line of Meta Marshall with Morgan Stanley. Please go ahead.

Great. Thanks. And congrats, Oleg. Just a couple of questions. And just can we just get like a rough size of the data center business, you know, in Q4 would be helpful. And then just kind of the contribution of inertial labs to kind of the Q1 guide would be helpful.

So let's just talk about NSC, just to take purely NSC, leave OSP out. But as it stands right now, you know, with this thing, roughly 50% of our revenue comes from service provider. And it's way down from close to 90%, you know, when I joined this company. And about 30% is what I would call the data center ecosystem. So it's semis, modules, you know, equipment vendors, and data center operators, right? and also include some of the enterprise customers. And I'll say 20% is the aerospace and defense. If I look back even like a year ago, the 50% was probably closer to 60 or even over 60, and the others were probably around 20 and below 20% for aerospace and defense. So all segments have grown. I would say the service provider, I would say, gradual recovery thus far, and we do think it's going to accelerate in the coming quarters with the number of these big fiber deployments that are being planned. But it's really the, I would say, data center and aerospace have grown quite significantly. And with the acquisition of Inertia Labs, we really have that segment growing very, very rapidly. So I would so it's as of you know as you know exiting uh june quarter i would say 50 30 20. and i would expect if you look at a year from now if i had to look um i would say maybe it will be a bit less than 50 and the other segments will be a bit bigger because they're just growing faster uh than the service provider sector and got it sorry regarding your question uh inertia labs you if you recall when we announced the transaction, we mentioned around 50 million run rate a year.

It's tracking above this number. However, both, you know, the fourth quarter and the number that we baked into the first quarter is also kind of including some growth from the base air expense and defense business. It's not all about inertial ads.

Okay, great. Thank you.

Your next question comes from the line of Andrew Spinole with UBS. Please go ahead.

Thanks. I wanted to ask a similar question for Q1. I guess, you know, if the normal seasonality would have been down, I don't know, 5%, something like that from Q4 to Q1, how would you sort of describe the upside to that? You know, which was the bigger contributor between data center and aerospace and defense? Can you split out which, you know, how big the contribution was to that upside?

No, I think it's kind of getting into the segmentation that we don't disclose. So, I mean, they were both very strong.

Okay. Fair enough. Just trying to understand. But I want to ask a margin question on NSE. You're still in kind of the low, I guess, what, mid-single digits here for Q1. What do you think you can get that margin to in NSE? What sort of revenue do you need to get there? What's your longer-term thinking on the upside to that margin?

So on NSC, as that business kind of recovers, you know, if you look at it just prior to the telecom meltdown in the September of calendar 22, we have approached 20% operating margin on the NSC business unit, and that is before it had significant data center exposure and aerospace and defense. So data center margins are somewhat higher than the service, kind of the field instrumentation. However, the aerospace defense is a bit lower. So in a way, they kind offset each other so net net nsc will probably stay in the low 60s gross margin but i would say i think that's pretty much i would say the profile of the the margin so when we look at that and we obviously made some acquisitions i think as we continue to grow in data center and military military airspace and a recovery, continued recovery in the service provider. I think our first goal is move comfortably into mid to high teens and then into the 20s, longer term.

Great. Thank you.

Sure.

Your next question comes from the line of Mehdi Hazain. Please go ahead.

Yes, sir. Thanks for taking my follow-up questions. Oleg, it's great that you have the fiber and helps you with a better seasonal trend into the new fiscal year, but I'm a little bit cautious as to what happens to the March quarter when cloud service providers close the calendar the year. Should we see the typical seasonality that happens in September or Q1 fiscal year for you happens in the March quarter?

You know, I fully expect, you know, if I purely take the service provider by without any kind of bluebirds where they have some big program they want to spend, I think, you know, but it's, I mean, there's always going to be some cyclicality with that, because you know let's assume a steady state the service providers will always buy a bit less in september and march but what we are having is like if you look at the enterprise and data center actually march and september are stronger quarters for them so as i said i mean are we are you fully gonna eliminate the um any kind of seasonality um i think you're always going to have some of it it's just going to be less and less pronounced i mean so maybe instead of a down quarter you may be slightly down or a flattish quarter on some of these things but I do think our you know some of our new businesses the growth there in the neutron will be probably offsetting most of the whatever seasonality plus if I look at it if I were to believe all these aggressive spend pronouncements that are coming from you know fiber operators and others I think I would imagine um there's going to be some strength in their spend uh that may spill over into the march quarter so it may be a bit more muted but it's too early to talk because i really don't have any

visibility into march i do have some visibility in december and it looks very healthy in that respect okay and then uh double clicking on osb it seems to me that there is still a little bit of a lingering ASP pressure, especially on the 3D sensing, and then I'm looking at the margin profile for the Q1 fiscal year, am I right with that thought process and what are the things that you're doing to mitigate that? And as a follow-up to it, given the fact that overall OS smartphone unit shipment has been kind of a low single little over the past couple of years could could we be hitting the bottom in terms of the 3d sensing opportunities for you and if there is any uptake in os unit shipment could that also help mitigate the asp pressure thank you well so i mean when we when we think about the asp pressure on the let's say 3d sensing consumer business right i mean we've been uh taking down costs pretty good.

I mean, the reality is our margins have been able to maintain margins in that business. I mean, the challenge there is volume. You know, we are very highly penetrated in that market segment and it's kind of fully saturated. So the margins don't suffer because we are able to reduce the cost to keep up with the ASP reduction. I think what's probably has been bigger problem there is the volume hasn't really grown because you know it's a good news bad news when you're highly penetrated at the particular customer on good news you have the customer on the bad news if the customer is not seeing much volume growth here on here then it's not happening so I think that's not the case I think what you are seeing the bigger impact on margins is really the mix and then the counterfeiting products between the older pigment technologies and the newer and depending on the time of the year or major customers you are building either the lower margin mix product or the higher margin mix product and that's the I'd say that's probably a bigger swing factor in the quarter to quarter gross margin on OSP. The second one is I do believe ASP has stabilized. OSP is around around $300 million run rate. We are starting to grow a little bit. We are diversifying into new segments. We have a number of very promising applications and market segments that we are entering that in the two to three years will start bringing in some meaningful revenue and we'll see that segment to start growing again. So I think I'd say for OSP, I think this fiscal year is kind of stabilization and gradual growth. And then, you know, growing faster as the new segments start materializing for that business.

And maybe just to echo what Tolex said, I mean, OSP generally is a high fall-through business. And it's all volume-based. I mean, the ASP is not a factor, not in our projection right now.

And that's where we have our biggest fixed costs. i mean if you see what those those factories that's a lot of iron sitting on the floor but but go like just as a quick follow-up you're not darling any impact from a changing form factor thinner phone or foldable you're um and it's to me if you're not factoring that in there maybe there's no change in 3d sensing or or you're just being conservative yeah well I mean we're talking about today I mean clearly there's a roadmap we have new products on a roadmap I don't want to get into the specifics but there's a lot of new engineering which will probably result in some of the ASP appreciation as we implement these new form factors and some of these new opportunities because it's basically new products that need to be developed and I don't want to go into specifics on that. So right now we're talking about mainly what we're shipping in production, not what's on the roadmap.

Okay, great. Thanks for details.

Sure. Thank you.

That concludes our Q&A session. I will now turn the call back over to Vibuti Nier.

Thank you, Bella. This concludes our earnings call for today. Thank you all for joining. Have a good afternoon.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect. Everyone have a great night.