VIAVI SOLUTIONS INC. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Net revenue for the quarter was $270.8 million, above the high end of the guidance range of $255 million to $265 million. Operating margin was 14.9%, significantly above the guidance range. EPS was $0.13, above the high end of the guidance range.
• NSE revenue was at the high end of its guidance range, driven by strong order pace from service providers and NEMs for field instruments and recovery across product segments. NE revenue was up year-over-year due to strong demand for lab and field instruments.
• Acquired Inertial Labs, strengthening VIAVI's position in the PNT space. Expanded PNT portfolio positions well in high growth markets like alternative navigation and autonomous vehicles.
• OSP revenue was below guidance due to weaker demand for 3D sensing products. OSP gross margin and operating margin were down year-over-year due to lower volume and product mix.

Segment Performance

• NSE: Net revenue for the second fiscal quarter was $199.9 million, at the high end of the guidance range ($184 million to $192 million). Year-over-year, NSE revenue was up 11.3%. NSE gross margin was 64.8%, 140 basis points higher year-over-year. NSE's operating margin was 8.7%, a 510 basis points increase year-over-year, significantly above the guidance range of 3.8% to 5.8%.
• NE: Revenue for the quarter was $179 million, up 15.1% year-over-year. NE gross margin was 64.5%, an increase of 200 basis points from the same period last year due to higher volume and product mix.
• SE: Revenue was $20.9 million, down 13.3% from the same period last year, driven mainly by enterprise customers' conservative spend. SE gross margin was 67.5%, a decrease of 140 basis points from the same period last year due to lower revenue.
• OSP: Revenue for the second fiscal quarter was $70.9 million, slightly below the low end of the guidance range ($71 million to $73 million). Year-over-year, revenue was down 5.3%, primarily due to weaker demand for 3D sensing products. OSP gross margin was 50.6%, down 150 basis points from the same period last year. OSP's operating margin was 32.4%, a decrease of 400 basis points year-over-year as a result of low gross margin fall through.

Guidance

• For the third fiscal quarter of 2025, expected revenue in the range of $276 million to $288 million. Operating margin is expected to be about 14% ± 100 basis points, and EPS to be between $0.10 and $0.13.
• NSE expected to be approximately $207 million ± $5 million, with an operating margin of 7% ± 100 basis points, including a high single digit million from Inertial Labs.
• OSP revenue is expected to be approximately $75 million ± $1 million, with an operating margin of 33% ± 100 basis points.
• Tax expenses for the third quarter are expected to be around $9 million ± $500,000. Other income and expenses expected to reflect a higher net expense of approximately $4.2 million. Share count expected to be around 226.1 million shares.

Risks

• Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from expectations.
• OSP's 3D sensing products face weaker demand, and inventory management issues with anti-counterfeiting products could impact performance.
• Uncertainties in the timing and extent of recovery in certain segments like SE due to enterprise customer spend conservatism.

Question and Answer

• Q: Ruben Roy asked about fiber monitoring, specifically if it's mostly telco service providers or hyperscalers. A: Oleg Khaykin responded it's a combination of telcos (building out fiber networks) and hyperscalers (putting sophisticated fiber monitoring interfaces in data centers to monitor connectivity).
• Q: Andrew Spinola inquired about the upside in the quarter and contribution from SE vs secular growth drivers. A: Oleg Khaykin said a third to a half came from service provider recovery, with gradual recovery in wireless and growth in fiber lab and production segments.
• Q: Ryan Koontz asked about wireless rebound and how it's driven. A: Oleg Khaykin said it correlates with operators restarting 5G deployment, with placement of field instruments indicating plans for major 5G deployment restart, driven by cost considerations like reclassifying 4G spectrum to 5G.
• Q: Tim Savageaux asked about carrier strength in North America and Europe. A: Oleg Khaykin mentioned North America has strong fiber monitoring from hyperscalers and early stages of deployment, while Europe is strong with NEMs but recovery in wireless and fiber fields expected to pick up later.