Viavi Solutions (VIAV) Q1 2027 Earnings Call Transcript

DATE

Wednesday, Nov. 4, 2026

CALL PARTICIPANTS

• Head of Investor Relations - Vibhuti Nayar
• President and Chief Executive Officer - Oleg Khaykin
• CFO - Ilan Daskal

TAKEAWAYS

• Net Revenue -- $469.3 million, representing 56.9% year-over-year growth due to strong demand from the data center ecosystem and the acquisition of Spirent product lines.
• Non-GAAP EPS -- $0.47, increasing from $0.15 in the prior year reflecting higher net income and operating leverage.
• NSC Segment Revenue -- $376.1 million, up 74.1% year over year driven by demand for lab, production, and field instruments.
• Spirent Revenue Contribution -- $52.7 million, representing the initial contribution from newly integrated high-speed ethernet and network security product lines.
• OSP Segment Revenue -- $93.2 million, growing 12.2% year over year due to strength in 3D sensing and anti-counterfeiting products.
• Non-GAAP Operating Margin -- 29%, expanding 1,270 basis points year over year as a result of higher volume and cost efficiencies.
• Operating Margin Benefit -- 110 basis points, resulting from an $11 million tariff refund received during the quarter.
• NSC Operating Margin -- 25.5%, compared to 8.2% in the prior year due to higher revenue fall-through and product mix.
• OSP Gross Margin -- 57.1%, up 460 basis points year over year primarily driven by higher volume and favorable product mix.
• Operating Cash Flow -- $104.7 million, compared to $31 million in the prior year due to higher net income and the timing of working capital.
• Share Repurchases -- 3.95 million shares, purchased for $150 million at an average share price of $37.98.
• New Share Repurchase Authorization -- $500 million, approved by the board in addition to the $18.4 million remaining on the previous program.
• Total Cash and Short-term Investments -- $535.3 million, compared to $656.7 million at the end of the prior fiscal quarter.
• Effective Tax Rate -- 8%, reflecting a historical low for the company due to jurisdictional mix and the utilization of net operating losses.
• CapEx -- $12 million, compared to $8.5 million in the prior year as the company focused on capacity expansion.
• Second Quarter Revenue Guidance -- $505 million to $515 million, reflecting expected sequential growth across key end markets.
• Second Quarter Non-GAAP EPS Guidance -- $0.50 to $0.52, based on a projected share count of approximately 264 million shares.
• Second Quarter NSC Segment Guidance -- $426 million to $434 million, driven by continued demand from data center and aerospace customers.
• Second Quarter OSP Segment Guidance -- $79 million to $81 million, reflecting seasonally lower demand for 3D sensing and anti-counterfeiting products.
• Semiconductor Test TAM -- $100 million, representing the potential annual revenue opportunity from expanding into the outsourced assembly and test market over the next several years.
• Initial CPO Shipments -- Single-digit million-dollar shipments, marking the company's first milestone shipments into the co-packaged optics segment during the quarter.
• NSC Sequential Growth Drivers -- 40% from data center demand and approximately one-third from aerospace and defense, with the remainder coming from service providers.

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RISKS

• Khaykin stated, "Wireless products remains the only low light in the service provider segment due to the anemic spend environment," noting that this subsegment continues to experience limited expenditure.

SUMMARY

Viavi Solutions Inc. (NASDAQ:VIAV) reported its fiscal first quarter results, which showed revenue growth driven by the integration of Spirent product lines and demand in the data center and defense sectors. Management stated that the company is expanding its focus toward high-volume production testing within the semiconductor supply chain. The company reported achieving a revenue run rate ahead of prior expectations while entering new markets such as co-packaged optics and autonomous systems. Management indicated that growth momentum is expected to continue through the fiscal year as various technology refresh cycles begin.

• Oleg Khaykin noted that peak volume for 1.6T optical modules is expected during the second half of calendar 2027, with 800-gig and 1.6T modules likely to run concurrently.
• The company reported that its TRx system was selected by the U.S. Army's Threat Systems Management Office to create electromagnetic environments for drone and interceptor development.
• Management noted that the first milestone shipments for co-packaged optics (CPO) were made in the quarter ended Oct. 3, 2026, with acceleration expected in subsequent periods.
• Oleg Khaykin indicated that the transition of semiconductor testing into outsourced assembly and test (OSAT) facilities represents a new market segment for the company with potential to exceed $100 million in revenue.
• The company stated that service providers are entering a multiyear refresh cycle to replace equipment purchased between 2020 and 2022.
• Management reported that the company expects to reach a $2 billion revenue run rate during the current fiscal quarter, reaching that milestone ahead of previous timelines.

INDUSTRY GLOSSARY

• AI-RAN: Artificial Intelligence Radio Access Network, a technology integrating AI into wireless network architectures.
• CPO: Co-packaged optics, a technology that integrates optical components with electronic circuits on a single substrate to reduce power and increase density.
• DAA: Distributed Access Architecture, a cable network architecture that moves functions from the headend to the node.
• DOCSIS 4.0: Data Over Cable Service Interface Specification 4.0, a standard for higher-speed broadband over hybrid fiber-coaxial networks.
• NOL: Net Operating Loss, a tax credit used to offset future profits and reduce tax liability.
• NPO: Near-packaged optics, a technology that places optical engines close to the switch silicon.
• OCS: Optical Circuit Switch, a device that routes optical signals without converting them to electrical signals.
• OSAT: Outsourced Semiconductor Assembly and Test, companies that provide third-party packaging and testing services for semiconductor foundries.
• PNT: Positioning, Navigation, and Timing, technologies used to provide resilient location and timing data.

Full Conference Call Transcript

Operator: Afternoon. My name is Jonathan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Viavi Solutions fiscal first quarter 27's earnings call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question, please press 1 on your telephone keypad to raise your hand. You wish to remove your question, press 1 again. At this time, I would like to turn the call over to Vibhuti Nayar, of Investor Relations. Please go ahead.

Vibhuti Nayar: Thank you, Jonathan. Good afternoon, everyone. Welcome to Viavi Solutions fiscal first quarter 27 Earnings Call. My name is Vibhuti Nayar. Head of Investor Relations for Viavi Solutions. And with me on today's call are Oleg Khaykin, our President and CEO and Ilan Daskal, our CFO. Please note, this call will include forward-looking statements about the company's financial performance, outlook, and longer term growth strategy. These rest on a number of assumptions. Such as sustained capital spending, particularly by data center ecosystem, service providers, and aerospace and defense customers, Our ability to maintain or gain market share, and develop and deliver new products on time, adequate component availability, and stable macroeconomic conditions. These assumptions are not exhaustive.

And additional assumptions risks, uncertainties are discussed in our filings with the SEC. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current estimation and expectations. Please review our most recent annual report on Form 10 k filed with the SEC on August 13, 2026, and our quarterly SEC filings, particularly the risk factors described in those filings for additional information regarding the assumptions, risks, and uncertainties underlying these forward-looking statements. These forward-looking statements including the guidance that we provide during this call, and our expectations regarding the end markets, revenue growth and market expansion, are valid only as of today. BIAVI 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 04:30 p.m. Pacific time this evening. With that, I would like to turn the call over to Ilan. Ilan?

Ilan Daskal: Thank you, Vibhuti. Good afternoon, everyone. Now I would like to review the results of the first quarter of fiscal year 27. Net revenue for the quarter was $469.3 million, which is above the high end of our guidance range of $450 million to $460 million. Revenue was up 5.9% sequentially and on a year-over-year basis was up 56.9%. Operating margin for the first fiscal quarter was 29% above the high end of our guidance range of 26.7% to 27.5%. Operating margin expanded 5 percentage points from the prior quarter and on a year-over-year basis, was 12.7 percentage points higher.

Operating margin included a net benefit of about 110 basis points from tariffs refund of approximately $11 million, which was offset by the additional 1 week of some variable costs. EPS at $0.47. Was well above our guidance range of $0.40 to $0.42, and was up $0.13 sequentially. On a year over year basis, EPS was up $0.32. EPS includes a net benefit of about $0.02 from tariff refunds and from the additional 1 week of variable expenses. Moving on to our Q1 results by business segment. NSC revenue for the first fiscal quarter came in at $376.1 million, which is above the high end of our guidance range of $360 million to $368 million.

Revenue from Spirent product lines was $52.7 million. On a year over year basis, NSC revenue was up 74.1% as a result of continued strong demand for our lab and production and field products, driven by the data center ecosystem as well as the acquisition of Spirent product lines. We also saw strong demand for our aerospace and defense products. NSC gross margin for the quarter was 66.2% which is 310 basis points higher on a year-over-year basis and was mainly driven by the tariff refunds and product mix. NSE's operating margin for the quarter was 25.5%, versus 8.2% during the same quarter last year.

NSE operating margin was well above our guidance range of 22.6% to 23.6%, mainly as a result of higher fall through. OSP revenue for the first fiscal quarter came in $93 million, which is also above the high end of our guidance range of $90 million to $92 million. On a year over year basis, OSP revenue was up 12.2%, driven by strength in 3D sensing and anti counterfeiting, and other products. OSP gross margin was 57.1% up 460 basis points on a year-over-year basis primarily driven by higher volume and favorable product mix. OSP's operating margin was 43.2%, which is in line with our guidance range of 43% to 43.4%.

OSP operating margin increased 600 basis points 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 Q1 were $535.3 million compared to $656.7 million in the fourth fiscal quarter of 26. Cash flow from operating activities for the quarter was $104.7 million versus $31 million in the same period last year and was driven by higher net income and timing of working capital. CapEx for the quarter was $12 million versus $8.5 million in the same period last year. During the first quarter, we purchased about 3.95 million shares of our stock for about $150 million at an average share price of $37.98.

We have about $18 million remaining under the current authorized share repurchase program, and our board of directors has authorized a new buyback plan of $500 million. Our capital allocation strategy will continue to focus on organic growth, potential M&A targets, as well as opportunistic share buybacks. The fully diluted share count for the quarter was 266.2 million shares, up from 227.9 million shares in the prior year and versus 268 million shares in our guidance for the first fiscal quarter. Moving on to our guidance for the second quarter of fiscal year 27. We expect the second fiscal quarter revenue for Viavi to be up sequentially driven by continued strength in our key end markets.

We expect quarter over quarter growth to continue throughout the rest of the fiscal year, driven by tailwinds in our end markets. For NSE, we expect second fiscal quarter revenue to be up as a result of continued strong demand for lab and production and field products, driven by the data center ecosystem, as well as aerospace and defense customers. For OSP, we expect quarter over quarter revenue to be lower in line with seasonality of lower demand for 3D sensing and anti counterfeiting, and other products.

For the second fiscal quarter of 27, we expect VIAVI revenue in the range of $505 million and $515 million We expect NSE revenue in the second fiscal quarter of 27 between $426 million and $434 million. OSP revenue is expected to be in the range of $79 million and $81 million. Operating margin for Viavi is expected to be 29.3% plus or minus 30 basis points. NSC operating margin is expected to be 28.1%, plus or minus 30 basis points. OSP operating margin is expected to be 35.7% plus or minus 20 basis points. And EPS is expected to be between $0.50 and $0.52.

Our tax expenses for the second quarter are expected to be around $12 million plus or minus $500 thousand as a result of jurisdictional mix. We expect other income and expenses to reflect a net expense of approximately $3.5 million and the share count is expected to be around 264 million shares.

Oleg Khaykin: With that, I will turn the call over to our colleague, Thank you, Ilan. The first quarter came in above the high end of our guidance. Our fiscal 2027 is off to a good start. The year-to-year performance was driven by strong growth in many of our end markets. NSC revenue in fiscal Q1 grew approximately 74% year over year primarily driven by continued strong demand from the data center and aerospace and defense customers. More specifically, the data center segment, which includes high performance semis, optical modules, NAMS, and hyperscalers, drove strong demand for lab and production and field instruments in support of the scale up scale out, and scale-across applications.

In addition to the traditional lab and production end markets, we also expanded our TAM to include the semiconductor packaging and test. With the adoption of NPO and CPO technologies, we expect the semiconductor packaging and test segment to become a major new growth area for Viavi. September quarter marked a major milestone as we commenced the initial shipments into that segment. Data center demand for our products remains very strong, and we expect continued robust growth in this segment in calendar 2027. Our aerospace and defense business also saw another quarter of strong year on year and quarter-on-quarter growth driven by demand for our positioning, navigation, and timing products. Our communication and avionics products are also seeing robust demand.

Our TRx system was recently selected by the US Army's Threat Systems Management Office to create complex, realistic electromagnetic environments across newly opened army test ranges to support drones, counter drones, and interceptor development. This is potentially a sizable growth opportunity for Viavi over the next several years. We expect strong momentum in our A&D business unit to continue into calendar 2027. Service provider business, which includes field instruments, wireless, and service enablement products, was up driven by stronger than expected seasonal demand. The highlights included increased demand for our fiber monitoring systems, in support of fiber build outs and for our cable instruments in support of DOCSIS 4.0 and DAA cable architecture.

In addition, we are seeing early signs of a multiyear refresh cycle from service providers as they begin to upgrade and replace the equipment purchased in 2020 through 2022. Wireless products remains the only low light in the service provider segment due to the anemic spend environment. That said, we remain optimistic about the medium term prospects for our wireless business as AI-RAN and 6G development starts to ramp up. Lastly, our OSP business unit also saw strong year on year revenue growth driven by 3D sensing and anti counterfeiting, and other products. Looking ahead to Q2, we expect a very strong quarter for NSE.

We expect NSE revenue to be up quarter on quarter driven by strong and growing demand from the data center and aerospace and defense customers. We also expect seasonal tailwinds from service providers. Conversely, we expect OSP business unit to be down quarter on quarter in line with the seasonally lower demand for both anti and 3D sensing products. Net, we expect the quarter on quarter growth to be meaningfully up with strong NSE demand more than offsetting seasonally weaker OSP core. To summarize, our fiscal 2027 is off to a very good start and we expect a strong momentum to continue into the second half of the fiscal year.

During this quarter, we expect to reach $2 billion revenue run rate, which is ahead of our prior expectations. As we look ahead at our diverse end markets, customer dynamics, and the expanding Viavi end market footprint, we expect the current growth momentum to continue over the next several years. We see 4 major drivers supporting our growth strategy. First the continued growth of the data center segment driven by continued investment in scale up, scale out, and scale-across applications. Expanded Viavi TAM, including semiconductor assembly and test and fiber manufacturing, increased fiber penetration and densification in the data center, and faster product replacement cycles.

Second continued aerospace and defense growth driven by strong demand for our positioning, navigation, and timing products. Third, a multiyear service provider refresh cycle. And fourth longer term, is a recovery of the wireless business driven by 6G and AI ramp. In summary, I would like to thank the Viavi team for their continued strong innovation and execution. And thank our customers and shareholders for their continued support. With that, I will now turn it back over to the operator for Q&A.

Operator: We will now begin the question-and-answer session. Please limit yourself to 1 question and 1 follow-up. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 again. Ask that you pick up your handset when asking a question to allow for optimal sound quality. You are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Ruben Roy from Stifel. Your line is now open. Please go ahead.

Ruben Roy: Yes. Hi. Thank you for taking my questions. And congrats, Ilan and Oleg, on the outlook to a $2 billion run rate. Oleg, you talked about the strength going into the December quarter and, you know, some of the drivers there. Wondering, as you think about this 14% or so quarter on quarter guide, for NSE into the fourth quarter, can you maybe walk us through how much of the step up is coming from the, traditional data center ecosystem versus service provider seasonality, which I think is strong typically in the December quarter. And then A&D. So. Yeah.

Oleg Khaykin: I mean, I think if you. Actually, every 1 of our product lines is growing into December quarter. I mean, clearly, would say, field instruments and service enablement is benefiting from seasonally stronger service provider spend. But I would say if I look at the projected NSC growth, I would say probably about 1-third is coming from the data center growth. About probably 1-third coming actually, about maybe 40% coming from data center growth. About 1-third is coming from aerospace and defense, and the rest is service provider. So it is actually in the NSE business, it is-- we are seeing nice growth across the board anywhere between 10% to 30%. Depending on the product line. Helpful.

Ruben Roy: And then as a follow-up, Ilan talked about expectations for sequential growth to continue through the fiscal year. Typically, March is a seasonally weaker quarter, and I assume some of these data center tailwinds are continuing as you think about calendar 2027. Oleg, you also talked about entering the optical plane of semiconductor test and we have been talking about things like NPO and CPO. Can you talk high level about the revenue opportunity for that new area of your business, who the early customers are, and if some of those revenues are considered in the guidance for continued sequential growth through fiscal 2027?

Oleg Khaykin: Sure. Yes. I mean, the-- so, traditionally, our lab and production, you sell into contract manufacturing mostly making I will say the fiber optic modules, you know, pluggables. As we see the NPO and CPO penetrating, we are now actually opening a whole new market segment, which traditionally would be known also as OSAT, outsourced assembly and test. And that is selling our optical test products into the kind of probe stations at the foundry. And of course, then the multiple insertions at the final assembly and test. So that is a completely new market segment for Viavi.

We have made our first shipments this quarter, and we think this could be a sizable segment in a couple years I mean, north of $100 million for Viavi. Just by itself. So it is a nice growth market and it is a. I mean, clearly, an attractive, more predictable segment than many of our service provider segments. The other area is, you know, we talked about also densification of fiber and, you know, making this massive parallel connectors. And that is just like we are now seeing demand for our products in the semiconductor supply chain. We are also seeing a market opening up with the fiber optic and the connector manufacturers.

So that is 2 new market segments that we are entering above and beyond our traditional kind of pluggable testing. So that is a very attractive and it is clearly driven by market size and the volume and to the extent we see more densification more multicore fibers more integrated silicon photonics, closer to the ASIC, that is going to be the principal driver of demand in those markets. Terms of customers, those are all the usual suspects. I think pretty much all the major AI processor and optical switch as well as the Ethernet switch vendors who are the early adopters of the CPO and NPO. Technologies. Great. Thanks for the detail, Oleg.

Operator: Your next question comes from the line of Ryan Coots from Needham and Company. Your line is now open. Please go ahead.

Ryan Koontz: Great. Thanks for the question, and, yeah, great outlook,, guys. I want to ask about a couple of product cycles within the data center and try to gain an understanding of where we are from your perspective, maybe starting with the 1.6T optical modules. Obviously, if we are at an inflection point here and from your perspective of selling test gear, has a lot of that production capacity been built out now for you, or is there still a lot ahead for Viavi here in terms of selling into the production capacity side?

Oleg Khaykin: I would actually say it is still very early innings. I mean, if you use a baseball analogy, you are probably more like a second, third inning. I think the 1.6T peak will be probably sometime in the second half of next year. I mean, in terms of approaching the, you know, high volume. I mean, today, they are still the highest volume shipments is 800-gig. 1.6T is just kind of starting to ramp up. And I And I can see 800 and 1.6 running concurrently for quite a while. But it will be probably till the end of calendar year where the 1.6 will surpass 800-gig at the earliest.

Ryan Koontz: Got it. Helpful. Thank you. And maybe on some of these new, OCS products that are coming market for, you optical switching, I assume your fiber testers, you know, have monitoring, have some potential here to sell into this new product cycle? How would you assess that opportunity for you?

Oleg Khaykin: That 1 is-- I think OCS is probably from a point of view of test content is probably 1 of the biggest sweet spots in the market. of the dollar content per port. So it is clearly as these volumes grow, it is a very attractive segment for us. Got it. Great.

Ryan Koontz: And then, 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 still dominated by your PNT into the drone ecosystem, or are there other products that are contributing much there?

Oleg Khaykin: I would say it is the drone ecosystem. Both aerial, ground, sea, and undersea. Drones, followed by the alternative GPS to GNSS. So it is all the products to. You know, for anti spoofing and a jamming equipment you need to provide resilient timing and navigation system. So it is going to include retrofitting the field system as well as the new products being launched. Got it.

Ryan Koontz: Maybe 1 last if I could squeeze it in around. Wireless. You talked about, you know, hopefully bringing some recovery there. Are you thinking that this opportunity where SpaceX is talking about building a new terrestrial carrier, is that a real opportunity for you to sell your field gear into that? And probably lab?

Oleg Khaykin: Well, I mean, clearly, if anybody is gonna be doing it, you have to develop the equipment so that will stimulate some of our sales. But I think I view it also as a positive because it is by introducing kind of the new player in the. Into the market and I. And clearly, you know, I know as much about it as you are in terms of all the initial pronouncements. I think it is all gonna be feeding into the 6G and the AI-RAN deployment with the non terrestrial network component.

So I think the sooner somebody gets moving, it will be a more of a change in equilibrium where things are kinda being currently in a limbo mode. I mean, there is a R&D going on, and we are selling into that. But until things kick into high gear with the planned deployment, that is when the You will actually see volume picking up. Cool. We welcome it. Thanks for the comments. Sure. More innovation. Thanks a lot. Sure.

Operator: Your next question is from the line of Michael Genovese from Rosenblatt. Your line is now open. Please go ahead.

Michael Genovese: Thanks very much. there is a lot of interest out there, Oleg, in NPO, CPO. So just any more color you can give us on whether there were revenues there in September or whether they really start in December and if they are more on the NPO or CPO from your perspective. And just any other color you can help give us on that as a growth driver and 2027 and beyond, I think people would appreciate?

Oleg Khaykin: I would say the. I mean, as I said, the. Our first our first milestone shipments were in the September quarter. Think of it as a single-digit million-dollar shipment. Just early beginning, it is accelerating in the December quarter. it is going to continue. there is a little echo. It will continue to accelerate into the March quarter and so on and so forth. So it is-- it started kind of-- it is-- we initially shipped in September and it is ramping in every quarter. Since the. Going forward. And it is predominantly supporting a CPO I think there may be some designs or NPO, but I think the overwhelming mix is supporting CPO.

Michael Genovese: Okay. Thanks for that. And then on the operating I mean, the operating income rose more than the revenue did in the quarter. So if we even if we back out the full $11 million tariff refund, I am getting an incremental operating margin of about 70%. So does that seem right to you? And since in the past, you have 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?

Oleg Khaykin: Well, I think the-- probably, you know, all things being equal, you know, there is always leading component versus, like, component. I mean, eventually, you are-- you bring up some OpEx cost and some bonuses and things like that. So early on when you get this incremental revenue, a disproportional amount falls to the bottom line. But I think also, I would not say it is 70. I think it is 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 the low to mid fifties. As an incremental fall through to the bottom line. Yeah.

Ilan Daskal: And, Michael, so, you know, it is. Some of the operating expenses this quarter is about timing. You know, similar for the December quarter. Usually, when you get to the March quarter, there is a little bit uptick in the operating expenses. All the statutory expense and others, etcetera. So, similarly, you know, when we kind of, hiring kind of hits R&D, etcetera, it is all about timing. Nothing else.

Oleg Khaykin: But I think you bring up the point as we have been saying it for several quarters. We have a significant operating leverage in our business model as revenue goes up. Because effectively, it is 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 expense is now in the single digits. Which is the second operating leverage driven by our heritage from JDS Uniphase where we inherited massive NOL. So that is finally all falling into place and seeing very strong of both operating as well as the AP leverage at the margin as well.

Operating margin as well as the net profit. Okay.

Ilan Daskal: The effective tax rate this quarter was down to 8%. So that is kind of, I think, historically low for us. Yeah.

Michael Genovese: Great. Okay. Perfect. And then I will just get 1 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 is a 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 is pretty clear that there is still credit concerns rattling people. And now there is the politics, and, you know, sort of just-- you know, general worries about data centers. So just-- you know, you have got good perspective on a lot of things.

Do you have anything to add to help us kind of think through those issues?

Oleg Khaykin: Well, you know, I take a-- 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 centers I think the data center is not going away. New technology is going to continue to go into data centers. The refresh cycle of technology in data centers is about 3 to 4 years. Okay? So the same technologies that go into AI data centers will go into even regular cloud data center. And, you know, 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 are getting into semiconductor test. And into the fiber optic and connector manufacturing test. It does not matter if it is AI data center or the cloud data center replacement it is still gonna be a new market. And then the whole thing is they are shortening our product cycle densification is all that. So I think only a portion of the data center spend 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 gonna be. And that is only the data center. Then there is the aerospace and defense. I mean, if you look at it, you could think about maybe there will be less defense spending. I will tell you 1 thing, there will be a hell of a lot more money spent on anything autonomous such as drones, and the, you know, this lower cost weapon systems which require its own in internal PNT systems. And we are very well positioned for that market.

And last but not the least, you know, we had a lot of sales in 2020 to 2022 All of these products are very long in the tooth. And there will be probably a multiyear. We are approaching a multiyear replacement and refresh cycle. From service providers, and that is kind of like the tide that raises all the boats. So I think if somebody just takes it purely Viavi as an AI play, I think they are grossly undervaluing the diversification of our end markets. And what we are playing in. You know, eventually, wireless is also gonna recover. So today, it is been for last 3 years. it is been very much a headwind.

Eventually, it will become a tailwind, and that is obviously will kick in. Another stage of the growth. So, you know, feel pretty good about our business. We are not a 1 trick pony. We actually fairly well diversified and there is multiple technology cycles that are favoring us.

Analyst: And not only AI, but AI is clearly a big 1.

Ilan Daskal: And, Mike, you know, I may add that, you know, in the prepared remarks, we specifically highlighted that we see a continued growth, you know, in the next few quarters. And that is you know, that is updated. it is-- it is not changed, you know, due to the political kind of aspect that, you know, you mentioned earlier.

Oleg Khaykin: I mean, AI is not going anywhere, and data centers will continue to. I mean, anybody thinks that AI is dead, I mean, is delusional because there is still the rest of the world, and, I mean, there is a fundamental competition. So I think it may not grow as rapidly, but it is still gonna grow and it is still at a pretty sizable investment already being committed. So I mean, that is just kind of my view on it. Yep. Perfect. I appreciate the comments. Thank you so much. And I will just add 1 more thing. We have never overhyped it. I mean, there is been a lot of companies kind of got ahead of themselves.

We always took a more measured and conservative view of how it is gonna grow. In fact, we probably were a little too conservative. We thought we will hit the $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 is pulled in to the end of this calendar year. So if anything, we would probably. Should be a accused of being overly conservative in that respect. So in a way, it kind of plays out.

Operator: Your next question comes from the line of Andrew Spinola from UBS. Your line is now open. Please go ahead.

Andrew Spinola: Thank you. Oleg, Along those lines on AI, I am wondering from a high level, have you seen any changes in the buying by your customers whether anyone is adjusted spend here or there or cut back in places? Or is it pretty much the same as it is been?

Oleg Khaykin: Well, actually, it is. You know, I would say in many ways, we have seen our expectations. We were lagging the demand. And if anything, we have been getting more surprised by the increase in the spend. So I think we are playing catch up to a large extent. I mean, we. As I was saying, you know, just before you came on is, you know, we thought we hit $500 million at the end of next calendar year. And, you know, we have had to pull it in almost pretty much the entire year. So I do not see any slowdown. But then again, I would say we probably were thinking much more conservatively in our outlook.

So to the extent there will be some pullback, it still represents an upside for us.

Ilan Daskal: And that goes again to our prior remark also that we see continued growth in the next few quarters. So Exactly. Again, it is it is. It does not change anything for us.

Andrew Spinola: Got it. Ilan, I have a question on the NSC margin. Right? As they mentioned earlier, quite strong in Q1 and the guide for Q2. Just wondering, are there any residual Spirent synergies that are flowing through here in H1 or is this all related to scaling the business?

Ilan Daskal: This is all scaling the business. Spirent integration was already completed At least 2, 3 quarters ago. It was pretty fast and successful. And, everything that you see right now is the leverage that we have from the growth that we are experiencing.

Oleg Khaykin: And I think, like, this quarter, even last quarter, we are seeing initial products which were kind of joint-- co- designed, I would say, or maybe integrated. And probably next calendar year, we are gonna launch products that are fully with Spirent and the Viavi portfolio. So think in that respect, the product lines, I mean, organizationally, we are fully integrated. The product lines wise, I think we are already I would say 25% there. Probably exiting next year, we should be at over 75%.

Andrew Spinola: Got it. And 1 last 1, Oleg, for 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 have obviously scaled up with Spirent, and, obviously, AI's. And data center has given you a lot of scale. Much better margins. And I am wondering as you approach this business, does anything change for you in terms of your longer-term thinking in terms of where you are investing, you know, what markets you are going after?

And 1 of the things I am particularly curious about is you know, you are talking about the semiconductor test and some of your success in some of these other markets. I am wondering if you are capturing more share on the R&D side if you are seeing that and if that is part of your strategy potentially going forward.

Oleg Khaykin: Well. So I think, you know, look. 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 they are. 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 this single biggest driver of expansion of operating margins is the top line growth. Right? On top of it, you know, bringing in Spirent, it is clearly comes at the higher margin, so that kinda helps the overall picture.

But even you look at it, Spirent had the nice growth but it is, you know, low teens. I mean, our organic business grew, but 50% year on year for the September quarter. So it is just purely pure Viavi with no acquisitions. Right? So in that respect, you know, the products we are getting into, you know, clearly just the volume of sales, a lot of it just falls right to the bottom line. As we talk about the growth clearly, of the big areas we focused was the R&D test. And that is kinda leading the market. But the single biggest volume that scale up when we talk about semiconductor test 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 is the volumetrically what drives the revenue and volume is when it goes into the production test. And by production test, I am talking about not only the traditional testing in and out of the Plugables, but it is now up to 5 insertions in the. You know, from the wafer probe to the known good die testing to the optical engine test to the assembled substrate and the optical engine all the way to the final test.

And that is the piece where we are seeing our growth happening when we started shipping in the first quarter into that market. And the other 1 is also, as the complexity densification is going on. You are going to multicore fiber, and you go into massive parallel fiber optic connectors, we are now seeing our equipment also being pulled into the fiber optic and connector manufacturing supply chain. So it is going well beyond the traditional kind of optical module test. And you know, the last but not the least, I think, is the OCS. We have been in this market for many years.

Now the volumes, they were fairly low, but now they are starting to scale and we are seeing a lot of demand for our products also driven by the OCS growth. that is great color. Thanks a lot, Oleg. Thank you. Thanks, Andrew.

Operator: Your last question comes from the line of Timothy Savageaux from Northland Capital Markets. Your line is now open. Please go ahead.

Tim Savageaux: Good afternoon. Congrats on the great results. And I wanna go back to the commentary on the CPO, NPO opportunity And I think you mentioned, you know, expectations that could be $100 million-plus business. And I wanna try to relate that to you know, what your customers are seeing. Right? Lumentum just talked about a $5 billion order there, I am sure, over multiple years. But can you relate revenue at that level to opportunity for Viavi? Should we be thinking something I do not know, low to mid single digits in terms of, you know, if this is $2 billion annual business for your customers, it is a $100 million for you.

On the 1 hand, on the other, would you say the same thing about OCS? In terms of that potential to get to $100 million-plus. As you did about MPO.

Oleg Khaykin: So when I talk about $100 million-plus, it is purely semiconductor. That does not include OCS. Right? This is more like your Ethernet switching or AI processor and things like that. OCS is a different animal. Their. The amount of content per port is quite significant because you know, also the time the testing is quite sizable. So I would say, I mean, generally, people say, they are gonna do $2 billion. My question becomes over Is it like an annual run rate or is it like over 3 years or what have you. Right? Clearly, I mean, from there, we can Let's let's say it is annual. Capacity. Annual.

Well, I mean, to support, that much, that probably would be in the tens of millions of dollars, maybe approaching, like, between $50 million and $100 million. Great. And, you know, what I. I was not I was only trying to say that is about rough you look at the OC of it as a No. Yeah. as 2% to 5% of their revenue. Beautiful. Now what I was trying to say is to the extent we are talking about the CPO opportunity, would OCS-- be of a similar magnitude over time or greater understanding they are not related to each other.

I think the CPO with switches and ASICs is a higher volume opportunity because, I mean, they just fully metrically, it is a much bigger volume business. Right? Because think about you go to OCS, you are really getting into the core. So you do not need. You have a lot of test time for each 1 of them because you could have, like, 300x300 switch. But it is sitting at 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 is many more of them on the edge and you need multiple insertions.

So there is I mean, it is kinda hard to tell because I think the. there is not enough data points to really see how things will shake out. But there, you have much bigger volume of ASICs Right? Unit volumes are much higher. And you need multiple insertions. So I would say my bet on that is probably gonna be somewhat bigger-- maybe I would say OCS is a lower volume but higher value per shipment. shipment. And the CPO with the ASIC, it is a much higher volume and lower value per shipment. Great. Thank you.

Tim Savageaux: I can fit 1 more in there, you mentioned organic growth at 50%. I am going to assume the data center growth was greater than that on a year on year basis. And, also, now is, you know, more than 50% of NSE revenue Are both of those fair statements at this point?

Oleg Khaykin: Yeah. So if I look at September quarter last year versus this year, so you know, NSE was $216 million in September 2026. Sorry. And today, it is-- it is 2025. And then today, it is $376 million. So there is a $160 million growth Okay? $52 million of it is the Spirent, so you back it out, so it is about a $100 million growth. And I would say the data center yeah. it is clearly more than 50%. Right? And the. I would say aerospace and defense is the second highest And the.

I would say aerospace and defense and field instruments are I would say, I would say a little bit north of 50%, and data center is, I mean, like, almost, you know, 2x. Great. We are talking growth rates there, I assume. But thanks and congrats. Yeah. Thank you.

Operator: We have now reached the end of the Q&A session. I will now turn the call back over to Vibhuti Nayar for closing remarks.

Vibhuti Nayar: Thank you, Jonathan. This concludes our earnings call for today. Thank you for joining everyone. Have a good afternoon.

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

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