VIAV earnings call transcript, November 4, 2026

It's a very attractive segment for us. Got it. Great. And then with regards maybe to shifting gears over to your defense and aerospace side, any color there in terms of kind of product? Mix, I assume this is mostly, is it still dominated by your P&T into the drone ecosystem or are there other products that are contributing much there? I'd say it's the drone ecosystem, both aerial, ground, sea and undersea drones, followed by the alternative GPS to GNSS. So it's all the products to you know, for anti spoofing and a jamming equipment where you need to provide resilient timing and navigation system. So it's kind of including retrofitting in the field system as well as the new products being launched. Got it. Maybe one last one if I can squeeze it in around wireless. You talked about that, you know, hopefully bringing some recovery there. Are you thinking that this opportunity that where SpaceX was talking about building a new terrestrial carrier? Is that a real opportunity for you to sell your field gear into that? And probably lab. Well, I mean, clearly, if anybody is going to be doing it, you have to develop the equipment. So that'll stimulate some of our sales. But I think I view it also as a positive because it's by introducing kind of the new player into the market. And clearly, you know, I know as much. But as you are in terms of all the initial pronouncements, I think it's all going to be feeding into the 6G and AIRN deployment with the non-terrestrial network components.

So I think the sooner somebody gets moving, it will be more of a change in equilibrium where things are kind of being currently in a limbo mode. I mean, there's R&D going on. You're selling into that. But until things kick into high gear with the planned deployment, that's when you'll actually see volume picking up. So we welcome more. I'm more innovation. Yeah. Yeah. Thanks.

There's a little echo. It will continue to accelerate into the March quarter and so on and so forth. So it's it started kind of it's initially shifted. September and it's ramping in every quarter since going forward. And it's predominantly supporting a CPO. I think there may be some designs or NPO, but my my I think that. Overwhelming makes a supporting CPO. OK, thanks for that. And then on the on the operating margin, I mean, the the the operating income rose more than the revenue did in the. quarter. So if we even if we back out the full 11 million dollar tariff refund, I'm getting an incremental operating margin about 70%. So does that seem right to you? And since in the past, you've mentioned numbers. that are more in the 40s, maybe in the 50s, you know, is there, you know, is was that too low? And are we actually looking at a higher incremental operating margin, you know, just based on the evidence here? Well, I think the. Probably, you know, all things being equal, you know, there's always leading component versus lagging component. I mean, eventually you bring up some opex costs and some bonuses and things like that. So early on. And when you get this incremental cost, disproportional amount falls to the bottom line. But I think also I wouldn't say it's 70. I think it's probably more in the high fifties, low sixties for this particular quarter. But I think the conservative good way to think about it is in.

Low to mid fifties as an incremental fall through to the bottom line. Yeah. And Mike also, you know, it's some of some of the operating expenses this quarter. It's about timing, you know, similar for the December quarter, usually. When you get to the March quarter, there is a little bit uptick, you know, the operating expenses. All the statutory expenses. And others, et cetera. So similarly, you know, when we kind of hiring kind of R&D, et cetera. So it's all about timing. But I think you bring up the point as we've been saying it for several quarters. We have a significant operating leverage in our business model as revenue goes up because effectively it's just higher volume, not necessarily. More work content or more headcount and things like that. And the other thing is, of course, as you noticed, our tax expenses now in a single digits, which is the second operating leverage. Driven by our heritage from JDS Uniface, where we inherited massive NOL. So that's finally all falling into place, and we're seeing very strong both operating as well as the appearing leverage. Which are the gross margin as well as operating margin as well as the net profit at the effective tax rate this quarter was down to 8%. So that kind of I think historically low for us. Yeah. Great. Okay, perfect. And then I'll just get one more in here. You know, just, I mean, this is a fantastic guide. I mean, especially considering how much OSP is down sequentially. I mean, it's a really, really strong guide. You know, the stock, I mean, given where the stock is and the reaction is not as strong as I would expect. I mean,

I think it's pretty clear that there's still credit concerns rattling people. And now there's the politics and, you know, sort of just worry, you know, general worries about data centers. So just, you know, you've got good perspective on a lot of things. Do you have anything to add to help us kind of think through those issues? Well, you know, I take, you know, I think I agree with you. I think the somehow we are being treated as the AI play, which is we have a significant portion of our business exposed to data center. But remember data center. I think the data center is not going away. The new technology is going to continue to go into data centers. The refresh cycle of technology in data centers about three to four years. OK, so. The same technologies that go into idea centers will go into even regular cloud data center. OK, and you know, the only a portion of the data center business is driven by volume of investment. I mean, then let's not forget. We also have expanded TAM. We're getting into semiconductor tests and into the fiber optic and connector manufacturing test. It doesn't matter if it's AI data center or the cloud data center replacement. It's still going to. Be a new market and then the whole thing is that shortening of product cycle densification is all that. So I think only a portion of a data center spent for us is I mean the big portion is driven obviously by the capex.

But we are still very much lagging what was being spent or being committed. We are still way behind that curve in terms of what the actual demand going to be. And that's only the data center. Then there's the airspace and defense. I mean, if you look at. If you could think about maybe there'll be less defense spending, but I'll tell you one thing. There'll be a hell of a lot more money spent on anything autonomous such as drones and the, you know, these lower cost weapon systems which require. It's all in internal P&T and we are very well positioned for that market. And last but not least, you know, we had a lot of sales in 2022. All of these products. Are very long in the tooth and there'll be a probably a multi year. We approach a multi year replacement to refresh cycle from service providers. And that's kind of like the tide that raises all the boats. So I think if somebody just takes it purely VIAV is. AI play, I think they are grossly undervaluing the diversification of our end markets and where we are playing and and, you know, eventually wireless is also going to recover. So today. It's been for last three years has been very much over of a headwind. Eventually it will become a tailwind and that's obviously will kick in another another stage of the growth. So, you know, I feel pretty good about it. Our business, we are not a one trick pony. We actually fairly well diversified and there's multiple technology cycles that are favoring us and not only AI, but the AI is clearly a big one in my, you know, I may hate that, you know, in the prepared remarks, we specifically highlighted it.

We see a continued growth, you know, in the next few quarters. And that's, you know, that's updated. It has not changed, you know, due to the political kind of aspect that, you know, you mentioned earlier. I mean, AI is not going anywhere. Data centers will continue to. I mean, anybody thinks that the AI is dead, I mean, it's delusional because there's still the rest of the world. And I mean, there's a fundamental competition. So I think it may not grow us rapidly, but it's still going to. Grow and it's still a pretty sizable investment already being committed. So I mean, that's just kind of my view on it. Yeah, perfect. I appreciate the comments.

Thank you so much.

And I'll just say one more thing. We have never overhyped. I mean, there's been a lot of companies kind of got ahead of themselves. We always took a more measured and conservative view of how it's going to grow. In fact, we probably were a little too conservative. We thought we'll hit 500 million run rate the end of next. calendar year. Then we have updated it to the middle of the calendar year and now it's pulled in to the end of this calendar year. So if anything, we would probably should be accused of being overly conservative in that respect. So in a way it kind of plays out.

fast and successful. And everything that you see right now is the leverage that we have from the growth that we are experiencing. And I think like this quarter, even last quarter, we're seeing initial products, which were kind of- Co-designed, I would say, or maybe integrated. And probably next calendar year, we're going to launch products that are fully integrated between Inspirent and the VIAV portfolio. So I think in that respect, the product- lines, I mean, the organizational, we are fully integrated. The product lines-wise, I think we are already, I'd say, 25% there. Probably exiting next year, we should be at over 75%. And one last one, Oleg, for you. You know, a couple years ago when I started covering you guys, I think the market was much tighter, margins were a lot lower, you were a smaller business, you've obviously scaled up with spiring and obviously AIs and data. Center has given you a lot of scale, much better margins. And I'm wondering, as you approach this business, does anything change for you in terms of your longer term thinking, in terms of where you're investing, you know, what markets you're going after? And one of the things I'm particularly. Curious about is you're talking about the semiconductor tests and some of your success in some of these other markets. I'm wondering if you're capturing more share on the R&D side, if you're seeing that and if that's part of your strategy and potentially going forward.

Well, so I think, you know, when you start covering us. We were still heavily exposed to the service provider field instruments. But, you know, actually gross margin wise, maybe low 60s is not that much lower. But there, you know, because the company was a smaller size. The burden of R&D and sales was much higher. As a result, you had a much lower operating margins than NSE. So the single biggest driver of expansion of operating margins is the top line growth right on. On top of it, you know, bringing in Spirant, it clearly comes at the higher margin. So that kind of helps the overall picture. But even you look at it, Spirant had the nice growth, but it's, you know, low teens. I mean, our organic business grew about 50% year on year for the September quarter. It's just purely pure VIAV with no acquisitions, right? So in that respect, you know, the products we're getting into, you know, clearly just the volume of sales. Part of it just falls right to the bottom line. As we talk about the growth, I mean, clearly one of the big areas we focused was the R&D test, and that is kind of deleting the market. But the single biggest volume. The scale up when we talk about semiconductor tests is the production, right? So clearly we are in every lab for every high performance semi company when they are testing their PCI Express. Or their 1.6 terabit, you know, Ethernet and so on and so forth. But it's the volumetrically what drives the revenue and volume is when it goes into the production test.

And by production test, I'm talking about not only the traditional testing in and out of the pluggables, but it's now up to five insertions in the, you know, from the wafer probe to the. The known good eye testing to the optical engine test to the assembled substrate and the optical engine all the way to the final test. And that's the piece where we are seeing our growth. Happening and we started shipping in the first quarter into that market. And the other one is also came out as the complexity densification is going on. You're going to multicore fiber and you go into massive parallel fiber optic connectors. We're now seeing our. equipment also being pulled into the fiber optic and connector manufacturing supply chain. So it's going well beyond the traditional kind of you know optical module test and you know the last but not least I think is the OCS. We've been in this market for many years. Now the volumes there were fairly low but now they're starting to scale and we're seeing a lot of demand for our products also driven by the OCS growth. That's a great call. Thank you.

Thanks Andrew.

And to support that much, that probably would be in the tens of millions of dollars, maybe approaching between 50 and 100 million dollars.

Great. And, you know, whatever I wasn't. I was only trying to say as you look at the. Yeah, up to five percent, five percent of your. Revenue. Beautiful. Now, what I was trying to say is to the extent where we're talking about the CPO opportunity, would OPS? Oh, sorry. OCS be of a similar magnitude over time or greater understanding they're not related to each other. I think the CPO with switches and ASICs is a higher volume opportunity because, I mean, they just volumetrically, it's a much bigger volume. Business, right? Because think about when you go to a CS, you're really getting into the core. So you don't need. Now you have a lot of test time for each one of them because you could have like 300 by 300 switch, but it's sitting as kind of, you know. At the center, if you go, I mean, when you talk about the CPO with ASICs and, you know, CPUs, there's many more of them on the edge and you need multiple insertions. So there's, I mean. It's kind of hard to tell because I think there's not enough data points to really see how things will shake out. But there you have a much bigger volume of ASICs, right? Unit volumes are much higher and you need multiple insertions. So I'd say I might bet on that it's probably going to be somewhat big. Maybe I say OCS is a lower volume but higher value for you for shipment and the CPO with ASICs. It's a much. higher volume and lower volume for shipment. Great. Thank you. If I can fill one more in there, you mentioned organic growth at 50%. I'm going to assume the data

center growth was greater than that on a year-a-year basis and also now is more than 50% of NSE revenue. Are both of those fair statements at this point?

Yeah, so if I look at September quarter last year versus this year, so, you know, NSE was 216 million in September 26th. Sorry, and today it's in it's 25. And then today it's 376. So there's a $160 million growth. Okay. 52 million of it is the aspirant. So you back it out. $100 million growth. And I would say the data center, yeah, it's clearly more than 50%, right? And I would say aerospace and defense. It's the second highest. And the, I would say, airspace and defense and field instruments are, I would say, a little bit north of 50%. And data center is, I mean, like, almost. You know, 2x. Great. We're talking growth rates there, I assume. But thanks. Growth rates, yeah. Thank you. We have now reached the Q&A session. I will now turn the call back over to Vibouti Nayar for closing remarks.

Thank you, Jonathan.