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DATE
Wednesday, October 29, 2025 at 4:30 p.m. ET
CALL PARTICIPANTS
Chief Executive Officer — Oleg Khaykin
Chief Financial Officer — Ilan Daskal
Vice President, Investor Relations — Vibhuti Nayar
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RISKS
OSP Margins — OSP gross margin declined 300 basis points year-over-year to 52.3% in fiscal Q1 2026 (period ended September 27, 2025) due to an unfavorable product mix.
OSP Operating Margin Pressure — OSP operating margin fell 250 basis points year-over-year to 37.1% in fiscal Q1 2026, below the guidance range, due to product mix and higher manufacturing costs.
Wireless Segment Weakness — Management stated, "the cylinder in our engine that is still fairly weak is the wireless business," citing continued soft demand from wireless carriers.
TAKEAWAYS
Total Revenue -- $299.1 million net revenue, up 3% sequentially and 25.6% year-over-year, exceeding the high end of guidance.
Operating Margin -- 15.7%, surpassing the guidance high end and up 130 basis points sequentially and 570 basis points year-over-year.
EPS -- $0.15, up $0.02 sequentially and $0.09 year-over-year, exceeding the upper end of guidance.
NSE Segment Revenue -- $216 million, up 35.5% year-over-year and above the guidance high end, primarily driven by data center ecosystem demand and the Inertia Labs acquisition.
NSE Gross Margin -- 63%, up 210 basis points year-over-year, driven by volume and favorable mix.
NSE Operating Margin -- 7.5%, up from negative 4.6% last year and above guidance, driven by higher fall-through.
OSP Revenue -- $83.1 million, up 5.5% year-over-year, driven by strength in anti-counterfeiting and other products; within guidance.
OSP Gross Margin -- 52.3%, down 300 basis points year-over-year, reflecting a less favorable product mix.
OSP Operating Margin -- 37.1%, down 250 basis points year-over-year and below guidance, due to product mix and increased manufacturing costs.
Total Cash and Short-Term Investments -- $549.1 million at the end of fiscal Q1 2026, compared to $429 million in 2025.
Cash Flow from Operations -- $31 million for the quarter, versus $13.5 million in the same period last year.
Spirent Acquisition -- Acquisition closed, contributing an estimated $200 million annual revenue run rate, above prior $188 million estimate.
Term Loan B Financing -- $600 million Term Loan B closed to fund the Spirent transaction and for general corporate purposes.
Share Repurchase -- 2.7 million shares repurchased for approximately $30 million; $170 million remains authorized under the current program as of fiscal Q1 2026.
Share Count -- Fully diluted share count at 227.9 million, up from 224 million in the prior quarter, versus 228.6 million in guidance.
Q2 Guidance (Total Revenue) -- $360 million to $370 million for fiscal Q2 2026, including roughly $45 million to $55 million from Spirent in NSE, with OSP revenue guidance of approximately $77 million.
Q2 Guidance (Operating Margins and EPS) -- Total operating margin expected at 17.9% plus or minus 60 basis points; EPS guidance is $0.18 to $0.20, with Spirent's contribution forecast at $0.00 to $0.02 for fiscal Q2 2026.
SUMMARY
Viavi Solutions (VIAV 0.14%) delivered revenue, operating margin, and EPS above the upper end of guidance, with year-over-year and sequential gains in key financial metrics. Management attributed NSE segment outperformance to demand from the data center ecosystem and recent acquisitions, while OSP faced margin headwinds due to product mix. Full-year fiscal 2026 guidance incorporates the recently closed Spirent business, which is expected to provide incremental revenue above original internal estimates and marginal EPS accretion in the reported quarter.
Management outlined a revenue mix shift, projecting data center ecosystem revenue may soon surpass traditional service provider revenue, supporting a more balanced portfolio.
CFO Daskal said, "currently, including Spirent, we are towards kind of the $160 million a quarter," forecasting further potential growth post-integration.
The data center market is seeing faster technology cycles and higher margin contribution, with CEO Khaykin explaining, "You're going from anywhere between six to eight years between generations of products to about two to three years."
Spirent's business is described as "both higher gross margin than the average NSE and it's higher operating profit than average NSE," according to Oleg Khaykin, expected to be accretive to overall profitability.
The company closed a $600 million Term Loan B to fund the acquisition and plans to report the combined network segment as a unified business segment going forward.
INDUSTRY GLOSSARY
Term Loan B (TLB): A senior secured syndicated loan instrument, often used to finance acquisitions, typically with institutional investor participation.
NSE: Viavi’s combined Network Enablement and Service Enablement segments, focused on test, measurement, and assurance solutions for communications networks.
OSP: Optical Security and Performance Products segment, providing optical solutions for anti-counterfeiting and sensing markets.
Inertia Labs: An acquired entity providing solutions that contributed to NSE segment growth; referenced in the current quarter's results.
Spirent: Acquired high-speed Ethernet network security and channel emulation business lines from Keysight, referenced as a strategic addition to Viavi’s data center portfolio.
Fall-Through: The amount of incremental revenue that directly contributes to operating income, after associated costs.
PNT: Positioning, navigation, and timing products, referenced in context of Viavi’s aerospace and defense business.
Full Conference Call Transcript
Ilan Daskal: Thank you, Vibhuti. Good afternoon, everyone. Now I would like to review the results of 2026. Net revenue for the quarter was $299.1 million, which is above the high end of our guidance range of $290 million to $298 million. Revenue was up 3% sequentially and on a year-over-year basis was up 25.6%. Operating margin for the first fiscal quarter was 15.7%, above the high end of our guidance range of 14.6% to 15.4%. Operating margin increased 130 basis points from the prior quarter and on a year-over-year basis was up 570 basis points. EPS at $0.15 was also above the high end of our guidance range of $0.13 to $0.14 and was up $0.02 sequentially.
On a year-over-year basis, EPS was up $0.09. Moving on to our Q1 results by business segment. NSE revenue for the first fiscal quarter came in at $216 million, which is above the high end of our guidance range of $208 million to $214 million. On a year-over-year basis, NSE revenue was up 35.5% as a result of strong demand for production as well as field products, and was mainly driven by the data center ecosystem, as well as the acquisition of Inertia Labs. NSE gross margin for the quarter was 63%, which is 210 basis points higher on a year-over-year basis, primarily driven by higher volume and favorable product mix.
NSE's operating margin for the quarter was 7.5% compared to negative 4.6% during the same quarter last year. NSE operating margin was above the high end of our guidance range of 5.4% to 6.2%, primarily driven by higher fall-through. OSB revenue for the first fiscal quarter came in at $83.1 million, which is in line with our guidance range of $82 million to $84 million and was up 5.5% 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. OSB gross margin was 52.3%, down 300 basis points from the same period last year and was mainly due to unfavorable product mix.
OSP's operating margin was 37.1%, which is below our guidance range of 38.1% to 38.5% due to product mix and higher manufacturing costs. The operating margin decreased 250 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 $549.1 million compared to $429 million in 2025. Cash flow from operating activities for the quarter was $31 million versus $13.5 million in the same period last year. CapEx for the quarter was $8.5 million versus $7.3 million in the same period last year.
During the quarter, we successfully refinanced our $50 million 1.625% three-year convertible notes due in March 2026 with $250 million 0.625% five-and-a-half-year convertible notes due in March 2031. As part of this transaction, existing convert holders exchanged about $100 million for the new convert and the remaining $150 million raised will serve to pay off the balance of the March 2026 convert. This remaining $150 million is included in the cash balance of $549 million at the end of 2026. In conjunction with this transaction, we purchased approximately 2.7 million shares of our stock for about $30 million. We have almost $170 million remaining under our current authorized share repurchase program.
The fully diluted share count for the quarter was 227.9 million shares, up from 224 million shares in the prior quarter and versus 228.6 million shares in our guidance for the first fiscal quarter. Moving on to our guidance for 2026. In mid-October, we successfully closed the acquisition of Spirent's high-speed Ethernet network security and channel emulation business lines from Keysight. The acquisition of these business lines is expected to add about $200 million of annual revenue run rate, which is above our prior estimate of around $188 million. We also concurrently closed the previously announced $600 million Term Loan B, which was used to fund the transaction at close as well as general corporate purposes.
In addition to the acquisition of Spirent's business lines, we expect the second fiscal quarter revenue for Viavi to reflect continued strength in many of our end markets. Our guidance includes financial performance of Spirent's business line for approximately ten weeks. For NSE, we expect continued strong demand for production as well as field products driven by the data center ecosystem. For OSP, we expect quarter-over-quarter revenue to be lower in line with seasonality of lower demand for both anti-counterfeiting and 3D sensing. For 2026, we expect Viavi revenue in the range of $360 million and $370 million. We expect total NSE revenue between $283 million and $293 million, including revenue from Spirent between $45 million and $55 million.
OSB revenue is expected to be approximately $77 million. Operating margin for Viavi is expected to be 17.9% plus or minus 60 basis points. Total NSE operating margin is expected to be 13.6% plus or minus 70 basis points. This includes Spirent's contribution, which is expected to be slightly accretive to existing NSE margin for this quarter. OSB operating margin is expected to be 34% plus or minus 50 basis points. EPS is expected to be between $0.18 and $0.20. Viavi's standalone EPS is expected to be about $0.18. We estimate Spirent's contribution to EPS is in the range of $0.00 to $0.02 after allocating pro rata interest on debt.
Historically, Spirent's agency revenue has been stronger in the second half of the calendar year. This strength in revenue is reflected in the guidance for the fiscal second quarter. We currently plan to leverage the complementary product portfolio and capabilities and report NSE as one business segment going forward. Our tax expense for the second quarter is expected to be around $10 million plus or minus $500,000 as a result of jurisdictional mix. We expect other income and expense to reflect a net expense of approximately $12.2 million, which increased mainly due to the interest on the TLB. And the share count is expected to be around 228.7 million shares. With that, I will turn the call over to Oleg.
Oleg?
Oleg Khaykin: Thank you, Ilan. The 2026 saw the continuation of strong momentum from 2025, coming in above the high end of our guidance. It was also significantly up year on year and counter-cyclically up quarter on quarter. NSE revenue in Q1 grew approximately 35% year on year, primarily driven by strong demand from the data center ecosystem and aerospace and defense customers. The data center ecosystem, which includes high-performance semis, optical modules, and NAMs, drove strong demand for production products in support of the AI data center build-out. We saw strong demand across all optical networking product lines, the 800 gig and 1.6 terabit Ethernet test, chip-to-chip interconnect and protocol test, and a broad range of production test equipment.
In addition, we are now also seeing a growing demand for our traditional field instruments by hyperscalers as they build out and operate their new AI data centers. We expect this strong momentum to continue well into fiscal 2026. Lastly, with the recent acquisition of the highly complementary Spirent high-speed Ethernet product line, we have further strengthened our position in the data center ecosystem, significantly increasing our business footprint there. Our aerospace and defense business also saw another strong quarter of growth driven by continued high-end demand for our positioning, navigation, and timing products. We expect the strong demand to continue throughout fiscal 2026. The service providers business was generally stable during the quarter.
The gradual recovery in fiber was mostly offset by the continued soft demand for wireless products. We expect this trend to continue in the medium term. Looking ahead, we expect strong quarter-on-quarter growth in NSE driven by both the continued strong demand from the data center ecosystem and aerospace and defense customers for Viavi Classic products, and the incremental revenue from the recently acquired Spirent product lines. Now turning to OSP. OSP saw strong year-on-year revenue growth driven by recovery in anti-counterfeiting and other products. The 3D sensing demand was in line with seasonal expectations. We expect fiscal Q2 to be down quarter on quarter in line with the seasonally lower demand for both anti-counterfeiting and 3D sensing products.
In summary, we expect the strong start in Q1 to continue throughout fiscal 2026, supported by the stabilization and recovery of our mature end markets, including the service providers, anti-counterfeiting pigments, and 3D sensing, and the continued strong demand by the data center ecosystem and aerospace and defense customers. In conclusion, I would like to welcome our new employees to Viavi, and thank the Viavi team for its continued strong innovation and execution. Lastly, I would also like to thank our customers and shareholders for their continued support. With that, I will now turn it back to the operator for the Q&A.
Operator: Thank you. The floor is now open for questions. Your question comes from the line of Ruben Roy of Stifel. Your line is open.
Ruben Roy: Hi, Oleg and Ilan. Thanks for the questions. And great to see the progress, and congrats on the closing of the Spirent business. I guess the first question, Oleg, would be, as you continue down the road of diversifying your revenue, maybe you can give us an update of what the mix is if you think about your kind of core telecom service provider revenue in NSE, versus some of the new products that you're selling at the hyperscale? And then obviously, you've been talking a lot about aerospace and defense doing very well with expectations for continuing growth. So maybe if you could just give us the mix as a first question. Thank you.
Oleg Khaykin: Sure. Thanks. I would say if we look at our exit of the fiscal year, we did about 50, 30, 20. So 50% service provider, 30% data center ecosystem, and 20% aerospace and defense. Now as we close the Spirent business, it's about, what, 40-45% about, you know, 40%, and then the remainder 45% is service provider, 40% data center, and 15% aerospace and defense purely as you average it out. So we are now getting to the point where the data center revenue is almost approaching the traditional service provider. Which, you know, significantly de-risks the volatility of the service provider spend and the aerospace and defense continues to grow as well.
So I think, you know, as we look forward, we are gonna probably, I would say, exiting this year. We may see data center ecosystem surpass the service provider. And, you know, service provider will still grow, but it's growing at a much lower rate than data center and our aerospace defense will also continue to grow. So we'll have a much more balanced portfolio and less, I would say, dependent on the neurotic service provider spend.
Ruben Roy: Great. Thanks for that detail, Oleg. If I take Spirent out of the guidance, it looks like my math is right. You're still growing around 10% sequentially on that core NSE business, almost 20% year over year. And I was wondering if you could maybe, you know, break out, you know, given that service provider is still sort of mixed with wireless, you know, still having some headwinds, etcetera. If you think about that growth on the core business, can you break it out between sort of what you're seeing in data center versus the aerospace and defense?
Oleg Khaykin: Sure. So I think the, you know, we look at data center, we look at everything that pulls into data center. So we're gonna see a very strong demand, believe it or not, for our field instruments, but it's a field instrument by the data center ecosystem. It's these specialist fiber companies that are doing now interconnect. I mean, you probably saw some very interesting dynamics, with NVIDIA investing in Nokia. I can, kinda elaborate on that. What we are seeing is, you know, initially, it was all about building our data center. Then they realized the fiber interconnect between data centers is crap. So they said, okay. We cannot accept the traditional fiber network provider.
So there's been a significant investment and emergence of the specialist fiber interconnect companies that are now spending quite a bit of money really improving the reliability and performance of the fiber networks. And we're actually seeing that is driving also the revenue of our traditional, what we call, field instrument business. Then, of course, the classical data center, you know, the 1.6 terabit, 800 gig, the, you know, production up production test equipment continues to grow very nicely into December. There's gonna be an additional momentum building as far back as far further into March. And aerospace defense will continue to, you know, gradually, grow on the continued basis that it has been doing.
And the only, I would say, kind of the cylinder in our engine that is still fairly weak is the wireless business. Due to the, you know, the wireless spend dynamics by the major wireless carriers. But you saw a very interesting thing. Just as we said about two years ago that eventually, somebody will wake up that the fiber is awful. They'll start investing in fiber, and that's already happening now. So this whole thing is trickling down from data center into fiber networks. Well, the next bottleneck that is, you know, not ready for the whole AI ecosystem is the wireless RAN.
That's why, actually, we were not surprised at all that NVIDIA put in a billion dollars into AI RAN in Nokia. And we do hope, I mean, we are seeing that's really accelerating the 5G advance and 6G development. We will likely pull this in closer. And we know the others are seeing it, and they're also gonna be set scaling their investment. So we do think our wireless business probably would be kind of the last cylinder in the engine to turn on, into the next calendar year. So that's kinda hopefully gives you a good color on all the elements of the NSE business.
Ruben Roy: Yeah. Absolutely. Thanks a lot. If I could sneak one in for Ilan, great to see the operating margin guidance for NSE. Obviously, Spirent's starting to contribute there. But can you give us maybe how you're thinking about operating margins as you sort of run rate the business to full quarter? Kind of exiting fiscal 2026 and into fiscal 2027?
Ilan Daskal: So thanks for the question, Ruben. So currently, including Spirent, we are towards kind of the $160 million a quarter. I believe that obviously we are still working on or just starting to work on integration, etcetera. So probably for, you know, the early part of 2026 calendar. It can reach, you know, maybe $5 million higher or so at around, you know, the $165 range.
Operator: Your next question comes from the line of Mehdi Hosseini of SIG. Your line is open.
Mehdi Hosseini: Yes. Thanks for taking my question. Two from my end. Oleg, let's assume wireless doesn't come back. Kind of a worst-case scenario. Given the Spirent and the baseline assumption that it would be $0.08 accretive and strengthen fiber and perhaps a slightly higher growth rate for smartphones next year, it seems to me that you should be exiting calendar '26 at close to, like, a dollar annualized EPS. And if wireless were to come back, there will be growth above that target. And I'm not asking you for a guide. But given the scenario you laid out, wireless could come back and just be extra and help you with that higher earning power. Any thoughts here will be great.
Oleg Khaykin: Well, so, I mean, as you can see, just as our business started tanking from the, you know, cut back in service providers in 2022, I mean, we had a significant operating de-leverage. Well, now that we're going in the other direction, we're getting significant operating leverage. Where every incremental dollar just drops right to the, you know, a big chunk of it drops to the bottom line. So I mean, you're right. I mean, getting up to if things continue as they are, I mean, it's entirely possible we'll be running around close to a dollar a share next year. I mean, you know, your words and God's ears. And you're right.
Wireless is a significant incremental catalyst once it gets going because it's really been one of the segments that's kind of been left behind in this whole recovery. And I mean, clearly, as it starts turning around, it will be a major contributor to the bottom line.
Mehdi Hosseini: Okay. Great. And just double-clicking on the OSB and given the upcoming changes to the form factor for smartphone applications, should I assume that some of the past pricing pressure is going to abate and go away and at least you should have some operating leverage there without contemplating what the real smartphone unit growth would be?
Oleg Khaykin: Sure. I think you're right. I mean, it's a more maturing segment. I mean, the volumes, I mean, you know, we're fairly saturated in that market. So the only incremental growth comes from, you know, the unit growth, and maybe a greater adoption of the world-facing 3D cameras. But, you know, we are seeing actually also incremental uptick of the facial recognition technologies with the Android players in Asia. Not the big ones like Samsung, but it's mostly the Chinese. So we do think it will provide some additional growth. And there we sell, you know, wafers to module integrators. And so it provides a bit more leverage there.
Also, the automotive market with LiDAR in Asia is becoming a big consumer of the 3D sensing filters. Now we gotta put it in perspective. You know, it's kinda hard to compete with 300 plus million units. I mean, automotive is, like, maybe 10 million. But let's say, a nice welcome growth in the unit volume. And in terms of the ASP erosion, I think it's fairly stabilized at this point. And, I'd say the volume is the only thing that matters right now in terms of growing the revenue in that segment.
Mehdi Hosseini: Okay. Thank you.
Operator: Your next question comes from the line of Ryan Koontz of Needham and Company. Your line is open.
Ryan Koontz: Great. Thanks. If we could, double-click on the data center a little bit of a quiet market for you in terms of, I think, investors understanding your exposure there. Great to hear you're working that up. Oleg, do you feel like your execution in that customer segment is where it needs to be today? Do you need to invest more and go to market? And do those customers have different product requirements that you might need to respend new products for data center, or is it largely the same products as your traditional SPs?
Oleg Khaykin: Well, you know, it's a great question. You know, we've been investing in this business for the last three years. And, you know, the term that I've borrowed from the distribution business is turns and earns. And let me just clarify what it means. So what we're seeing today as we shifted from telecom service providers driving the roadmap, to the data center driving our roadmap. You're going from anywhere six to eight years between the generations of products to about two to three years. So you have a very much faster turnover. But also of the technologies. Means you gotta deliver your products now every two to three years.
Because it is driven by engineering labs and new product development, it comes in at much higher margin. So you are turning the product portfolio much faster. Means you're not you don't have this, like, a long value of waiting for the next generation. And you're earning higher, percentage gross profit, because it's a, you know, first to market always wins big. So in that respect, we really like it because it's increasing the size of the market for us. And it's accelerating the revenue velocity for us. And we get paid for the value we deliver by being always the leader in this market.
So today, I mean, the reason I use the word the data center ecosystem is because our products don't just address a particular segment. We address everything along the entire value chain. It's your processor companies, you know, you all know who they are. It's your physical layer. Communication companies like Surdy's and the module integrators. It's your system companies optical gear like CNM, Resell, Cisco, and so on and so forth. And it's actually ultimately, the actual hyperscaler who have extensive internal R&D developing anything from optical modules to MEMS switches to full-blown, you know, data center equipment.
So, I mean, this is, like, the best thing you can have because and you're dealing with engineering budgets and the, you know, intense competition where everybody's trying to be first to market with a better technology. So, I mean, this is like, you know, truly living inside of a tornado. And, our team loves it because that actually plays very well to our traditional strength to be at the bleeding edge of bringing in a leading-edge technology to the optical networking.
Ryan Koontz: That's super helpful. Would you say, Oleg, you have And, actually, you know, I would add one more thing.
Oleg Khaykin: Sure. You know, I would add one more thing. You know, we talk always about speed. So 400, 800, 1.6, 3.2. That's a network speed. Which you also have in parallel is chip-to-chip interconnect. You go from PCIe 3.0, 4.0, 5.0, today in 6.0, and then it will be next year 7.0. So every time you move to a higher speed, you need a corresponding PCI Express next standard as well. So you're it's a TikTok. You deliver your network speed, which immediately needs a whole wholesale replacement of all the chip-to-chip interconnect. So that's a force multiplier on that whole data center growth.
Ryan Koontz: Yeah. That's really great. And would you say you have a similar set of competitors and similar share in the data center relative to your legacy customer base?
Oleg Khaykin: Well, I would actually say where we play, you know, a day, like, purely the layer zero, layer one, we have a significantly greater share because that's the traditional strength of JDS Uniphase Viavi. We're very strong in it. With the acquisition of Spirent, we have now added layer two to layer seven capability as well. And there, you know, it's a there's two major competitors in that space. I mean, clearly, one was Spirent, and the other one is Keysight through their acquisition of Ixia. I would say, you know, no. Today, it's Viavi and Keysight that are big players in that space.
And, you know, there's about maybe four or five additional smaller players playing in individual layers kind of, you know, all over the world. But it's very much, I would say, two major players because the level of intensity and speed which you have to bring out the product it's not a low-budget game. It drives quite a significant R&D spend. So I would say, in that particular space, I'd say it's Keysight and Viavi.
Ryan Koontz: Great. And maybe just a follow-up if I could on the aerospace and defense area. Can you kind of characterize those products? Are those PNT like modules you're selling in typically? Or what's the fulfillment model look like? You're selling to drone companies and the like or defense companies?
Oleg Khaykin: Yes. So it goes into everything. So we have a smorgasbord. We can sell you an inertial measurement unit. It looks like a chip in a specialized package. Then we can sell you a module that has multiple of these chips with a controller and logic that does the inertial navigation system. Or we can sell you a full-blown inertial navigation system with sensor fusion receiving sensor data from cameras. The satellite antennas, everything else. So we have a full solution and depending on which customer we engage and what their relative capabilities are, we'll sell them individual components. We sell them the modules, or we sell them the complete solution.
So if you're looking at some of these drone companies, you know, I would say in Central and Eastern Europe. I mean, you may buy they may buy the entire solution. If you're dealing with more sophisticated US companies, I mean, they may be buying modules or individual components that go into their critical systems. But it's all about autonomous vehicles payers, ground, sea, or undersea. I mean, you name it, that's what we are servicing. And the nice thing about it, it's the same platform that can address all these different markets. Including the mining, agricultural, and surveillance drones, and all these things that you need. If you think about the fully GPS-independent autonomous, kind of robotic vehicles.
Operator: Next question comes from the line of Michael Genovese of Rosenblatt Securities. Your line is open.
Michael Genovese: Thanks. Look, I think my phone broke up. I think you gave a new annual revenue number for the HSE acquisition. But I just didn't hear what it was.
Ilan Daskal: Yeah. So, basically, currently, you know, once we close the transaction, we got a little bit more insight. Currently, on an annual run rate, we believe it's about $200 million. Including, you know, the emulation piece. The channel emulation. And prior to that, we thought more about $188 million. So, yes, it is higher right now.
Michael Genovese: Okay. So my question is about the Spirent business. Right?
Ilan Daskal: Yes. Yes. Yes.
Michael Genovese: And so my question has to do with, you know, does that change on higher revenue or any other reason kind of bring accretion date, you know, sooner than twelve months? Or are we still thinking twelve months before it becomes accretive?
Ilan Daskal: So it depends also on seasonality. Remember that their stronger half is on the second calendar half. So that's the reason that this quarter we see some positive EPS. Most likely in the first calendar half, it's a little bit softer. But when you think about it from a full calendar year, yes, it's slightly higher. But when you compare it to our fiscal year, the dynamic changes a little bit.
Oleg Khaykin: Yeah. But, you know, that's not clearly higher revenue makes the accretion sooner rather than later.
Michael Genovese: And then I, you know, I think most of my questions were asked, but I just want to ask specifically on large service providers like AT&T, Verizon, or the cable companies if we look at the wireline part of the network, you know, we heard weak wireless from you on that, but and then it sounds like a lot of the optical activity is being done by optical specialists. Is there anything to say about the Tier one large cable and telco on the wireline side? Is there any trend there that you can call?
Oleg Khaykin: So, yeah, I would say gradual recovery. I mean, fiber is growing. But, you know, but, you know, and we do know there's gonna be some big RFPs coming out from major cable operators and the service providers. And it's more with I'm now look when I look at the fiber are now starting to segment them into professional grade fiber operators and kinda consumer grade. AT&T is more of consumer grade. So they just continue, like, you know, keep talking about adding a lot of fiber. Customers. And that actually is great news to us. And I just wanna hear when I see the money, I'll believe it.
I mean, they did make some pretty bullish announcements, and we do think next year, there will be accelerating some buying. So it all plays very well. But then there is also this whole category of what I call professional grade fiber operators. Emerging companies like Lumen, there's similar companies in Europe who all they focus on is interconnecting all these data centers. And I'd say the next one will be how do you connect them all to the wireless basebands I mean, base stations, you know, to the towers. Because you now need to bring a reliable 10 gig, 100 gig traffic to the, all the towers.
So we do expect the combination between the traditional and these, you know, the professional grade fiber operators continue to grow nicely into next year. But even the, you know, so I'd say, you know, take as the base, you know, the base business, the traditional service providers, it's all goodness because it's a high tide that raises all the boats. So we call it we kinda call it as a base business. And all these other, you know, companies, they call them speedboats. So it's your profession grade fiber operators, the semis, modules, NAMs, these are all kind of speedboats that are growing much faster than the overall market.
But, I mean, it is encouraging to see even the your base, you know, service providers starting to spend more money.
Michael Genovese: Alright. Great. Thanks for the color.
Operator: Your next question comes from the line of Andrew Spinola of UBS. Your line is open.
Andrew Spinola: Thank you. Just one for me. If you could provide a little bit more color on the business the Spirent business that you acquired. With the margin profile on that business consistent with the overall business? Was it better or worse? When I'm thinking about modeling that, post the twelve months when it turns accretive, do you think you can drive the margin in that acquired business in line maybe your targeted 20% for NSE? Or do you think you can do better? How should I think about that?
Oleg Khaykin: Well, so I think this that business is both higher gross margin than the average NSE and it's higher operating profit than average NSE. So it's net accretive, and I do believe that through, you know, integration and, a greater efficiency, we can actually expand their margins, further. And I think we do have a I think on cost of goods, we should be doing a lot better because we have now greater scale in the parts procurement and greater leverage of engineering and sales resources.
Ilan Daskal: And we'll just yeah. Specifically on the gross margin, we see things, you know, from the mid to high sixties, which is, as Oleg mentioned, definitely above our corporate average. So it's a nice contribution there.
Andrew Spinola: Got it. And is that business seeing the same acceleration that you're seeing in the rest of your data center business?
Oleg Khaykin: Yes. Well, I mean, probably not the same percentage because it's a much bigger from a much bigger base. But, absolutely, they have a very, exciting product called, there's a traditional HSE high-speed Ethernet test that you, you know, sell to chip companies via modules and systems. And enterprise data centers. And then there's a whole different flavor called AI HSE, which test generates AI workloads so you can test your network on how good it is to run the AI traffic and, AI data. So that is that piece is growing even faster.
Andrew Spinola: I see. And wanted to ask one last question actually on the data center business. I'm trying to think about that business in terms of units versus what other growth drivers you might have? So how much of that business is so if the number of switches being produced is doubling, tripling, what have you, how does that translate to benefits for you? Are you seeing most of your growth because of the growth in units in these products? Or is it that there's just a lot more investment in R&D new SKUs, new players in the space? How should I think of that?
Oleg Khaykin: It's a combination. So when we talk about sales to the lab, we I. To the R&D equipment, it's number of companies, number of projects, number of chips. And remember, I also said the very fast product churn cycle. Right? Like, every two, three years next generation, so that drives the more like the lab sales are driven by projects. Right? So it's number of companies, number of projects, and how quickly one generation transitions to the next. And when we talk about production, that is driven purely by units. So the more units you're producing, the more you're shipping, the more you need to buy to set up more production lines.
So this is more like you think about contract manufacturers, the more lines they add, the more equipment they need to buy.
Andrew Spinola: What's the split in your business between unit-driven business versus project-driven business on the data center side? Roughly?
Oleg Khaykin: You know, I we don't really split it. That's, you know, dicing it very thin. Because it's effectively the same product, the same technology, batched into different boxes.
Andrew Spinola: Got it. Thank you very much.
Operator: Sure. Thank you. Your next question comes from the line of Tim Savageaux of Northland Capital. Your line is open.
Tim Savageaux: Hey, good afternoon and congrats on the results and the guide. And I want to focus in on there in particular. First, on Spirent, you mentioned a larger base. Interested in what context you meant that. But it sounds like given what you're guiding to, and I don't know if you're 50, 30, 20 going to 45, 40, 15, I'll just assume that's fiscal '25 versus fiscal '26. But seems like Spirent's got to be well above 50% exposed to data center.
Oleg Khaykin: Yeah. So what I Is that fair to say?
Tim Savageaux: Go.
Oleg Khaykin: Yeah. So, I mean, the percentage you gave, that's exiting this calendar year. It's like exiting December. The mix, now the new Spirent business. Now in terms of their exposure, I would say if I define the data center ecosystem, I mean, the lion's share of their business is data center ecosystem. But they also have, you know, enterprise, an enterprise data center. So I mean, I thought when I say data center ecosystem, it's chips, modules, systems, and hyperscalers. They also have the enterprise, like, say, financial insurance and other companies where they test their own firewalls and things like that. So that's a I'll say probably, like, an 80-20 split probably.
Tim Savageaux: Okay. Yep. That makes sense. And looking at the organic guide, which is still, you know, pretty impressive, I guess, you know, 310 to 320, and understanding you're getting a healthier Spirent contribution despite the shortened time period. You know? And you explained that. But as you look at that, and asked this a little bit before, but we've seen some pretty good numbers in terms of what some of the big U.S. carriers are looking to spend in Q4. I might have looked at that organic number and thought an old-fashioned budget flush, apparently not. It doesn't look like you're building much in there. Am I right?
For the traditional tier one telecom providers, are you looking at that to be flat?
Oleg Khaykin: Q3 and Q4? No. There are some, for traditional.
Tim Savageaux: Right. Sorry.
Oleg Khaykin: So for the traditional sorry. Yes, Kevin. So for traditional, there is some incremental growth, but I mean, I won't say budget flush. I mean, the incremental demand is coming from what I call the professional grade kinda tier two, tier three focus players. I mean, you can call it budget flash. You can call it but I think their stuff is driven by projects that they and contracts that they signed with hyperscalers. And what we are seeing now increasingly I mean, what we used to call, you know, you'd have field instruments where we would sell 90 plus percent to service providers.
We're now seeing, you know, like, a quarter up to a third of revenue is going into the whole data center driven, service provider ecosystem.
Tim Savageaux: Okay. So you look at that organic growth going on September to December? All the
Oleg Khaykin: Yeah. So we all seen the Verizon AT&T saying that next year, they're gonna expand, you know, hey. If that happens, that will be just like a further, tide that will raise all the boats.
Tim Savageaux: Got it. It looks like anything that happened with the tier one You know?
Ilan Daskal: Team, you know, for we're not guiding for March, but it's not that we see anything, you know, materially different, you know, going into March.
Oleg Khaykin: So, you know, I mean, the one the only thing I say about tier ones every quarter percent drop in interest rate frees up an awful lot of cash. For them to do things, and there's a lot of pent-up demand. I mean, basically, it's like they've been sweating the assets for the last three to four years. And, you know, a lot you know, these things, like anything else, it wears out. It needs to be updated. And so I do think, as they get they're getting a little bit they're feeling better and more comfortable with the debt load, the interest load. And, you know, I mean, they all been sending all the right signals.
So that's actually quite encouraging, and that's a positive thing for us. Would be further I would say, accelerator or a boost to the overall demand.
Tim Savageaux: Great. Congrats again.
Operator: That concludes our Q&A session. I'll now turn the conference back over to Vibhuti for closing remarks.
Vibhuti Nayar: Thank you, JL. This concludes our earnings call for today. Thank you for joining. Have a good evening.
Operator: This concludes today's conference call. You may now disconnect.