VIAV

Good afternoon. My name is Hillary, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Viavi Solutions fiscal third quarter 2026 earnings call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please type star one on your telephone keypad to raise your hand. At this time, I would like to turn the conference over to Vibhuti Nayar, Head of Investor Relations. Please go ahead.

Thank you, Hillary. Good afternoon, everyone, and welcome to Viavi Solutions fiscal third quarter 2026 earnings call. My name is Vibhuti Nayar, Head of Investor Relations for Viavi Solutions. With me on today's call is 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. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations and estimations. We encourage you to review our most recent annual report and SEC filings, particularly the risk factors described in those filings. The forward-looking statements, including the guidance that we provide during this call and our expectations regarding the end markets and acquired business, are valid only as of today. Viavi undertakes no obligation to update these statements.

Please also note that unless we state otherwise, all results discussed on today's 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'll make the recording available on our website by 4:30 P.M. Pacific Time this evening. With that, I would like to now turn the call over to Ilan. Ilan.

Thank you, Vibhuti. Good afternoon, everyone. Now I would like to review the results of the third quarter of fiscal year 2026. Net revenue for the quarter was $406.8 million, which is above the high end of our guidance range of $386 million and $400 million. Revenue was up 10.2% sequentially, and on a year-over-year basis was up 42.8%. Operating margin for the third fiscal quarter was 21%, above the high end of our guidance range of 19.2% and 20.2%. Operating margin increased 170 basis points from the prior quarter, and on a year-over-year basis was up 430 basis points.

EPS at $0.27 was also above the high end of our guidance range of $0.22-$0.24 and was up $0.05 sequentially. On a year-over-year basis, EPS was up $0.12. Moving on to our Q3 results by business segment. NSE revenue for the third fiscal quarter came in at $321.5 million, which is above the high end of our guidance range of $304 million and $316 million. Revenue from Spirent product lines was $54.2 million, which was in line with our expectations and included few opportunities that were pushed out from the prior quarter. On a year-over-year basis, NSE revenue was up 54.4%, primarily driven by the acquisition of Spirent product lines.

We also saw strong demand for our lab and production and field products driven by the data center ecosystem, as well as for our aerospace and defense products. NSE gross margin for the quarter was 65.3%, which is 220 basis points higher on a year-over-year basis and was primarily driven by higher volume and favorable product mix. NSE's operating margin for the quarter was 17.2%, an increase of 680 basis points on a year-over-year basis. NSE's operating margin was also above the high end of our guidance range of 15%-16% as a result of a higher fall-through. OSP revenue for the third fiscal quarter came in at $85.3 million, also above our guidance range of $82 million-$84 million.

On a year-over-year basis, OSP revenue was up 11.4%, primarily driven by strong demand for 3D sensing and anti-counterfeiting and other products. OSP gross margin was 50.3%, down 130 basis points on a year-over-year basis, and it was mainly due to unfavorable product mix. OSP's operating margin was 35.3%, an increase of 140 basis points on a year-over-year basis. OSP's operating margin was in line with our guidance range of 34.8%-35.8%. Moving on to the balance sheet and cash flow. Total cash and short-term investments at the end of Q3 were $508 million compared to $772.1 million in the second quarter of FY 2026.

Cash flow from operating activities for the quarter was a use of $26.3 million versus $7.8 million that we generated in the same period last year. The cash flow was mainly impacted by the earn out payments to Inertial Labs, timing of working capital, and employee variable costs. CapEx for the quarter was $5.9 million versus $6.8 million in the same period last year. During the quarter, we successfully paid $49 million in cash for the remaining principal of the convertible notes due in March 2026, and we issued about 1.8 million shares for the conversion premium above par. We also prepaid during the quarter $150 million of the Term Loan B. We currently have $450 million remaining for that loan.

The prepayment is in line with our capital allocation priorities. During the quarter, we did not purchase any shares of our stock as we prioritized our capital allocation towards debt management. The fully diluted share count for the quarter was 249.5 million shares, up from 226.9 million shares in the prior year, and versus 245 million shares in our guidance for the third fiscal quarter. Moving on to our guidance for the fourth quarter of fiscal 2026. We expect the fourth fiscal quarter revenue for Viavi to be up sequentially, driven by continued strength in many of our end markets across NSE and OSP.

For NSE, we expect quarter-over-quarter revenue to be higher as a result of continued strong demand for our lab and production and field products driven by the data center ecosystem, as well as for our aerospace and defense products. For OSP, we expect quarter-over-quarter revenue to be higher, driven by strength in across all of the product lines. For the fourth fiscal quarter of 2026, we expect Viavi revenue in the range of $427 million and $437 million. We expect NSE revenue between $340 million and $348 million. OSP revenue is expected to be in the range of $87 million and $89 million. Operating margin for Viavi is expected to be 22.7% ±50 basis points. NSE operating margin is expected to be 18.7% ±50 basis points.

OSP operating margin is expected to be 38.4% ±40 basis points. EPS is expected to be between $0.29 and $0.31. Our tax expenses for the fourth quarter is expected to be about $10 million ±$500,000 as a result of jurisdictional mix. We expect other income and expense to reflect a net expense of approximately $12 million, and the share count is expected to be around 256 million shares. With that, I will turn the call over to Oleg. Oleg?

Thank you, Ilan. The results of the third quarter of fiscal 2026 exceeded our expectations and came in above the high end of our guidance. The strong year-on-year and quarter-on-quarter performance was driven by strong growth in many of our end markets. NSE revenue in Q3 grew approximately 54% year-over-year, primarily driven by strong demand from the data center ecosystem and the aerospace and defense customers. The data center ecosystem, which includes high-performance semis, optical modules, NEMs, and hyperscalers, drove strong demand for lab and production and field instruments in support of AI data center build-out. We are seeing strong demand across all data center segments, scale up, scale out, and scale across. Acceleration of industry investment in ever greater communication speeds and chip-to-chip interconnect technologies are the principal drivers of strong demand for our optical transport, silicon photonics, and communication protocol and high-speed Ethernet test equipment.

The Q3 growth was also helped by recently acquired Spirent high-speed Ethernet product lines, which gave us access to a large installed base of enterprise customers. HSE performance came in line with our expectations. Given strong and growing customer demand, we expect the data center ecosystem revenue momentum to continue through the calendar 2026. Our aerospace and defense business also saw another strong quarter-on-quarter growth, driven by continued growth demand for our positioning, navigation, and timing products. We expect this trend to continue through the calendar year. The Service Provider Business, which includes field instruments, wireless, and service enablement, was in line with seasonality. As you may recall, the Service Provider Business is seasonally weaker during the March and September quarters and seasonally stronger during the June and December quarters.

Some notable on the service providers, dynamics during the March quarter included early orders from cable operators, relating to the new DAA architecture and continued weak but stable demand for wireless test products. We do not expect recovery and growth in the near term for wireless business. Now, turning to OSP. OSP saw strong year-on-year growth driven by strong demand for 3D sensing and anti-counterfeiting products. Looking ahead to Q4, we expect NSE revenue to be up quarter-on-quarter, driven by continuous strong and growing demand from the data center and aerospace and defense customers and seasonally stronger service provider spend. We expect OSP to be up also quarter-on-quarter, driven by strength across all product lines. In conclusion, we expect our data center and aerospace and defense end markets to be strong drivers for the foreseeable future.

I would like to thank the Viavi team for its 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.

Thank you. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, please press star one again. If 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.

Great. Thank you. Hi, Oleg and Ilan. Congrats on the momentum here in the business. I guess to start, Oleg, maybe we could just drill into the data center momentum and if you think about sort of the first half of the year and what you're seeing here with the beat in the March quarter and the guidance for June. Can you detail out, you know, sort of a little more detail around the drivers by production field and, you know, just kind of what you're seeing in terms of visibility from your customers.

Obviously a lot going on with AI infrastructure networks and that type of thing, but just trying to get to a little more detail around lab production and field and how you see that, you know, sort of trending from here as you look ahead.

Sure. Well, I mean, the, you know, on the lab side, it's your classical, you know, optical transport and PCIe express test products. As you develop all these new AI chips for inference or the training, it requires, as you can imagine, very high speeds for all the ports and the overall traffic. I mean, everybody who is working on any kind of product out there that's gonna go into these next generation systems, be it for AI training or AI inference, is buying our optical transport and our protocol test solutions. That's primarily lab, but also exactly same equipment is being bought by NEMs for building optical switches and all the other gear that goes into the systems. That's kind of on the lab side.

On the production, we are seeing a lot of momentum on this whole co-packaged optics area, and that plays extremely well to the traditional Viavi strength with the, you know, the old JDS Uniphase products that go into the production line where you are measuring a spectral performance, the optical performance of all the various optics. It's also, we are selling now a lot of that equipment to the semiconductor vendors as they develop their integrated packaged optics solution. I mean, it's pretty much everything we do in that, in that area relating to the advanced silicon for both training and inference applications and all the optical gear that goes into the data centers is playing and perfectly aligned to our portfolio.

Now, on the field instrumentation side, as all these data centers come up, they are putting a lot of investment into ensuring peak performance. I tell you, I mean, I've never seen so much demand for our fiber monitoring solutions. I mean, I'd say these data centers are buying more equipment than regular service providers for the whole big network. That is obviously driving the whole field instrument side of the business. I mean, it's now approaching close to, I'd say 40%, 45%, pretty soon, probably maybe 50% of the field instruments is actually driven by the data center. In that respect, it's a very good alignment between what the market needs and what we actually have.

That's great detail. Thanks, Oleg. I guess for a follow-up on that, you had started to see some hyperscaler activity around 800G, I would assume last year. Some of these things that you're talking about in answer to the question and on the call today, things like 1.6T co-packaged optics.

They're actually just starting, it seems like. Is that the right way to think about it? I guess the question for that is.

Well, I mean, you know, Go ahead.

I was just gonna ask, the question, it would be, you know, sort of in terms of your mix here, you know, is it I would assume it's still more weighted towards some of the older generation technology, or is that the wrong way to think about it? You know, kinda how do you think 1.6T and some of these new products layer in, I guess, is the question.

Yeah. It's all. I mean, the 800G is still very much a high volume driver. A lot of the new development is using our 1.6T. By the way, we released 1.6T a year and a half ago. You just see. Actually, ironically, it was initially the NEMs, the optical equipment vendors who deployed it first in development, and now it's spreading to the semis and the whole packaged optics. Yeah, I mean, 1.6T is ramping in the lab, and we're also having some of the early production product to the module vendors. You know, there's no, like, one way or the other. It's actually both of these are in.

One is ramping into volume, the other one continues to be strong in the volume.

Thank you for your question. Your next question comes from the line of Mehdi Hosseini from SIG. Your line is now open.

Yes. Thanks for taking my question. Oleg, congrats on execution. I wanna get a bigger picture and looking more longer term. I see your midpoint of your June quarter guide implying annualized earning of $1.20, which is much higher than the prior peak from FY 2022. With that as the context, how should we think about company's earning power over the next one or two years? I'm not asking for a guide. I just wanna get a better picture how these the new vector, the demand vectors that are materializing are gonna enable you with longer term earning power and how to follow up.

It's a great question. I think clearly, you know, I would say our NFC business is now getting very close to 20% operating profit. It's all volume driven. For every incremental dollar in NFC, I mean, you're getting about, what, $0.40-$0.45 dropping to the bottom line. Ilan can give you a lot more detail on that. Clearly, that's driving up the operating margin. Our OSP has always had pretty high operating margin, but also with the higher revenue now, it's now going from, like it was in the 60, high, mid-60s to several low 70s. Now it's moving to high 80s to maybe, low 90s.

That gets you a couple percentage points higher gross margin, which then obviously drops right down to the couple percentage points higher operating margin. Already at the blended average, we are like we're at 23%-24%. As NSE keeps getting stronger, you know, we that will keep moving into the mid 20s and maybe higher. In that respect, there's a tremendous operating leverage that comes with volume. You know, also, you know, we've been able to weather pretty well any kind of the price increases due to components and component shortages.

You know, as we probably will try to pass some of that increases to our customers, that will be an additional mitigation of the cost, which will probably give us a little bit more expansion on the gross margin. Clearly combination of keeping up with the price increases and passing it on, maintaining healthy gross margins, volume growing, driving significant operating leverage, and fundamentally, you know, it scales very nicely from this point on. I mean, as our fixed costs fully covered, every incremental dollar is what, about 40, 45%?

Yeah. For modeling, Mehdi, so on the NSE side, it's around, you know, today the 40% level, obviously, you know, the top line, you know, we assume will continue to drive as it continues to grow. When you think about the operating leverage and the operating income for NFC and the company, I mean.

I'll say last but not the least, you know, we've talked a lot about our NOLs. Guess what? Now that we are, you know, generating a lot of profit, and a lot of it falls in the U.S. jurisdiction because of where our IP and R&D is, I mean, all that incremental profit comes in at virtually zero tax.

Yes In the North America.

This quarter, for example, you know, the effective tax rate is about 12%.

Got you.

That's a benefit there.

Okay.

Yeah.

I mean, the only little.

So do you?

Headwind you have is, you know, with the converts, you get a little bit dilution as your price, stock price goes up. You know, you gotta factor a bit higher share count in your calculations.

Okay. As my second question of follow-up, I wanna come back to scaling. Right now, again, midpoint of the June quarter implies about a 25% growth from the prior peak from mid 2022. Back then, 5G wireless was a big factor. I'm under assumption that wireline, especially as we roll out 1.6T and subsequent to that 3.2T, offers the bigger term. Given that setup, you have been able to scale revenue through acquisition, organic growth. Where do we go from here? Is there any way you can help me understand the growth from here, especially catalyzed by 1.6T and 3.2T?

I think the intensity of our equipment increases as you're going to higher speeds, for both not only the networking speed or bandwidth, but also with the chip-to-chip interconnect. On top of it, you throw in things like co-packaged optics or near-packaged optics and all that. Actually, you're not only growing with the market, you are also having a broadening of application areas where our equipment is being bought. I mean, for example, when you start making, manufacturing multi-mode and hollow core fiber, you now. Before we never really sold into the manufacturing lines. The level of complexity in these products requires our instruments. We are now seeing opportunities emerging where we'll be selling into the production environment on things like fiber manufacturing, right?

Things like people making co-packaged optics or integrated optics. Now you are selling optical equipment into the lab that before you only used for, you know, maybe fiber optic modules. Now they need to characterize and design these optical components, then all these optical components need to be tested in like multiple insertions because the yield is so critical when you build this whole module. I mean, if you have, one device is bad, you throw away the entire, once it is completely sealed, you can't rework it. You have to test every component that goes into the module. You test it again once you mount it, only at the end you put an ASIC onto the module. In that respect, it drives a tremendous amount of test requirements in the manufacturing process.

Sure. I completely understand. I think your booth tour at OFC in March was illustrative of this increased test insertion points. I guess back to my question, could these opportunities help you with the $500 million of a quarterly revenue? I'm not asking for a specific timing, is a $500 million of a quarter revenue a realistic target?

I think it's entirely realistic. I think this quarter we are, right, midpoint is what? Around $232 million. It's moving in that direction. Remember, I'd say it's early on. We're seeing a lot of early demand in this, truly as a lot of that next generation optical equipment and components come into being. You look at some of these new high-power Ethernet switches, they're embedding like optical photonic integrated circuits into substrates and all that. It's the scope of the market is expanding tremendously. Let's not forget our aerospace and defense business. It's also growing very nicely. We don't talk much about it, but that business is like also driving the wave.

Last but not the least, you know, wireless will not be down forever. Eventually, we do need to, you know, to consume all the data through our wireless devices. I think eventually, either the service providers or some other money will come in to take the wireless infrastructure and make it AI-RAN, which will rebound the spend in that market. Today, our wireless business is down about 40%-45%, depending on the quarter. That alone could drive, you know, $20 million-$30 million additional quarterly revenue.

Mehdi, I assume just to make sure that we are level setting kind of the expectations here, I assume first you referred on the $500 million to the NFC piece and not total Viavi, but it's also not about.

No, I think he's talking about total Viavi.

That's why I wasn't sure. In any case, this is not necessarily kind of immediate next fiscal year. This is over kind of the next kind of upcycle.

Yeah.

Thank you for your question. Your next question comes from the line of Ryan Koontz from Needham. Your line is now open.

Great. Thanks. Good question. Terrific results, guys. Just excellent. Maybe just a quick clarification on the data center customer mix there. It sounds pretty broad and diversified, but as you think about the different types, the semis, the opticals, the NEMs, the operators, can you give us maybe an order of kind of which one of those customer segments is driving the, are the biggest within the data center mix today?

You know, it's fairly well, you know, it varies quarter by quarter. I mean, let's put it this way, the actual data centers are buying quite a bit. I mean, I'd say if you only just take the one single segment, I would say it'd be, you know, hyperscalers would be a big, biggest bucket cause they not only buy equipment for data centers, but they also run their own R&D, developing their own.

Yeah

Processors and modules and the optics, right?

Yep.

Within the hyperscalers, I'd say there is, you know, the ones who are much more into doing their own stuff are actually much bigger, and there's some that are not so big.

Yeah

But it's percolating across, right? The next big bucket would be the modules makers and the system makers, right? People making optical modules and optical systems. I would say the next bucket is the silicon vendors. I mean, I, you know, I haven't really looked at it, but it's a fairly even balanced distribution.

That's great color. Thank you, Oleg. Maybe switching gears to Spirent. Obviously, they're a big part of your success here in data center as you build that momentum. Can you maybe talk about the synergies you're seeing with that business as it relates to, you know, both the product side of the house as well as the sales side?

I would say the, I mean, clearly, they come with a pretty big established customer base. I would say we are really upgrading the hardware performance of their products, which makes them much more competitive. They have a very good, you know, established reputation and the I would call it a application-hardened software for all kinds of Ethernet traffic. In a way, it's a good combination, accelerating our hardware development to the ever higher speeds and bringing their software and combining it together. I'd say the first truly integrated product that we're gonna have between them and us is 3.2 Tb.

We are doing very well already, leveraging our 800 Gb position with their 800 Gb, you know, Ethernet task. You know, obviously expanding it to our customers, who they did not have, but also getting access into their customers, which drives broader discussion and more strategic discussion around not only high-speed Ethernet, but all the other products that we bring into the mix.

That's great. Sounds like the cross-selling is already beginning there.

Yes

If I could get one last one in here around emerging product areas. Obviously, defense is one. You know, how would you characterize where you are in winning share for this PNT with the growth in all the drones? Would you touch on maybe what you're doing in wireless in the satellite arena, if you see that as emerging opportunity for LEOs? Thank you.

Sure. You know, the positioning, navigation, and timing, actually a lot of what the revenue what we're seeing today and driving today, most of it was actually designs that were won before we acquired them. We're now starting to see even things coming, ramping up, ever since we acquired it. If I look at the funnel of wins in the last, let's say, 12 months, as these things kick in, that momentum will continue to drive that business. It's all goodness, and it's, you know, clearly drones is a big one, but pretty much anything autonomous. I mean, whether it's air, land, sea or undersea, vehicles, creates a great pool. We are now winning some of the U.S. tier 1s.

I mean, traditionally, they were very strong with tier 2s and a lot of international. I would say in the past year, we have really, as we brought in a lot of the kind of discipline regarding around the implementing ITAR and various secure access systems, we are now being considered by U.S. tier 1 players, and we are starting to play in much bigger leagues in that respect. That was the aerospace defense. Your satellite question, wireless. Well, you know, as I tell my wireless team, when the market is awful, you know, focus on the next generation, and it's 6G, it's NTN and all these kind of applications, and we are very heavily involved with, you know, kind of the 5G+, 5G++, 6G.

A lot of it is, they're really focusing on the two types of communication: the AI-RAN, which is basically running AI traffic through the advanced wireless network and the ground to satellite communication. This is what a lot of our advanced wireless applications are focused on today.

Terrific. Thanks, Oleg, and congrats again.

Sure.

Thank you for your question. Your next question comes from the line of Andrew Spinola with UBS. Your line is now open.

Thank you. Wanted to ask on the component shortages and some of the supply constraints. I'm just wondering if during the quarter you were able to meet all of the supply or all of the demand, rather, or if the supply constraints limited you. As a part, as sort of like an addendum to that question, you know, we're starting to see a lot of long-term supply agreements in other areas in this industry, to meet the hyperscaler demand and sort of, you know, increases in visibility a couple of years out. I'm wondering what your visibility is like. Have you started to enter into any long-term supply agreements with some of your bigger customers? What, what's evolving on that side? Thanks.

Thank you, Andrew. Well, I mean, I don't think we, you know, we don't have the volumes to enter into a long-term supply agreement. Remember, test and measurement, usually it's, you're leading a lot of the volume markets, so you have to buy the latest and greatest. What's more important for you is not necessarily supply agreement, but the early access. Means you're accessing alpha silicon or beta silicon well before it's released. You can develop the products that are available even before the qualified silicon is released to the market. That is where we focus on. In terms of the availability, you know, in test and measurement, you generally pay the highest ASP of their price distribution. It's never a problem to get it.

You just got to make sure you get enough notice. I would say if we say supply shortage would not be because we could not get the material. We just didn't get, you know, we'd get an upside order with too little lead time to get it in. Generally, you know, you pay more money, you always get the product. The nice part about being at a bleeding edge of the test and measurement, you know, people need the product that works and, you know, pricing is secondary in that respect. Now, as you get into more mature products like field instruments, you know, handhelds, yeah, their cost is very important and there we generally maintain inventory.

We got a lot of headache from my CFO and our audit committee few quarters back because we went in and put some product on the shelf because we anticipated the shortage coming in. Today, we look pretty smart as a result of it, and nobody's complaining. In the end, you got to manage your supply chain, and last thing you want to do is be a penny wise and pound foolish. If you don't pay, don't complain. Nobody's going to give you any availability. So far, clearly there is a supply shortage, especially memories. Listen, I think memory is going to be a deficit till 2030, according to some of the studies I've seen. Given our volume requirements, it's not such a big deal.

I think having a product available ahead of everybody else and having early access is probably what's more important.

Andrew, I can add to that also. If you look at our balance sheet for March, you will see on the inventory level, you know, it's up single digit million. The majority of it was to secure some additional components for the upcoming demand.

Yeah. I mean, we look two, three, four quarters out and we make some bets because it's not the issue if we don't get the product, it's really the lead time and making sure we give adequate notice to the vendors.

Appreciate that color. I want one follow-up. I wanted to ask, you talked about incremental margins earlier on the call of 40%-45%. I think that makes a lot of sense. It looks like that's what's in your numbers and for Q4 in your guide. I'm trying to think about how to think about fiscal 2027. My assumption is that you've got the 40%-45% incrementals on the core business as you scale. What I'm really asking about is, you announced last quarter, I think it was about $30 million restructuring. I think you acknowledged some of that will probably get reinvested.

I'm wondering at this point, if you could give us any color on, you know, maybe how much of that is going to drop to the bottom line, how much of that is going to be reinvested. Frankly, you know, my assumption would be a good chunk of that is going to hit the bottom line, so maybe incrementals in FY 2027 are closer to 50%. I wonder if you'd comment on that.

Well, maybe I'll start and Ilan will give you the details. We're going to implement most of it by the end of our fiscal year, so the June quarter. There's some remainder that probably will go through the end of the calendar year. I think, Ilan, what is it? Roughly 1/3 of it gets reinvested.

Andrew, the 40% fall through that we see right now, you know, probably and there is a good reason to assume that it can go higher. Specifically, if you think about the second half of the fiscal year next year, meaning 2027, there is still, you know, the seasonality that Oleg mentioned in the prepared remarks. If you think about the September quarter, you know, usually it's a down quarter for us, et cetera. We need all the restructuring to materialize, and that will take also until the end of the calendar year, this calendar year.

The increase in the fall through from the 40% level, is fair to assume that, you know, with the top line kind of growth, will be more visible in the second half of the fiscal year of next fiscal year, meaning it's the first half of the calendar year of 2027.

One thing I just want to clarify. When Ilan says September quarter is a seasonally down quarter for us, for service provider segment, that's what it is. If you think about it, in the old days before we had this whole, data center and aerospace and defense, if you look at the old Viavi, it's like, March and September quarter would be the down quarters because that's the type of spending that of service providers. By the way, that pattern is still there, except now it's on a much smaller scale. Because of the aerospace and defense and our data center business is growing so strongly, it's more than offset. You still have that, underneath it, you have that up and down.

You would see like a much bigger jump between March and June quarter because you have a tailwind from service providers. Conversely, you have a smaller increase in the September quarter because you have a headwind from the service providers. In December, you'll have a tailwind again. I mean, this thing is still there. It's just becoming a lot more and more muted from impact on overall Viavi.

Right. On a quarter-on-quarter kind of trajectory overall.

Mm-hmm

December is stronger versus September, and September is still more muted relative to June.

That's right. That's right.

Yep.

Understood. Thanks for taking my questions.

Thank you for your question. Your next question comes from the line of Michael Genovese from Rosenblatt Securities. Your line is now open.

Hey, thanks. Been exciting times, guys. Congratulations for being right in the middle of it. Oleg, I keep hearing now, as we go to silicon, more silicon photonics and more co-packaged optics, that the bottlenecks to the whole thing are moving to the packaging from the foundry players and to the test and measurement for the electronics, the optics, the engines, and the ASICs. It seems like there's so much testing to be done with co-packaged optics. My first question is, you know, do you agree that testing is a bottleneck? And if so, you know, how will you address that over time to, you know, to take advantage of that?

I'll say amen, brother. You're absolutely right. I mean, you know, the whole test, you know, packaging used to be kind of a backend afterthought. It is now the system. It's now a strategic asset. You look at companies like, you know, Well, I don't wanna name names, but all the leading semiconductor companies, the packaging expertise, package is now the system. You're looking at integrating glass substrates. You're looking putting photonic integrated circuits next to the electronic integrated circuits, embedded into the, this whole CoWoS Chip-on-Wafer-on-Substrate, right? You're building this really complex thing, then if you look at, you're putting now all these co-packaged optics on a periphery of the chip.

This thing is starting to look more and more like a brick, and some of them weigh, I mean, we're talking about kilos of weight, right? To me, that's like music to my ears because, you know, as you probably know, I started in this industry, I ran Amkor, so it was like, you know, it's like all the riding the Dangerfield, you got no respect. Well, now the respect is, like, hugely, and I mean, we are seeing now our technologies and our capabilities are being dragged straight into this whole value chain of testing from the individual optical components to wafer-level packaging to the heterogeneous integration packaging, all the way down to being integrated into major test platforms.

That's like a whole new business that we did not even have. Then last but not the least, this whole rack-mounted systems that are being built as custom tests by leading players. We're supplying a lot of the guts and a lot of hardware that goes into those systems. As I was saying, you know, my thing is like it's the, from the old JDS Uniphase days, we still have all these products, and now there's a whole new life being injected into those products. That's something we didn't even think about, I would say three quarters ago.

Right. Just as a follow-up, just, you know, with newer things like OCS, where I think you're probably gonna have very high market share for testing, and then for co-packaged optics, I mean, are these in the numbers at all yet? Is this all in the future, I assume. I guess maybe my question would be, you know, how do you define the foreseeable future, when you're saying that you feel great about the foreseeable future?

Yeah.

Like how far out is that?

In the current numbers, it's kind of the early sales, but I'd say foreseeable future, you probably, you know, you're talking two to three quarters when it starts ramping up. It's the future is not that far off.

Yeah.

What

Yeah. Well, I guess.

What we are expecting or are selling right now is the early inning.

Right. Well, just to clarify the foreseeable future question. I mean, in the press release, you said something like, we feel great about, you know, growth into the foreseeable future. Is that multiple years that we're talking about?

No. No, no. I mean, generally when we as a practice don't wanna go beyond end of the calendar year. When I say foreseeable future, it's like next three quarters.

Perfect. Again, congrats.

Sure. Thank you.

Thank you for your question. Your next question comes from the line of Tim Savageaux from Northland Capital Markets. Your line is now open.

Good afternoon, congrats on some pretty spectacular results. Pretty simple question to start with. Well, actually a confirmation, then a question, and maybe I'll get a little more complex from there. Spirent was $54.2 million in the quarter. Is that right?

Yes. That's correct.

Okay. I guess the simple question is, what do you expect for next quarter for Spirent?

Spirent, you know, benefited from a few orders that we mentioned already in the last quarter that got pushed out to this quarter. This quarter, that's, you know, that's the reason that it's a little bit stronger than seasonality. We still expect, you know, on an annual basis, calendar annual basis, a similar run rate of, you know, around about the $200 million that we said, with a split of around 45%, 55%. That takes you, if you normalize everything, still back to, you know, just shy of the $50 million, maybe $48 million for the June quarter.

Okay. Well, that's a good answer, cause that speaks to higher levels of organic growth in your NSE business.

That's exactly right.

Yeah. Okay. Which I see approaching 40% here in Q4, the way I'm dicing things up here, and over 30% for the year. I guess I'll try to tie the last question to this one and say, when we see this type of environment for the foreseeable future, do you think you can see those type of organic growth rates, 30%, 40% for, you know, call it organic NSE continue over the next couple, three quarters?

Well, you know, I mean, one thing about percentages, it's very hard to maintain same percentage. I mean, because, you know, 30% on one number is, you know, is much smaller than 30% on a much bigger number. I think if you look at about growth in the absolute dollars, I mean, that's what we're striving to try to maintain.

I'll add also, you know, Oleg just mentioned earlier, you know, the service providers, which is part of the core NSE.

Yeah.

If you think again the seasonality. September, you know, traditionally does not enjoy the same growth rate if you bundle everything together. I'm not sure that, you know, our assumption is exactly, I mean, right?

I think he's talking about year-on-year.

On a year-on-year.

A year-on-year.

I am.

When you look at quarter, same quarter, same dynamics, yeah, I wouldn't say, I don't think you could say like a 40%.

Yeah

I think, still a high number should be realistic. You know, 40% on $400 million is one number, 40% on $200 million is a very different number, right?

No, I got it. Although I'd say consensus probably has you at high single digits right now, given what you reported, so you could probably do a little bit better than that.

For the full year, you mean?

Maybe double that or more.

For the full year.

The full year of 2027. I'm just making extraneous comments. I'm not asking you to guide anything. You've been very helpful in giving the breakdown. At least some I'll ask for either one of two ways, which is kind of the data center defense and service provider breakdown, if we can get an update there and/or growth rates in those categories estimated for what you saw here in fiscal Q3.

Well, I tell you, if everybody spends what they've claimed they're gonna spend, I mean, we still got a lot of growth to go on, right? I mean, if you take those assumptions, I think I'd say we're still in the fairly early segment of the ramp.

Message received there. Would you say, data center, and again, this kind of with and without Spirent confuses thing. I assume with data centers, so it's probably more than 50% of NSE revenue. What I was looking for is however you want to break it down. I think you'd said, you know, 45%, 15%.

Yeah. I think right now.

40% before.

Yeah, I think right now the data center is. I mean, the exit velocity this year is inching to the high 40%s. The service provider are inching towards mid-30%s, and aerospace and defense is a little over 15%. I wouldn't be surprised if data center in a not too distant future gets up to about 50% of our NSE revenue.

Got it. Thanks.

Okay.

Thank you for your question. Your next and final question comes from the line of Andrew Spinola with a follow-up from UBS. Andrew, your line is now open.

Thank you. I just wanted to ask a higher level question about your drone business, your module business from Inertial. How is that business performing? You know, obviously there's a lot of demand and new programs in that space, and I'm just wondering, you know, what you're seeing in terms of opportunities. You know, how is that business positioned? Is, you know, do you have all of the approvals and the ability to sell into all of the customers? You know, how should we think about that opportunity over the medium term?

It's a good question, Andrew. You know, you can judge from it the mere fact Ilan said that we just paid out. You can look at our balance sheet. We paid out a pretty big earn-out, means these guys have exceeded every forecast that they've given us. As I tell you, I've, in my career, I've made about close to 40 acquisitions. There's been only two of them have exceeded their first year forecast. Okay. This is the only one, it's Viavi, and I mean, that business is doing extremely well.

They make products, anything from the basic sensors that go into the inertial navigation system to fully blown inertial navigation system that it does the sensor fusion of, you know, GNSS, the, you know, location, the ground speed, the, you know, LiDAR and all these other things. You know, we're engaged with pretty much every drone, you know, munitions, subsystem, vendor of interest out there, both in U.S. as well as in the rest of the world. Clearly there's the clear guidelines what constitutes controlled versus not controlled. When you have a sensor and it's within a certain level of accuracy, for that you need export approval.

If you are making a product that's more commercial, let's say you're doing a surveillance drone or agricultural drone or, you know, something for mining industry, those things are deemed to be commercial. We have a very clear boundaries and, you know, how we, how we define the products, how we grade them, and obviously how we price them. Some products you can only export through the U.S. government export license. Others you can just sell as a commercial product.

Just one follow-up on that. You, it sounds like there's, you know, particularly strong growth and demand for lower-cost drones, and I'm just wondering, without knowing that market all that well, would the Inertial modules or some of those gyroscopes or sensors that Inertial sells, would they be applicable for the lower-end drones with, for that opportunity?

When you say lower end drones?

Are you priced out?

If you're talking something like $3,000, then no. If you're talking something like $30,000, then yes.

Okay. Perfect. Thank you, Oleg.

Okay. Sure.

There are no further questions at this time. I will now turn the call back to Vibhuti Nayar for closing remarks.

Thank you, Hillary. This concludes our earnings call for today. Thank you for joining, everyone, and have a good afternoon.

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