Viavi Solutions reports fiscal Q1 2026 revenue of $299.1 million, up 25.6% year over year, and raises guidance amid Spirent acquisition momentum.

JL - Operator - (00:00:43)

Good afternoon. My name is JL and I will be your conference operator today. At this time I would like to welcome everyone to the Viavi Solutions Fiscal First 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 during this time, simply press STAR followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press STAR one again. At this time, I would like to turn the conference over to Vibhuti Nayer, Head of Investor Relations. Please go ahead.

Vighuti Nair - (00:01:20)

Thank you. JL Good afternoon everyone and welcome to Viavi Solutions Fiscal First Quarter of 2026 Earnings Call. My name is Vibhuti Nayer, Head of Investor Relations for Viavi Solutions. With me on today's call is Oleg Haykin, our President and CEO and Ilan Baskow, 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 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 this call, except revenue, are non-GAAP. We reconcile these non-GAAP results to our preliminary GAAP financials and discuss their usefulness and limitations in today's earnings release. The release, as well as our supplemental earnings slides, which include historical financial tables, are available on Viavi's website at investor.viavisolutions.com. lastly, we are recording today's call and will make the recording available on our website by 4:30pm Pacific Time this evening. With that, I would now like to turn the call over to Ilan.

Ilan Baskow - Chief Financial Officer - (00:03:12)

Thank you Vibhuti Good afternoon everyone. Now I would like to review the Results of the first quarter of fiscal year 2026. Net revenue for the quarter was $299.1 million, which is above the high end of our guidance range of 290 and $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 13 to 14 cents and was up 2 cents sequentially on a year over year basis. EPS was up 9 cents. 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 to 214 million dollars on a year over year basis. NSE revenue was up 35.5% as a result of strong demand for lab and production as well as field products and was mainly driven by data center ecosystem as well as the acquisition of inertial labs. NSE gross margin for the quarter was 63% which is 210 basis points higher on a year over year basis and primarily driven by higher volume and favorable product mix. NSE's operating margin for the quarter was 7.5% compared to minus 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. OSP revenue for the first fiscal quarter came in at $83.1 million which is in line of our guidance range of 82 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. OSP 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 the fourth quarter of fiscal 2025. Cash flow from operating activities for the quarter was $31 million versus $13.5 million in the same period last year. capital expenditure (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 $250 million 1.625% three year convertible notes due in March 2026 with $250 million 0.625% five and a half years 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 the first fiscal quarter 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 the second quarter of fiscal 2026, in mid October we successfully closed the acquisition of Spirentt'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 Spirents business lines, we expect the second fiscal quarter revenue for VIAV to reflect continued strength in many of our end markets. Our guidance includes financial performance of Spirents business line for approximately 10 weeks. For NSE, we expect continued strong demand for lab and 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 floor demand for both anti counterfeiting and 3D sensing. For the second fiscal quarter of 2026 we expect Viavi revenue in the range of 360 and 370 million dollars. We expect total NSE revenue between 283 and 293 million dollars including revenue from Spirentt between 45 and 55 million dollars. OSP revenue is expected to be approximately 77 million dollars. 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 Spirentt's contribution which is expected to be slightly accretive to existing NSE margin. For this quarter. OSP operating margin is expected to be 34% plus or minus 50 basis points. EPS is expected to be between 18 cents and 20 cents VIAVI standalone EPS is expected to be about 18 cents and we estimate SPIREN contribution to EPS is in the range of 0 to 2 cents after allocating pro rata interest on debt. Historically, Spirents HSC 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 are expected to be around $10 million plus or minus $500,000. As a result of jurisdictional mix, we expect other and 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 Haykin - President and CEO - (00:12:01)

Oleg thank you ilan the first quarter of fiscal 26 saw the continuation of strong momentum from the fourth quarter of fiscal 25 coming in above the high end of our guidance. It was also significantly up year on year and countercyclically 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 SAMs optical modules and NEMs, drove strong demand for lab and production products. In support of the AI data center buildout, we saw strong demand across all optical networking product lines, the 800 gig and 1.6 terabyte 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 SPIRENS 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 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 mostly by recovery and anti counterfeiting in 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 26 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 and A.

JL - Operator - (00:15:21)

Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press STAR one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press STAR one again. If you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking a question. One moment for your first question. Your first question comes from the line of Ruben Roy of Stifel. Your line is open.

Ruben Roy - Equity Analyst - (00:15:56)

Hi Ole again Elon. Thanks for the questions and great to see the progress and congrats on the closing of the Spirent business. I guess the first question I'll like 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 and 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, maybe if you could just. Give us the mix as a First question. Thank you.

Oleg Haykin - President and CEO - (00:16:40)

Sure. Thanks. So 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 spiren business it's about what, 45%? About 40% and then the remainder. So 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 significantly de risks the volatility of the service provider spent and the airspace in defense continues to grow as well. So I think as we look forward we are going to probably, I would say exiting this year we may see data center ecosystem surpass the service provider. And 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 historic service provider spend.

Ruben Roy - Equity Analyst - (00:18:12)

Great, thanks for that detail. 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 break out given that service providers still sort of mixed with wireless, you know, still having some headwinds, etc. 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 iris based and defense business?

Oleg Haykin - President and CEO - (00:18:47)

Sure. So I think the, you know, when we look at data center we look at everything that pulls into data center. So we're going to see a very strong demand for, 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 intraconnect. I mean you probably saw some very interesting dynamics within video investing in the Nokia. I can kind of elaborate on that. But 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, you know, 1.6 terabit 800 gig, the production, optical production, test equipment continues to grow very nicely into the December quarter. And there's going to be an additional momentum building as far back as far further into the March quarter. And aerospace defense will continue to gradually grow on the continued basis that he 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 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 and 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 not ready for the whole AI ecosystem is the wireless ran. And that's why actually we were not surprised at all that Nvidia put in a billion dollars into AI Ran and Nokia. And we do hope, I mean we are seeing that's really accelerating the 5G advance and 6G development. We'll likely pull this in closer and we know the others are seeing it and they're also going to be start scaling their investment. So we do think our wireless business probably will be kind of the last cylinder in the engine to turn on into the next calendar year. So that's kind of hopefully gives you a good color on all the elements of the NSC business.

Ruben Roy - Equity Analyst - (00:21:40)

Yeah, absolutely. Thanks. If I could sneak one in for Elon. Great to see the operating margin guidance for nsc. Obviously spirits starting to contribute there but can you give us maybe how you're thinking about operating margins as as you sort of run rate the business to full quarter, you know, kind of exiting fiscal 26 and into fiscal 27. Thanks.

Ilan Baskow - Chief Financial Officer - (00:22:04)

Thanks for the question Ruben. So currently including Spirent, you know we are towards kind of the 160 million a quarter I believe you know that obviously we are still working on or just starting to work on integration et cetera. 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. Okay, thank you.

JL - Operator - (00:22:38)

Your next question comes from the line of Mehdi Hosseini of Sig. Your line is open.

Mehdi Hosseini - Equity Analyst - (00:22:44)

Yes, thanks for taking my question to from my end. Oleg. Let's assume wireless doesn't come back. Kind of a worst case scenario given the aspiring and baseline assumption that it would be $0.08 accretive and a strength in fiber and perhaps a slightly higher growth rate for smartphone 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 a higher earning power. Any thoughts here would be great.

Oleg Haykin - President and CEO - (00:23:48)

Well, so I mean as you can see, just as our business started tanking from the cutback in service providers in 2022, I mean we had a significant operating deleverage. 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 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 your words in God's ears. And you're right, wireless is a significant incremental catalyst once it gets going because it's really been one of these 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 - Equity Analyst - (00:24:49)

Okay, great. And just double clicking on the OSP and given the upcoming changes to the form factor for a smartphone application, 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 Haykin - President and CEO - (00:25:22)

I think you're right. I mean it's a more maturing segment. I mean the volumes, I mean we're fairly saturated in that market. So the only incremental growth comes from the unit growth and maybe greater adoption of the world facing 3D cameras. But we're seeing actually also incremental upticking 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 wafers to module integrators so it provides a bit more leverage there. But also the automotive market with LIDAR in Asia is becoming a big consumer of the 3D sensing filters. Now we got to put it in perspective. It's kind of hard to compete with 300 plus million units. I mean automotive is like maybe 10 million but let's say it's 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 - Equity Analyst - (00:26:50)

Okay, thank you.

JL - Operator - (00:26:54)

Your next question comes from the line of Ryan Koontz of Needham and company. Your line is open.

Ryan Koontz - Equity Analyst - (00:26:59)

Great, thanks. We could double click on the data center opportunity. I think that's been a little bit of a quiet market for you in terms of I think investors understanding your exposure there. Great to hear your working that up. Oleg. Do you feel like your execution in that customer segment is where it needs to be today? Do you invest more and go to market and do those customers have different product requirements that you might need to re spin new products for data center or is it largely the same products as your traditional SPs?

Oleg Haykin - President and CEO - (00:27:34)

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, the term that I've borrowed from 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 of the technologies. Means you gotta deliver your products now every two to three years. But also 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 which means you don't have this like a long value of waiting for the next generation. And you're earning higher percentage gross profits because it's a 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 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 all know who they are. It's your physical layer communication companies like Serdes and the module integrators. It's your system companies, optical gear like cnn, Riso, Cisco and so on and so forth. And it's actually ultimately the actual Hyperscaler. We have extensive internal R and D developing anything from optical modules to MEMS switches to full blown data center equipment. So I mean this is like the best thing you can have and you're dealing with engineering budgets and the 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 a tornado. And our team loves it because that's actually plays very well to our traditional strength to be at the bleeding edge of bringing leading edge technology to the optical networking.

Ryan Koontz - Equity Analyst - (00:30:19)

That's super helpful. Would you say, Oleg, you have and. Actually, you know, I would add one more thing.

Oleg Haykin - President and CEO - (00:30:23)

Sure. You know, I would add one more thing. You know, we talk always about speeds of 400, 800, 1.6, 3.2. That's a network speed. What 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 there 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 it's a TikTok. You deliver your network speed which immediately needs wholesale replacement of all the chip to chip interconnect. So that's a force multiplier on that whole data center growth.

Ryan Koontz - Equity Analyst - (00:31:08)

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 Haykin - President and CEO - (00:31:21)

Well, I would actually say where we play, you know, purely the layer zero, layer one, we have a significantly greater share because that's traditional strength of JDS Uniface Viavi. We are very strong in it. With acquisition of Spirent, we have now added layer 2 to layer 7 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. So I would say today it's Viavi and keysight that are big players in that space and there's about maybe four or five additional smaller players playing in individual layers all over the world. But it's very much, I would say two major players because the level of intensity and speed with which you have to bring out the product, it's not a low budget game. It drives quite a significant R and D spend. So I would say in that particular space, I'd say it's keysight and the Viavi.

Ryan Koontz - Equity Analyst - (00:32:29)

Great. And maybe follow up if I could on the aerospace and defense area. Can you kind of characterize those products? Are those P and T like modules you're selling in typically or, you know, what's the fulfillment model look like you're selling to drone companies and the like, or defense companies?

Oleg Haykin - President and CEO - (00:32:47)

Yes. So it goes into everything. So we have a smorgasbord. We can sell you 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 and everything else. So we have a full solution. And depending 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, I would say in central and Eastern Europe, I mean you may buy, they may buy the entire solution. If you're dealing with a 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. Air, 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. All these things that you need. If you think about the fully gps, independent, autonomous kind of robotic vehicles.

JL - Operator - (00:34:20)

Again, if you have a question, please press star one. Your next question comes from the line of Michael Genovese of Rosenblatt Securities. Your line is open. Thanks.

Michael Genovese - Equity Analyst - (00:34:30)

Look, I think my phone broke up because I think you gave a new annual revenue number for the HSE acquisition, but I just didn't hear what it was. Yes, go ahead.

Ilan Baskow - Chief Financial Officer - (00:34:45)

So basically, currently, once we closed 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. So yes, it is higher right now.

Michael Genovese - Equity Analyst - (00:35:06)

Okay, so I guess my question is right. Yes, yes, yes. And so my question has to do with does that change on higher revenue or any other reason, you know, kind of bring a, an accretion date, you know, sooner than 12 months or are we still thinking 12 months before it becomes accretive?

Ilan Baskow - Chief Financial Officer - (00:35:31)

So, you know, it depends also on seasonality. Remember that, you know, there are stronger half fees on the second calendar. Half so that's the reason, you know, 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.

Michael Genovese - Equity Analyst - (00:35:55)

Yeah, but not clearly higher revenue makes the accretion sooner rather than later. And then I think most of my questions were asked, but I just want to ask specifically on large service provider 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 and then it sounds like a lot of the optical activity is being done by optical specialists. But is there anything to say about the tier one large cable and telcos on the, on the wireline side? Is there any trend there that you can call? Yeah, I would say gradual recovery. I mean fiber is growing. But you know, but you know, we do know there's going to be some big RFPs coming out from major cable operators and the service providers. And it's more with now when I look at the, you know, fiber, we are now starting to segment them into professional grade fiber operators and kind of consumer grade. So AT&T is more a consumer grade. So they just continue like, you know, they keep talking about adding a lot of fiber customers and that ultimately is great news to us. And I just want to 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 the, 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, we kind of call it as a base business and all these other companies, we call them speedboats. So it's your professional 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 your base service providers starting to spend more money. Great. Thanks for the caller. Thanks.

JL - Operator - (00:38:58)

Your next question comes from the line of Andrew Spinola of ubs. Your line is open. Thank you.

Andrew Spinola - Equity Analyst - (00:39:05)

Just one for me wondering if you could provide a little bit more color on the spirit business that you acquired. Was the margin profile on that business. You know, consistent with the overall business. Was it better or worse? And when I'm thinking about modeling that, you know, post the 12 months when. It turns accretive, you think you can. Drive the margin in that acquired business in line with maybe your targeted 20% for NSE or do you think you can do better?

Ilan Baskow - Chief Financial Officer - (00:39:33)

How should I think about that? Well, so I think this, that that business is both higher gross margin than the average NSE and it's higher operating profit than average nc. So it's net net accretive. And I do believe that through you know, integration and greater efficiency we can actually expand their margins further. And I think we do have, 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. Andrew, just specifically on the, on the gross margin we see it in, you know, from the mid to high 60s which is as Oleg mentioned, definitely above our corporate average. So it's a nice contribution there.

Andrew Spinola - Equity Analyst - (00:40:25)

Got it. And is that business seeing the same acceleration that you're seeing in the rest of your data center business?

Ilan Baskow - Chief Financial Officer - (00:40:34)

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 sell to chip companies, the modules and systems and enterprise data centers. And then there's a whole different flavor called AI HSE which generates AI workloads so you can test your network on how good it is to run the AI traffic and, and AI data. So that is, that piece is growing even faster. I see. And wanted to ask one last question.

Andrew Spinola - Equity Analyst - (00:41:19)

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 you know, if the number of. Switches being produced, 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 and D, new SKUs, new players in this space.

Ilan Baskow - Chief Financial Officer - (00:41:50)

How should I think of that? It's a combination. So when we talk about sales to the lab, that is to the R and D equipment, it's number of companies, number of projects, number of chips. And remember I also said the very fast product turn 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 if you think about contract manufacturers, the more lines they add, the more equipment they need to buy.

Andrew Spinola - Equity Analyst - (00:42:44)

What's the split in your business between unit driven business versus project driven business.

Ilan Baskow - Chief Financial Officer - (00:42:50)

On the data center side, roughly, you know, we don't really split it. That's, you know, dicing it very thin because it's effectively the same product, the same technology packaged into different box.

Andrew Spinola - Equity Analyst - (00:43:04)

Got it. Thank you very much.

JL - Operator - (00:43:07)

Thank you.

Tim Savageau - Equity Analyst - (00:43:09)

Your next question comes from the line of Tim Savageau of Northland Capital. Your line is open. 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 it seems like Spirit's got to be well above 50% exposed to data center. Is that fair to say? Go ahead. Yeah, so I mean the percentages gave you, that's exiting this calendar year, it's like exiting December the mix including now the new spiral business. Now, in terms of their exposure, I would say if I define the data center ecosystem, I mean lion's share of their businesses. Data center ecosystem. But they also have enterprise and enterprise data center. So I mean 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 with their would test their own firewalls and things like that. So that's, I would say probably it's an 8020 split. Probably. Okay, well 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 aspiring contribution despite the shortened time period, you know, and you explain that. But as you look at that and kind of asked this a little bit before, but we've seen some pretty good numbers in terms of what some of the big US carriers are looking to spend in Q4. You know, I might have looked at. That organic number and thought, you know, an old fashioned budget flush. Apparently not. Doesn't look like you're building much in. There, am I right? You know, for the, you know, traditional tier one telecom providers, are you looking. At that Q3 to Q4? No, there are some for traditional. Sorry. So for the traditional. Sorry, yes. 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, kind of 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 and contracts that they've 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 the revenue is going into the whole data center driven service provider ecosystem. Okay. So you look, you look at that organic growth going September to December. Yeah, so we all seen the Verizon at&t saying that next year they're going to expand. You know, hey, if that happens, that will be just like a further tide that will raise all the boats. Got it. So it looks like anything good happening. With the tier one, you know, team, you know, also for, we're not guiding for March, but it's not that we see anything, you know, materially different, you know, going into March. So you know, I mean the one, the only thing I say about tier ones, every quarter percent drop in interest rate frees up 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 these things like anything else, it wears out, it needs to be updated. And so I do think as 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. It would be further, I would say, accelerator or a boost to the overall demand. Great. Thanks very much. Congrats again.

JL - Operator - (00:48:10)

Sure. That concludes our Q and A session. I'll now turn the conference back over to Vibhouti for closing remarks.

Vibhuti Nayer - (00:48:20)

Thank you, J.L. this concludes our earnings call for today. Thank you for joining. Have a good evening.

JL - Operator - (00:48:27)

This concludes today's conference call. You may now disconnect.