Executive Summary / Key Takeaways

• VIAVI Solutions operates at the intersection of network testing, monitoring, and optical technologies, strategically positioning itself to capitalize on secular trends like 5G, fiber build-outs, AI-driven data centers, and Positioning, Navigation, and Timing (PNT) for aerospace and defense.
• Despite a challenging period marked by conservative service provider spending, particularly in North America, the company is observing signs of gradual market recovery, anticipating improved demand in the first half of calendar year 2025.
• Recent performance in Q3 FY25 showed revenue growth of 15.8% year-over-year to $284.8 million, with operating margin expanding significantly to 16.7%, driven by higher volume and favorable product mix, exceeding guidance expectations.
• Strategic acquisitions, including Inertial Labs (PNT) and the planned acquisition of Spirent's high-speed Ethernet and network security business, are key to diversifying revenue streams and extending technological leadership in high-growth adjacent markets.
• Technological differentiation in high-speed Ethernet testing (up to 1.6 Tb/s), resilient PNT solutions, and fiber monitoring systems provides a competitive edge, particularly as data center and defense spending accelerates, although near-term risks like tariffs and continued telecom spending caution temper the outlook.

Setting the Scene: A Communications and Optical Technology Player Adapting to Evolving Markets

Viavi Solutions Inc., tracing its origins back to 1923 as JDS Uniphase, has long been a fixture in the communications and optical technology landscape. Today, the company operates through three distinct segments: Network Enablement (NE), Service Enablement (SE), and Optical Security and Performance Products (OSP). This structure reflects Viavi's strategic evolution, moving from a broad optical components provider to a focused player in network test, monitoring, and assurance, complemented by specialized optical technologies.

The company's overarching strategy is built on several pillars: defending and consolidating its leadership in core network testing markets, investing in secular growth trends like 5G and fiber, extending its technological capabilities into adjacent high-growth markets, and continuously improving operational efficiency. This strategy has been particularly critical in recent years, as the telecom industry has experienced significant shifts in spending patterns. Fiscal years 2023 and 2024 were notably challenging, characterized by a conservative spending environment among major service providers and network equipment manufacturers (NEMs), especially in North America, which weighed heavily on the NE segment. In response, Viavi has not only implemented restructuring plans to streamline operations but has also aggressively pursued strategic acquisitions and internal R&D to pivot towards more resilient and higher-growth opportunities.

A cornerstone of Viavi's competitive positioning lies in its technological differentiation. In network testing, the company offers advanced solutions for fiber, wireless, and high-speed Ethernet. Its Fiber Lab and Production tools are critical for the development and manufacturing of high-bandwidth optical components and systems, now increasingly driven by the demands of AI and data centers. Viavi has been at the forefront, launching the industry's first electrical 1.6 terabits per second (Tb/s) high-speed Ethernet testing solution, capable of 212G/lane testing. This technology provides tangible benefits in enabling faster validation and production of next-generation networking gear, crucial for hyperscalers and equipment vendors pushing the boundaries of data throughput. The company's R&D efforts in this area aim to support the rapid two-to-three-year technology cycles now prevalent in datacom, a significant acceleration compared to the previous six-year cycles driven by telecom.

Beyond raw speed, Viavi's expertise extends to network assurance and monitoring. Its field instruments and fiber monitoring systems provide essential visibility into network performance and health, enabling service providers and increasingly hyperscalers to ensure quality of service. The recently launched EdgeGM™ 7000, an Edge Grandmaster Clock, enhances the SecurePNT™ portfolio by offering up to 25G Precision Time Protocol (PTP) and multi-orbit altGNSS resiliency, exceeding Level 4 PNT resiliency standards. This technology is vital for critical infrastructure relying on accurate and resilient timing, addressing growing concerns about GPS/GNSS jamming and spoofing.

In the OSP segment, Viavi leverages its core optical coating technologies. While known for anti-counterfeiting applications, the segment also serves consumer electronics (3D sensing), industrial, government, and aerospace markets. The company's precision thin film optical coatings were notably used in a precision order sorting filter for NASA's Europa Clipper Mission, highlighting its advanced capabilities in specialized optical components.

Competitively, Viavi operates in markets with established players like Keysight Technologies (KEYS) and Spirent Communications (SPT) in network testing, and various semiconductor and optical component manufacturers like Skywater Technology (SKYT) and others in the OSP space. Indirect competition comes from SaaS monitoring solutions and emerging AI-driven analytics platforms. Viavi's technological edge in specific areas like high-speed optical testing and resilient PNT provides a competitive moat. For instance, its embedded systems can offer faster data analysis, potentially leading to better operational efficiency for customers compared to some rivals. However, larger competitors like Keysight benefit from greater scale and often exhibit higher profitability margins (Keysight's TTM operating margin is 17% vs. Viavi's 4.87%), which can fuel larger R&D budgets. Viavi's financial health, particularly its debt levels (Debt/Equity TTM of 0.88), also presents a vulnerability compared to competitors with lower leverage profiles like Esco Technologies (ESE) (Debt/Equity 0.13) or Keysight (Debt/Equity 0.40). The company's strategic response involves focusing its R&D on high-impact, high-growth areas and leveraging M&A to quickly build scale and capability in targeted adjacent markets like PNT.

Recent Performance and Financial Health: Navigating Towards Recovery

Viavi's financial performance in the most recent quarter, Q3 fiscal year 2025, showed promising signs of improvement, exceeding management's guidance ranges. Net revenue for the quarter reached $284.8 million, an increase of 15.8% compared to $246.0 million in the same period last year. This rebound was a significant positive, particularly following a challenging Q1 FY25 where revenue had declined year-over-year.

The NE segment was a primary driver of this growth, with revenue increasing by 22.6% year-over-year to $208.2 million. This reflected a recovery and growth across many product areas, notably strong demand from NEMs for fiber lab and production products (NE revenue specifically up 23.9% YoY to $188.0 million). The OSP segment also contributed positively, with revenue slightly improving by 0.5% year-over-year to $76.6 million, as strength in anti-counterfeiting and other products helped offset seasonal weakness in 3D sensing.

Profitability also saw a notable improvement. GAAP operating income for Q3 FY25 was $8.5 million, compared to a loss of $11.9 million in the prior year quarter. On a non-GAAP basis, operating margin reached 16.7%, a significant increase from 9.3% in Q3 FY24, and above the high end of the company's guidance range. This margin expansion was primarily attributed to higher volume and a favorable product mix, particularly within the NE segment where gross margin increased by 1.9 percentage points year-over-year to 63.4%. OSP gross margin also improved by 1.5 percentage points to 51.6%. The income tax benefit of $16.3 million in Q3 FY25 included a $25.9 million release of a valuation allowance related to the Inertial Labs acquisition, impacting net income positively.

For the nine months ended March 29, 2025, total net revenue was $793.8 million, up 6.1% from $748.4 million in the prior year period. GAAP net income for the nine months was $26.8 million, a substantial improvement from $4.1 million in the same period last year. Non-GAAP net income for the nine months was $75.7 million, or $0.34 per diluted share, compared to $56.4 million, or $0.25 per diluted share, in the prior year period.

Financially, Viavi maintains a degree of liquidity. As of March 29, 2025, cash and cash equivalents totaled $374.2 million, with total current assets of $835.4 million. This compares to total current liabilities of $544.7 million, resulting in a current ratio of approximately 1.53. The cash balance decreased from $471.3 million at June 29, 2024, primarily due to the cash payment for the Inertial Labs acquisition ($117.9 million net of acquired cash). Total debt stood at a net carrying value of $640.9 million ($244.8 million short-term, $396.1 million long-term) as of March 29, 2025. While this debt level is notable, the company had no borrowings under its $300 million revolving credit facility and approximately $165.6 million in available borrowing capacity, providing some financial flexibility. Cash flow from operating activities for the nine months ended March 29, 2025, was $66.0 million, compared to $90.2 million in the prior year period, with the decrease largely attributed to changes in operating assets and liabilities related to the Inertial Labs acquisition.

Compared to competitors, Viavi's TTM gross profit margin of 57.55% is competitive with Spirent (50-55% range) but lags Keysight (60-65% range). Operating margin (TTM 4.87%) also lags Keysight significantly (17% TTM) and is closer to Spirent (10-12% range historically, though recent SPT data shows negative operating margin). Viavi's Debt/Equity ratio (TTM 0.88) is higher than ESE (0.13) and Keysight (0.40), indicating a more leveraged balance sheet. This financial positioning underscores the importance of achieving anticipated cost savings from restructuring and successfully integrating acquisitions to drive margin expansion and improve financial resilience relative to peers.

Segment Dynamics and Strategic Initiatives Driving Future Growth

Viavi's three segments are responding differently to the current market environment and strategic pushes:

Network Enablement (NE): This segment is the core of Viavi's network testing business and is highly sensitive to service provider and NEM spending. While the past couple of years saw conservative spending, particularly in North America, management is observing signs of stabilization and anticipated a gradual recovery starting in the first half of calendar 2025 (second half of FY25). This recovery is expected to be driven by:

• Field Instruments: A pickup in demand is anticipated in the second half of FY25, linked to renewed fiber build-out and upgrade plans by service providers (including Tier 2 players and recent comments from majors like AT&T (T)) and the growing adoption of fiber monitoring systems by hyperscalers.
• Wireless: Signs of stabilization and "greenshoots" are appearing, driven by the resumption of 5G deployment in North America, specifically the acceleration of 4G to 5G spectrum conversion, which offers significant cost efficiencies (90-80% drop in cost per bit). Management expects recovery to start in the first half of calendar 2025, potentially earlier than previously thought. The emergence of new customers in ORAN development is a positive, though current spend is small.
• Fiber Lab and Production: This area is a significant growth driver, fueled by the AI and data center ecosystem. Demand for 800G and the recently launched 1.6 Tb/s high-speed Ethernet products is strong. The transition to higher speeds is now primarily driven by data centers, occurring at a much faster pace (2-3 year cycles) than previous telecom-led transitions. This business is expected to see significant growth through FY25.
• Mil/Aero: This segment, including Positioning, Navigation, and Timing (PNT), continues its robust year-on-year growth. The acquisition of Inertial Labs in January 2025 for approximately $134.4 million cash at closing (plus up to $175 million contingent consideration) significantly bolstered Viavi's PNT capabilities, adding positioning and navigation to its existing timing expertise (from the Jackson Labs acquisition). This business is characterized by a design win model, offering a potentially lower cost of growing revenue and profitability compared to the traditional test business, and is expected to be a strong multiyear growth driver, particularly in areas like drones and anti-spoofing/jamming.

Service Enablement (SE): This segment provides embedded systems and software for network and service assurance. While impacted by conservative enterprise spending, particularly in core products, there are areas of anticipated growth:

• AI OPS: Management sees significant interest in its AI OPS products, expecting this to be a major growth driver for FY25 and beyond, potentially reaching a quarterly run rate "comfortably in the 20s" next year.
• Private Networks: The business for mission-critical private networks is performing well and showing strong momentum in business development and orders.

Optical Security and Performance Products (OSP): This segment leverages Viavi's optical coating expertise.

• Anti-Counterfeiting: Demand is starting to rebound as channel inventories built during COVID are consumed. While near-term demand may be softer due to currency redesigns and sanctions (impacting approximately $7-8 million in annual revenue), a rebound to the traditional run rate is expected as old inventory cycles through. This recovery is crucial for improving OSP's operating margin by driving better manufacturing asset absorption.
• 3D Sensing: This market is largely saturated and driven by a single anchor customer, following seasonal patterns (stronger in the first half of the fiscal year). Early, albeit small-volume, adoption by Android players in China could be a significant positive if it becomes a major trend.

Strategically, Viavi is also pursuing significant M&A. The agreement to acquire Spirent Communications plc's high-speed Ethernet and network security business lines from Keysight for $410 million (plus $15 million contingent) is expected to close by July 31, 2025, pending regulatory approvals. This acquisition is intended to add complementary and synergistic products, further strengthening Viavi's position in high-speed Ethernet, security, AI, and digital infrastructure verticals. The company plans to finance this with additional debt but aims to maintain financial discipline, targeting less than 4x gross leverage and well below 3x net leverage long-term.

Operational efficiency is also a focus, with the Fiscal 2024 Plan expected to yield approximately $25 million in annualized gross cost savings, primarily benefiting operating expenses, by the end of fiscal 2025.

Outlook, Guidance, and Key Risks

Viavi's guidance for the fourth fiscal quarter of 2025 reflects a cautious stance despite underlying positive momentum. Management expects revenue in the range of $278 million to $290 million, approximately flat sequentially compared to the strong Q3 FY25. This is below typical seasonal expectations for a stronger Q4, attributed to a "prudent outlook" due to recently imposed U.S. tariffs. The guidance explicitly includes an estimated $3 million impact from absorbed tariffs on already booked orders, expected to be dilutive to gross margin and negatively impact EPS by approximately $0.01. While the company plans to pass on costs prospectively and can realign its supply chain within six months to mitigate future tariff impact if conditions stabilize, the near-term uncertainty warrants caution.

Q4 FY25 guidance projects an operating margin of 13.5% (plus or minus 1%) and EPS between $0.10 and $0.13. NSE revenue is expected to be around $208 million (plus or minus $5 million) with an operating margin of 5% (plus or minus 1%). OSP revenue is expected to be around $76 million (plus or minus $1 million) with an operating margin of 37% (plus or minus 1%).

Looking further ahead, management anticipates the conservative spend environment to persist through the remainder of calendar 2024 but expects a gradual demand recovery to begin in the first half of calendar 2025 (second half of FY25). This recovery is expected to be driven by the factors discussed above, particularly the momentum in Fiber Lab/Production, Mil/Aero, and the anticipated pickup in Field Instruments and Wireless. Fiscal 2025 OSP demand is expected to be similar to fiscal 2024 overall, with anti-counterfeiting stabilization offsetting 3D sensing seasonality.

However, several key risks could impact this outlook:

• Market Uncertainty & Spending Delays: The timing and extent of service provider and NEM spending recovery remain uncertain, potentially leading to delays or reductions in orders, as highlighted by the tariff situation.
• Geopolitical Tensions & Tariffs: Ongoing conflicts and trade tensions (especially US-China) can disrupt supply chains, increase costs, and restrict market access, directly impacting revenue and margins.
• Competition: Intense competition, particularly from larger, more resourced players like Keysight and increasingly agile competitors from Asia, can exert pricing pressure and challenge market share gains. The move to virtualized networks and software solutions could also lower barriers to entry and increase competition.
• Technological Change: The rapid pace of technological evolution requires continuous R&D investment, and failure to keep pace or execute new product introductions effectively could lead to lost opportunities and declining demand for legacy products.
• Acquisition Integration: Risks associated with integrating acquired businesses (Inertial Labs, Spirent's business) include failure to achieve expected synergies, retain key employees, or manage contingent consideration liabilities.
• Customer Concentration: Reliance on a limited number of large customers exposes Viavi to significant risk if any single customer reduces orders or exerts excessive pricing pressure.
• Debt Levels: The company's outstanding indebtedness could limit financial flexibility and increase vulnerability during market downturns or if cash flow generation falters.

These risks are particularly pertinent in the competitive landscape. Viavi's debt level, for instance, could constrain its ability to invest as aggressively in R&D or M&A as less leveraged competitors like Keysight or ESE. Pricing pressure from Asia-based competitors directly challenges Viavi's margins, requiring successful execution of cost-saving initiatives and leveraging technological advantages to justify price points. The ability to successfully integrate acquisitions and realize synergies is critical to building scale and diversifying revenue streams, reducing reliance on volatile core markets where larger competitors may have deeper pockets.

Conclusion

Viavi Solutions is navigating a complex market landscape, emerging from a period of conservative spending with signs of gradual recovery. The company's strategic focus on high-growth secular trends, particularly in AI-driven data centers, PNT for aerospace and defense, and the eventual recovery in 5G and fiber build-outs, positions it for potential growth. Technological leadership in areas like 1.6 Tb/s testing and resilient PNT solutions provides a competitive edge against both traditional and emerging rivals.

While recent financial performance shows promising margin expansion and revenue growth, the near-term outlook remains tempered by macroeconomic uncertainty and specific factors like the impact of tariffs on customer order timing. The company's balance sheet, while supporting strategic M&A, carries notable debt that requires careful management and successful execution of cost-saving initiatives. The core investment thesis hinges on Viavi's ability to capitalize on the accelerating demand in its targeted growth markets, successfully integrate its recent acquisitions to build scale and diversify, and leverage its technological differentiators to maintain competitive relevance as traditional telecom markets evolve and new competitive pressures emerge. Investors should monitor the pace of market recovery, the successful integration and performance of acquired businesses, and the company's ability to manage its debt and mitigate external risks like tariffs.