Q1 2026 Viavi Solutions Inc Earnings Call

Speaker #2: Good afternoon . My name is J.L. , and I will be your conference operator today . At this time , I would like to welcome everyone to the Viavi Solutions Quarter 2026 earnings call .

Speaker #2: 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.

Speaker #2: If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad.

Speaker #2: If you would like to withdraw your simply press star one again . At this time , I would like to turn the conference over to Vibhuti Nayar Head of Investor Relations .

Speaker #2: Please go ahead .

Speaker #3: Thank you . JL . Good afternoon , everyone , and welcome to Viavi Solutions fiscal first quarter of 2026 Earnings Call . My name is Vibhuti Nayar , Head of Investor Relations for Viavi Solutions .

Vibhuti Nayar: Thank you, Jael. Good afternoon, everyone, and welcome to Viavi Solutions Inc. Fiscal First Quarter of 2026 earnings call. My name is Vibhuti Nayar, Head of Investor Relations for Viavi Solutions Inc. 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 reports 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.

Speaker #3: 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 .

Speaker #3: 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 risk factors described in those filings .

Speaker #3: 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.

Speaker #3: 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 .

Vibhuti Nayar: 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 www.investor.viavisolutions.com. Lastly, we are recording today's call and will make the recording available on our website by 4:30 P.M. Pacific Time this evening. With that, I would now like to turn the call over to Ilan.

Speaker #3: 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 .

Speaker #3: Are available on the website at . Solutions.com . Lastly , we are recording today's call and will make the recording available on our website by 4:30 p.m.

Speaker #3: Pacific Time . This evening . With that , I would now like to turn the call over to Ellen .

Speaker #4: Thank you, Vibhuti Nayar. Good afternoon, everyone. Now I would like to review the results of the first quarter of fiscal year 2026.

Operator: 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 million 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 $0.13 to $0.14 and was up $0.02 sequentially. On a year-over-year basis, EPS was up $0.09. Moving on to our Q1 results by business segment.

Speaker #4: Net revenue for the quarter was $299.1 million , which is above the high end of our guidance range of 290 and $298 million .

Speaker #4: 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% .

Speaker #4: Operating margin increased 130 basis points from the prior quarter , and on a year over basis was up 570 basis points . EPs at $0.15 was also above the high end of our guidance range of 13 to $0.14 , and was up $0.02 sequentially on a year over year EPs was up $0.09 .

Speaker #4: Moving on to our Q1 business segment . NSC 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 .

Operator: NSC revenue for the first fiscal quarter came in at $216 million, which is above the high end of our guidance range of $208 million to $214 million. On a year-over-year basis, NSC 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 the data center ecosystem as well as the acquisition of Inertia Labs. NSC 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. NSC's operating margin for the quarter was 7.5% compared to negative 4.6% during the same quarter last year. NSC operating margin was above the high end of our guidance range of 5.4% to 6.2%, primarily driven by higher fall through.

Speaker #4: On a year over year basis . NSC revenue was up 35.5% as a result of strong demand for Lebanon production , as well as field products , and was mainly driven by data center ecosystem as well as the acquisition of inertial labs .

Speaker #4: NSC 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 .

Speaker #4: Nsc's operating margin for the quarter was 7.5% compared to -4.6% during the same quarter last year . NSC operating margin was above by the high end of our guidance range of 5.4% to 6.2% , primarily driven by higher fall through OSB revenue for the first fiscal quarter came in at $83.1 million , which is in line with our guidance range of 82 to $84 million , and was up 5.5% on a year over year basis .

Operator: OSP revenue for the first fiscal quarter came in at $83.1 million, which is in line with our guidance range of $82 million to $84 million and was up 5.5% on a year-over-year basis. The increase in revenue for the quarter was primarily a result of strength in anti-counterfeiting and other products. 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.

Speaker #4: 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 .

Speaker #4: Osps 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 .

Speaker #4: 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 .

Speaker #4: Cash flow from operating activities for the quarter was $31 million , versus $13.5 million in the same period last year . CapEx for the quarter was $8.5 million versus $7.3 million in the same period last year .

Operator: Cash flow from operating activities for the quarter was $31 million versus $13.5 million in the same period last year. CapEx for the quarter was $8.5 million versus $7.3 million in the same period last year. During the quarter, we successfully refinanced our $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.

Speaker #4: 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 .

Speaker #4: 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.

Speaker #4: This remaining $150 million is included in the cash balance of $549 million at the end of the first fiscal quarter of 2026.

Speaker #4: 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 .

Operator: 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 Spirent’s High-Speed Ethernet Network Security and Channel Emulation business lines from Keysight. The acquisition of these business lines is expected to add about $200 million of annual revenue run rate, which is above our prior estimate of around $188 million. We also concurrently closed the previously announced $600 million term loan B, which was used to fund the transaction at close as well as general corporate purposes.

Speaker #4: 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.

Speaker #4: Moving on to our guidance for the second quarter of fiscal 2026 , in mid-October , we successfully closed the acquisition of Spirent's high speed Ethernet network security and channel emulation business lines from Keysight .

Speaker #4: 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.

Speaker #4: We also concurrently closed the previously announced $600 million Term Loan B, which was used to fund the transaction at close, as well as for general corporate purposes.

Speaker #4: In addition to the acquisition of Spirent's business lines , we expect the second fiscal quarter revenue for Vzv to reflect continued strength in many of our end markets .

Operator: In addition to the acquisition of Spirent business lines, we expect the second fiscal quarter revenue for Viavi to reflect continued strength in many of our end markets. Our guidance includes financial performance of Spirent business line for approximately 10 weeks. For NSC, 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 lower 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. We expect total NSC revenue between $283 and $293 million, including revenue from Spirent between $45 and $55 million. OSP revenue is expected to be approximately $77 million. Operating margin for Viavi is expected to be 17.9% plus or minus 60 basis points.

Speaker #4: Our guidance includes financial performance of Spirent's business line for approximately ten weeks for NSC , we expect continued strong demand for lab production , as well as field products driven by the data center ecosystem .

Speaker #4: For OSP , we expect quarter over quarter revenue to be lower in line with seasonality seasonally of seasonality of lower demand for both anti-counterfeiting and 3D sensing .

Speaker #4: For the second fiscal quarter of 2026 , we expect revenue in the range of 360 and $370 million . We expect total NSC revenue between 283 and $293 million .

Speaker #4: Including revenue from Spirent between 45 and $55 million . OSP revenue is expected to be approximately $77 million . Operating margin for Viavi is expected to be 17.9% , plus or -60 basis points .

Speaker #4: Total . NSC operating margin is expected to be 13.6% , plus or -70 basis points . This includes spirits contribution , which is expected to be slightly accretive to existing NSC margin for this quarter .

Operator: Total NSC operating margin is expected to be 13.6% plus or minus 70 basis points. This includes Spirent's contribution, which is expected to be slightly accretive to existing NSC margin for this quarter. OSP operating margin is expected to be 34% plus or minus 50 basis points. EPS is expected to be between $0.18 and $0.20. Viavi's standalone EPS is expected to be about $0.18, and we estimate Spirent's contribution to EPS is in the range of $0.00 to $0.02 after allocating pro-rata interest on that. Historically, Spirent's 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 NSC as one business segment going forward.

Speaker #4: OSP operating margin is expected to be 34% plus or -50 basis points . EPs is expected to be between $0.18 and $0.20 . Viavi standalone EPs is expected to be about $0.18 , and we estimate Spirent contribution to EPs is in the range of 0 to $0.02 .

Speaker #4: After allocating pro-rata interest on debt, historically, Spirent's AGC 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.

Speaker #4: We currently plan to leverage the complementary product portfolio and capabilities, and report NSC as one business segment going forward. Our tax expense for the second quarter is expected to be around $10 million, plus or minus $500,000.

Operator: Our tax expense for the second quarter is expected to be around $10 million plus or minus $500,000 as a result of jurisdictional mix. We expect other income and expense to reflect a net expense of approximately $12.2 million, which increased mainly due to the interest on the TLB, and the share count is expected to be around 228.7 million shares. With that, I will turn the call over to Oleg. Oleg?

Speaker #4: 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 .

Speaker #4: Oleg .

Speaker #5: Thank you . Elan . 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 .

Oleg Khaykin: Thank you, Ilan. The first quarter of fiscal 2026 saw the continuation of strong momentum from the fourth quarter of fiscal 2025, coming in above the high end of our guidance. It was also significantly up year-on-year and countercyclically up quarter-on-quarter. NSC 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 SAMIs, optical modules, and NAMs, drove strong demand for lab and production products in support of the AI data center build-out. We saw strong demand across all optical networking product lines, the 800 gig and 1.6 terabit Ethernet test, chip-to-chip interconnect and protocol test, and a broad range of production test equipment.

Speaker #5: It was also significantly up year on year and counter-cyclical, up quarter on quarter. NSC revenue in Q1 grew 35% year on year, primarily driven by strong demand from the data center ecosystem and aerospace and defense customers.

Speaker #5: The data center ecosystem , which includes high performance semis , optical modules and NAMs , drove strong demand for lab and products in support of the AI data center buildout , we saw demand across all optical networking product lines .

Speaker #5: The 800 Gig and 1.6 Terabit Ethernet tests are tipped to chip, chip-to-chip interconnect, and protocol tests, as well as a broad range of production test equipment.

Speaker #5: 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 .

Oleg Khaykin: In addition, we are now also seeing a growing demand for our traditional field instruments by hyperscalers as they build out and operate their new AI data centers. We expect this strong momentum to continue well into fiscal 2026. Lastly, with the recent acquisition of the highly complementary Spirent High-Speed Ethernet product line, we have further strengthened our position in the data center ecosystem, significantly increasing our business footprint there. Our aerospace and defense business also saw another strong quarter of growth, driven by continued high-end demand for our positioning, navigation, and timing products. We expect the strong demand to continue throughout fiscal 2026. The service providers' business was generally stable during the quarter. The gradual recovery in fiber was mostly offset by the continued soft demand for wireless products. We expect this trend to continue in the medium term.

Speaker #5: We expect this strong momentum to continue well into fiscal 2026 . Lastly , with the recent acquisition of the highly complementary Spirent's high Ethernet product line , we have further strengthened our position in the data center ecosystem , significantly increasing our business footprint .

Speaker #5: 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 .

Speaker #5: We expect the strong demand to continue throughout fiscal The service provider's business was generally stable during the quarter . The gradual recovery in fiber was mostly offset by the continued soft demand for wireless products .

Speaker #5: We expect this trend to continue in the medium term. Looking ahead, we expect strong quarter-on-quarter growth in NSC, driven by both the continued strong demand from the data center ecosystem and aerospace and defense customers for Viavi classic products, as well as the incremental revenue from the recently acquired Spirent product lines.

Oleg Khaykin: Looking ahead, we expect strong quarter-on-quarter growth in NSC, 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 in anti-counterfeiting and other products. The 3D sensing demand was in line with seasonal expectations. We expect fiscal Q2 to be down quarter-on-quarter, in line with the seasonally lower demand for both anti-counterfeiting and 3D sensing products. In summary, we expect the strong start in Q1 to continue throughout fiscal 2026, supported by the stabilization and recovery of our mature end markets, including the service providers, anti-counterfeiting pigments, and 3D sensing, and the continued strong demand by the data center ecosystem and aerospace and defense customers.

Speaker #5: Now , turning to OSP , OSP saw strong year on year revenue growth , driven mostly by recovery in anti-counterfeiting . In other products .

Speaker #5: 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.

Speaker #5: In summary , we expect the strong start in Q1 to continue throughout fiscal 20 . Six , supported by the stabilization and recovery of our mature end markets , including the service providers .

Speaker #5: 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 team for its continued strong innovation and execution .

Oleg Khaykin: In conclusion, I would like to welcome our new employees to Viavi and thank the Viavi team for its continued strong innovation and execution. Lastly, I would also like to thank our customers and shareholders for their continued support. With that, I will now turn it back to the operator for the Q&A.

Speaker #5: Lastly, I would also like to thank our customers and shareholders for their continued support. With that, I will now turn it back to the operator for the Q&A.

Speaker #2: Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press Star 1 on your telephone keypad to raise your hand and join the queue.

Operator: 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 your question. One moment for your first question. Your first question comes from the line of Ruben Roy of Stifel Financial Corp. Your line is open.

Speaker #2: If you would like to withdraw your question , simply press star one again . If you are called upon to ask a question , enter your listening via loudspeaker on your device .

Speaker #2: Please pick up your handset and ensure that your phone is not on mute when asking your question. One moment for your first question.

Speaker #2: Your first question comes from the line of Reuben Roy of Stifel . Your line is open .

Speaker #6: Hi all . 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 would be , as you continue down the road of diversifying your revenue , maybe you can give us an update of what the mix is .

[Analyst]: Hi, Oleg and Ilan. Thanks for the questions and great to see the progress and congrats on the closing of the Spirent business. I guess the first question, Oleg, would be, as you continue down the road of diversifying your revenue, maybe you can give us an update of what the mix is if you think about your kind of core telecom service provider revenue in NSC versus some of the new products that you're selling at the hyperscale. Obviously, you've been talking a lot about aerospace and defense doing very well with expectations for continued growth. Maybe if you could just give us the mix as a first question. Thank you.

Speaker #6: If you think about your kind of core telecom service provider , revenue and NSC versus some of the new products that you're selling into hyperscale , and then obviously you've been talking a lot about aerospace and defense during very well with expectations for continuing to grow .

Speaker #6: So maybe , maybe if you could just give us give us the next . As a first question , thank you .

Speaker #5: Sure . Thanks . So I would say if we look at our exit of the fiscal year , we did about 50 , 30 , 20 .

Oleg Khaykin: Sure. Thanks. I would say if we look at our exit of the fiscal year, we did about 50, 30, 20, so 50% service provider, 30% data center ecosystem, and 20% aerospace and defense. Now, as we close the Spirent business, it's about, what, 40%, 45%, about 40%, and then the remainder, so 45% is service provider, 40% data center, and 15% aerospace and defense, purely as you average it out. 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 spend. The aerospace and defense continues to grow as well. 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.

Speaker #5: So 50% service provider , 30% . Data center ecosystem and 20% aerospace and defense . Now , as we close the the the .

Speaker #5: Sparring business , it's about what , 40 , 45% , about , you know , 40% . And then the remainder . So 45% is service provider , 40% .

Speaker #5: 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 .

Speaker #5: Spend and the aerospace and defense continues to grow as well . So I think , you know , 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 .

Speaker #5: And , you know , service provider will still grow , but it's growing at a much lower rate than data center . And our air space defense will also continue to grow .

Oleg Khaykin: Service provider will still grow, but it's growing at a much lower rate than data center. Our aerospace defense will also continue to grow. We'll have a much more balanced portfolio and less, I would say, dependent on the neurotic service provider spend.

Speaker #5: So we'll have a much more balanced portfolio and less I would say dependent on the neurotic service provider spend .

Speaker #6: Great . Thanks for that detail . And if I take spirent out of the guidance , it looks like my math is right .

[Analyst]: Great. Thanks for that detail, Oleg. If I take Spirent out of the guidance, it looks like my math is right. You're still growing around 10% sequentially on that core NSC business, almost 20% year-over-year. I was wondering if you could maybe break out, given that service provider is still sort of mixed with wireless, 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 aerospace and defense business?

Speaker #6: You're still growing around 10% sequentially on that core . NSC 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.

Speaker #6: 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 air , space and defense business ?

Speaker #5: Sure . So I think the you know , when we look at data center , we look at everything that pulls into data center .

Oleg Khaykin: Sure. I think when we look at data center, we look at everything that pulls into data center. We're going to see a very strong demand, believe it or not, for our field instruments, but it's field instruments by the data center ecosystem. It's these specialist fiber companies that are doing now interconnect. You probably saw some very interesting dynamics with NVIDIA investing in Nokia. I can kind of elaborate on that. What we are seeing is, initially, it was all about building out data centers. Then they realized the fiber interconnect between data centers is crap. They said, "Okay, we cannot accept the traditional fiber network providers." 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.

Speaker #5: So we're going to see a very strong demand , believe it or not , for our field instruments . But it's a field instruments by the data center ecosystem .

Speaker #5: It's these specialist fiber companies that are doing now interconnect . I mean , you probably saw some very interesting dynamics with Nvidia investing in the Nokia .

Speaker #5: I can kind of liberate on that . But what we're seeing is , you know , initially it was all about building our data center .

Speaker #5: Then they realized the fiber interconnect between data centers was inadequate. So they said, "Okay, we cannot accept the traditional fiber network providers."

Speaker #5: There has 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.

Speaker #5: And we actually seeing that is driving also the revenue of our traditional , what we call field instrument business . Then , of course , the the classical data center , you know , the , you know , 1.6 Terabit 800 gig , the , you know , production optical production test equipment continues to grow very nicely into the December quarter .

Oleg Khaykin: We're actually seeing that is driving also the revenue of our traditional, what we call field instrument business. Of course, the classical data center, the 1.6 terabit, 800 gig, the production optical production test equipment continues to grow very nicely into the December quarter. There's going to be an additional momentum building further into the March quarter. Aerospace defense will continue to gradually grow on the continued basis that it has been doing. 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. 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.

Speaker #5: And there's going to be an additional momentum building for as far back as far further into the March quarter . And aerospace defense will continue to , you know , gradually grow .

Speaker #5: On the continuing basis that has been doing and the only I would say kind of the cylinder in our engine that is still fairly weak is the wireless business due to the , you know , the wireless spend dynamics by the major wireless carriers .

Speaker #5: 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 .

Speaker #5: And that's already happening . Now . So this whole thing is trickling down from data center into fiber networks . Well , the next bottleneck that is , you know , not ready for the whole AI ecosystem is the wireless ran .

Oleg Khaykin: This whole thing is trickling down from data center into fiber networks. The next bottleneck that is not ready for the whole AI ecosystem is the wireless RAN. That's why, actually, we were not surprised at all that NVIDIA put in $1 billion into AI RAN in Nokia. We do hope, we are seeing that's really accelerating the 5G advance and 6G development. We will likely pull this in closer. We know the others are seeing it, and they're also going to start scaling their investment. 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. That hopefully gives you a good color on all the elements of the NSC business.

Speaker #5: And that's why actually , we were not surprised at all that Nvidia put in $1 billion into AI , ran in Nokia . And we do hope I mean , we are seeing that's really accelerating the 5G advance .

Speaker #5: And six G development will likely pull this in closer . And we know the others are seeing it . And they're also going to be start scaling their investments .

Speaker #5: 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.

Speaker #5: So that's kind of hopefully gives you a good color on all the elements of the NSC business .

Speaker #6: Yeah , absolutely . Thanks , Oleg . If I could sneak one in for Elon . Great to see the operating margin guidance for NSC .

[Analyst]: Yeah, absolutely. Thanks, Oleg. If I could sneak one in for Ilan, great to see the operating margin guidance for NSC. Obviously, Spirent is starting to contribute there. Can you give us maybe how you're thinking about operating margins as you sort of run rate the business to full quarter, you know, kind of exiting fiscal 2026 and into fiscal 2027? Thanks.

Speaker #6: Obviously , Spirent's starting to contribute there , but can you give us maybe how you're thinking about operating margins as you sort of run rate the business to full quarter , you know , kind of exiting fiscal 26 and into fiscal 27 .

Speaker #6: Thanks .

Speaker #4: Thanks for the question , Ruben . So currently we're including Spirent , you know , we are towards kind of the 160 million quarter .

Ilan Daskal: Thanks for the question, Ruben. Currently, including Spirent, we are towards kind of the $160 million a quarter. I believe that obviously we are still working on or just starting to work on integration, etc. Probably for the early part of 2026 calendar, it can reach maybe $5 million higher or so at around the $165 million range.

Speaker #4: I believe , you know , that obviously we are still working on or just starting to work on integration , etc. . So probably for , you know , the early part of of 2026 calendar , it can reach , you know , maybe 5 million higher or so at around , you know , the 165 range .

Speaker #6: Okay . Thank you .

[Analyst]: Okay, thank you.

Ilan Daskal: Sure.

Speaker #2: Your next question comes from the line of Mehdi Hosseini of SIG. Your line is open.

Operator: The next question comes from the line of Mehdi Hosseini of SIG. Your line is open.

Speaker #7: Yes , sir . Thanks for taking my question . Two from my end , Oleg . Let's assume wireless doesn't come back . Kind of a worst case scenario given the aspiring and a 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 .

[Analyst]: Yes. Thanks for taking my question, too, from my end. Oleg, let's assume wireless doesn't come back, kind of a worst-case scenario. Given the Spirent and a baseline assumption that it would be $0.08 accretive and a strength in fiber and perhaps a slightly higher growth rate for a smartphone next year, it seems to me that you should be exiting calendar year 2026 at close to like a $1 annualized EPS. If wireless were to come back, there will be growth above that target. 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.

Speaker #7: It seems to me that you should be exiting calendar year 26 at close to like .

Oleg Khaykin: As you can see, just as our business started tanking from the cutback in service providers in 2022, we had a significant operating de-leverage. Now that we're going in the other direction, we're getting significant operating leverage where every incremental dollar just drops right to the, you know, a big chunk of it drops to the bottom line. You're right. Getting up to if things continue as they are, it's entirely possible we'll be running around close to $1 a share next year. You know, your words and God's ears. You're right. Wireless is a significant incremental catalyst once it gets going because it's really been one of the segments that's kind of been left behind in this whole recovery. Clearly, as it starts turning around, it will be a major contributor to the bottom line.

Speaker #5: The direction we're getting significant operating leverage , where every incremental dollar just drops right to the , you know , big chunk of it drops to the bottom line .

Speaker #5: So I mean , you're right . I mean , the 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 .

Speaker #5: I mean , you know , your words in God's ears and you're right . Wireless is a significant incremental catalyst . Once it gets going .

Speaker #5: Because it's really been one of the segments that's kind of been left behind in this whole recovery . And I mean , you know , clearly , as it starts turning around , it will be a major contributor to the bottom line .

Speaker #7: Okay , great . And just double clicking on the OSB 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 , at least you should have some operating leverage there without contemplating what the real smartphone unit growth would be .

[Analyst]: Okay. Great. 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?

Speaker #5: Sure , I think you're right . I mean , some more maturing segment . I mean , the volumes I mean , you know , a fairly saturated .

Oleg Khaykin: Sure. I think you're right. It's a more maturing segment. The volumes, you know, we're fairly saturated in that market. The only incremental growth comes from the unit growth and maybe greater adoption of the world-facing 3D cameras. We're seeing actually also incremental upticking of the facial recognition technologies with the Android players in Asia. Not the big ones like Samsung, it's mostly the Chinese. We do think it will provide some additional growth. There we sell wafers to module integrators, so it provides a bit more leverage there. Also, the automotive market with LiDAR in Asia is becoming a big consumer of the 3D sensing filters. We got to put it in perspective. It's kind of hard to compete with 300+ million units. Automotive is like maybe 10 million, but let's say it's a nice welcome growth in the unit volume.

Speaker #5: In that market . So the only incremental growth comes from , you know , the unit growth and maybe greater adoption of the world facing 3G cameras .

Speaker #5: But , you know , we're seeing actually also incrementally up ticking of the facial recognition technologies with the Android players in Asia . Not not the big ones like Samsung , but it's mostly the Chinese .

Speaker #5: So we do think it will provide some additional growth . And there we sell , you know , wafers to module integrators . And so it's provides a bit more leverage there .

Speaker #5: 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 .

Speaker #5: You know , it's kind of hard to compete with 300 . Plus million units . I mean , automotive is like maybe 10 million , but it's a it's a nice welcome growth in the unit volume .

Speaker #5: 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 .

Oleg Khaykin: In terms of the ASP erosion, I think it's fairly stabilized at this point. I'd say the volume is the only thing that matters right now in terms of growing the revenue in that segment.

Speaker #7: Okay . Thank you .

[Analyst]: Okay, thank you.

Speaker #2: Your next question comes from the line of Ryan Coons of Needham and Company . Your line is open .

Operator: Your next question comes from the line of Ryan Koontz of Needham & Company. Your line is open.

Speaker #8: Great . Thanks . If 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 .

[Analyst]: Great. Thanks. If 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 you're working that up. Oleg, do you feel like your execution in that customer segment is where it needs to be today? Do you need to invest more and go to market? Do those customers have different product requirements that you might need to respend new products for data center, or is it largely the same products as your traditional service providers?

Speaker #8: Great to hear your working that up . Oleg . Do you feel like you're execution in that customer segment is where it needs to be today ?

Speaker #8: Do you need to invest more in go-to-market, and do those customers have different product requirements that you might need to respin new products for data centers, or is it largely the same products as your traditional ESPs?

Speaker #5: Well , you know , it's a great question . You know , we've been investing in this business for the last three years .

Oleg Khaykin: It's a great question. We've been investing in this business for the last three years. The term that I've borrowed from distribution business is churns and earns. Let me just clarify what it means. 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. You have a very much faster turnover of the technologies. It means you got to deliver your products now every two to three years. Also, because it is driven by engineering labs and new product development, it comes in at a much higher margin. You are turning the product portfolio much faster, which means you don't have this like a long volume waiting for the next generation.

Speaker #5: And , you know , the the the term that I've borrowed from distribution business is turns and earns . And let me just clarify what it means .

Speaker #5: 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 6 to 8 years between the generations of products to about 2 to 3 years .

Speaker #5: So you have a very much faster turnover of the technologies means you got to deliver your products now every 2 to 3 years .

Speaker #5: But also because it is driven by engineering labs and new product development . It comes in at much higher margin . So you are churning the product portfolio much faster , which means you're not you don't have this like a long valley waiting for the next generation .

Speaker #5: And you're earning higher percentage gross profits because it's a , you know , first to market always wins big . So in that respect , we really like it because its increasing the size of the market for us .

Oleg Khaykin: You're earning higher % gross profits because it's a, you know, first-to-market always wins big. In that respect, we really like it because it's increasing the size of the market for us. It's accelerating the revenue velocity for us. We get paid for the value we deliver by being always the leader in this market. The reason I use the word data center ecosystem is because our products don't just address a particular segment. We address everything along the entire value chain. It's your processor companies, you know, you'll 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 Ciena, Reso, Cisco, and so on and so forth. It's actually ultimately the actual hyperscaler who have extensive internal R&D developing anything from optical modules to MEMS switches to full-blown data center equipment.

Speaker #5: And it's accelerating the revenue velocity for us . And we get paid for the value we deliver by being always the leader in the in the market .

Speaker #5: So today, I mean, the reason I use the word "the data center ecosystem" is because our products don't just address a particular segment.

Speaker #5: We address everything along the entire value chain . It's your processor companies . You know your who they are . It's your physical layer .

Speaker #5: Communication companies like service and the you know , the module integrators . It's your system companies . Optical gear like Sienna research , Cisco and so on and so forth .

Speaker #5: And it's actually ultimately the actual hyperscaler who have extensive internal R&D developing anything from optical modules mEMS switches to full blown , you know , data center equipment .

Speaker #5: So , I mean , this is like the best thing you can have . And you're dealing with engineering budgets and the , you know , intense competition where everybody's trying to be first to with a better technology .

Oleg Khaykin: This is like the best thing you can have. You're dealing with engineering budgets and the intense competition where everybody's trying to be first-to-market with a better technology. This is like, you know, truly living inside a tornado. Our team loves it because that actually plays very well to our traditional strength to be at the bleeding edge of bringing leading-edge technology to the optical networking.

Speaker #5: So I mean , this is like , you know , truly living inside a tornado . our team loves it because that's actually plays very well to our traditional strength to be at the bleeding edge of bringing , you know , leading edge technology to the optical networking .

Speaker #8: That's super helpful . Would you say , Oleg , you .

[Analyst]: That's super helpful. Would you say, Oleg, you have?

Speaker #5: Have actually , you know , I would add one more thing . You know , I would add one more thing . You know , we talk always about speed .

Oleg Khaykin: Actually, you know, I would add one more thing.

[Analyst]: Sure.

Oleg Khaykin: I would add one more thing. We talk always about speeds: 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 it will be next year 7.0. Every time you move to a higher speed, you need a corresponding PCI Express next standard as well. It's a tick-tock. You deliver your network speed, which immediately needs a wholesale replacement of all the chip-to-chip interconnect. That's a force multiplier on that whole data center growth.

Speaker #5: So 400 , 800 , 1.6 , 3.2 . That's a network speed which you also have in parallel is chip to chip interconnect .

Speaker #5: You go from PCIe 3.0, 4.0, to 5.0. Today, we are at PCIe 6.0, and then next year, we will move to 7.0. So every time you move to a higher speed, you need a corresponding PCI Express.

Speaker #5: Next standard as well . So you are it's a tick tock . You deliver your network speed , which immediately needs a whole wholesale replacement of all the chip to chip interconnect .

Speaker #5: So that's a force multiplier on that whole data center growth .

Speaker #8: 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 ?

[Analyst]: That's really great. Would you say you have a similar set of competitors and similar share in the data center relative to your legacy customer base?

Speaker #5: Well , I would actually say where we play , you know , at the like purely the layer zero , layer one , we have a significantly greater share because that's traditional strength of JDS Uniphase Viavi .

Oleg Khaykin: I would actually say where we play, you know, at the like purely the layer zero, layer one, we have a significantly greater share because that's traditional strength of JDS Uniphase, Viavi. We were very strong in it. With the acquisition of Spirent, we have now added layer two to layer seven capability as well. There, you know, let's say there's two major competitors in that space. I mean, clearly, one was Spirent and the other one is Keysight through their acquisition of IXIA. I would say, you know, today it's Viavi and Keysight that are big players in that space. You know, there's about maybe four or five additional smaller players playing in individual layers kind of, you know, all over the world.

Speaker #5: We're very strong in it . With the acquisition of Spirent , we have now added layer two to layer seven capability as well , and they're , you know , it's a there's two major competitors in that space .

Speaker #5: I mean , clearly one was Spirent and the other one is Keysight . Through their acquisition of Ixia . So I would say , you know , today it's Viavi and Keysight .

Speaker #5: They're big players in that space . And you know there's about maybe 4 or 5 additional smaller players playing in individual layers kind of , you know , all over the world .

Speaker #5: But it's very much I would say a two major players because the level of intensity and speed with which you have to bring out the products , it's not a low budget game .

Oleg Khaykin: 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 products, it's not a low-budget game. It drives quite a significant R&D spend. I would say in that particular space, I'd say it's Keysight and Viavi.

Speaker #5: It's it it drives quite a significant R&D spend . So I would say in , in that particular space , I'd say it's Keysight and the .

Speaker #8: Great

[Analyst]: Great. Maybe I would follow up if I could on the aerospace and defense area. Can you kind of characterize those products? Are those positioning, navigation, and timing solutions like modules you're selling in typically, or you know, what's the fulfillment model look like? You're selling to, you know, drone companies and the like or defense companies?

Speaker #8: and maybe a follow up , if I could , on the aerospace and defense area . Can you characterize those products . Are those PA like modules you're selling in or , you know , what's the fulfillment model look like ?

Speaker #8: You're selling to drone companies and the like or defense companies ?

Speaker #5: Yeah . 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 .

Oleg Khaykin: Yeah. It goes into everything. We have a smorgasbord. We can sell you an inertial measurement unit that looks like a chip in a specialized package. We can sell you a module that has multiple of these chips with a controller and logic that does the inertial navigation system. We can sell you a full-blown inertial navigation system with sensor fusion receiving sensor data from cameras, the satellite antennas, and everything else. We have a full solution. Depending on which customer we engage and what their relative capabilities are, we'll sell them individual components, the modules, or the complete solution. If you're looking at some of these drone companies in Central and Eastern Europe, they may buy the entire solution. If you're dealing with a more sophisticated U.S. company, they may be buying modules or individual components that go into their critical systems.

Speaker #5: Then we can sell you a module that has multiple

Speaker #5: 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 a sensor data from cameras .

Speaker #5: The satellite antennas and everything else . So we have full solution . And depending on which customer we engage and what their relative capabilities are , we'll sell them .

Speaker #5: Individual components . We sell them the modules , we sell them the complete solution . So if you're looking at the some of these , you know , drone companies , you know , I would say in central and Eastern Europe , I mean , you may buy they may buy the entire solution if you're dealing with a more sophisticated US companies .

Speaker #5: And 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 .

Oleg Khaykin: It's all about autonomous vehicles, air, ground, sea, or undersea. You name it, that's what we are servicing. The nice thing about it is it's the same platform that can address all these different markets, including mining, agricultural, and surveillance drones, and all these things that you need if you think about the fully GPS-independent, autonomous kind of robotic vehicles.

Speaker #5: I mean , you it , that's what we are servicing . And the nice thing about it , it's the same platform that can address all these different markets , including the mining , agricultural and surveillance drones and all these things that you need .

Speaker #5: If you think about the name fully GPS , independent , autonomous , kind of robotic vehicles .

Speaker #2: Again , if you have a question , please press star one . Your next question comes from the line of Michael Genovese of Rosenblatt Securities .

Operator: 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.

Speaker #2: Your line is open .

Speaker #9: Thanks . Look , I think my phone broke up because I think you gave a new annual revenue number for the the the HSC acquisition , but I just didn't hear what it was .

[Analyst]: Thanks. Oleg, I think my phone broke up because I think you gave a new annual revenue number for the HSC acquisition, but I just didn't hear what it was.

Speaker #5: Yeah . So Elon will go ahead .

Oleg Khaykin: Yeah, Ilan will go ahead.

Speaker #4: So basically currently , you know , once we close the transaction we got a little bit more insight currently on an annual run rate .

Ilan Daskal: 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 the emulation piece, the channel emulation. Prior to that, we thought more about $188 million. Yes, it is higher right now.

Speaker #4: We believe it's about 200 million including , you know , the emulation piece . The emulation and prior to that we we thought more about 188 .

Speaker #4: So yes , it is higher right now .

Speaker #9: Okay . So I guess my question is .

Oleg Khaykin: Okay, I guess my question is.

[Analyst]: This is the Spirent business, right?

Speaker #5: Right .

Speaker #9: Yes , yes , yes . And so so so my my question has to do with , you know , does that change on higher revenue or any other reason , you know , kind of bringing an accretion date .

Oleg Khaykin: My question has to do with, you know, does that change on higher revenue or any other reason, you know, kind of bring an accretion date sooner than 12 months, or are we still thinking 12 months before it becomes accretive?

Speaker #9: You know , sooner than 12 months ? Or are we still thinking 12 months before it becomes accretive ?

Speaker #4: So , you know , it depends also on seasonality . Remember that , you know , there are stronger half is on the second calendar , half .

Ilan Daskal: It depends also on seasonality. Remember that their stronger half is on the second calendar half. That's the reason this quarter we see some positive EPS. Most likely in the first calendar half, it's a little bit softer. When you think about it from a full calendar year, yes, it's slightly higher. When you compare it to our fiscal year, the dynamic changes a little bit.

Speaker #4: 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 .

Speaker #4: 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 .

Speaker #5: Yeah , but not that clearly higher revenue makes the accretion sooner rather than later .

Oleg Khaykin: Yeah, in that, clearly, higher revenue makes the accretion sooner rather than later.

Speaker #9: Okay . And then I you know , 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 .

[Analyst]: Great. I think most of my questions were asked, but I just want to ask specifically on large service providers like AT&T, Verizon, or the cable companies. If we look at the wireline part of the network, we heard weak wireless from you on that. It sounds like a lot of the optical activity is being done by optical specialists. Is there anything to say about the tier one large cable and telcos on the wireline side? Is there any trend there that you can call?

Speaker #9: If we look at the wireline part of the network , you know , we heard weak wireless from you on that . But and then it sounds like a lot of the optical activity is being done by optical specialists .

Speaker #9: But is there anything to say about the tier one large cable and telcos on the on the wireline side , is there any any trend there that you can call ?

Speaker #5: So yeah , I would say gradual recovery . I mean fiber is growing but you know , but you know , and we do know there's going to be some big RFPs coming out from major cable operators .

Oleg Khaykin: Yeah, I would say gradual recovery. I mean, fiber is growing. We do know there's going to be some big RFPs coming out from major cable operators and the service providers. When I look at the fiber, we are now starting to segment them into professional-grade fiber operators and kind of consumer-grade. AT&T is more of a consumer-grade. They just continue, like, they keep talking about adding a lot of fiber customers. That actually is great news to us. I just want to hear, when I see the money, I'll believe it. I mean, they did make some pretty bullish announcements. We do think next year there will be accelerating some buying. It all plays very well.

Speaker #5: And the service providers . And its more with I now look when I look at , you know , fiber . We're now starting to segment them into professional grade fiber operators and kind of consumer grade .

Speaker #5: So AT&T is more of a consumer grade . So they just continue like you know , they keep talking about adding a lot of fiber customers .

Speaker #5: And that actually is great news to us . And I just want to hear when I see the money , I'll believe it .

Speaker #5: 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 .

Speaker #5: But then there is also this whole category of I call professional grade fiber . 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 base bands ?

Oleg Khaykin: There is also this whole category of what I call professional-grade fiber operators, emerging companies like Lumen. There are similar companies in Europe who all they focus on is interconnecting all these data centers. I'd say the next one will be how do you connect them all to the wireless basebands, I mean, base stations, to the towers. You now need to bring a reliable 10 gig, 100 gig traffic to all the towers. We do expect the combination between the traditional and the professional-grade fiber operators to continue to grow nicely into next year. Even the base business, the traditional service providers, it's all goodness because it's a high tide that raises all the boats. We kind of call it a base business. All these other companies, we call them speedboats. It's your professional-grade fiber operators, the SAMIs, modules, NAMs.

Speaker #5: I mean , base stations , you know , to the towers , because you now need to bring a reliable ten gig , 100 gig traffic to the all the towers .

Speaker #5: So we do expect the combination between the traditional and these , you know , professional grade fiber operators continue to grow nicely into next year .

Speaker #5: But even the , 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 .

Speaker #5: So we we kind of call it as a base business . And all these other , you know , companies , we call them speedboats .

Speaker #5: So it's your professional grade fiber operators . The semis , modules , names , these are all kind of speedboats that are growing much faster than the overall market .

Oleg Khaykin: These are all kind of speedboats that are growing much faster than the overall market. It is encouraging to see even your base service providers starting to spend more money.

Speaker #5: But I mean , it is encouraging to see even the your base , you know , service providers starting to spend more money .

Speaker #9: Okay , great . Thanks for the color .

[Analyst]: All right. Great. Thanks for the call.

Speaker #5: Sure . Thanks .

Oleg Khaykin: Sure. Thanks.

Speaker #2: Your next question comes from the line of Andrew Spinola of UBS . Your line is open .

Operator: Your next question comes from the line of Andrew Spinola of UBS Group AG. Your line is open.

Speaker #10: you . It's fun for me . Wondering if you could provide a little bit more color on the business . The business that you acquired .

[Analyst]: Thank you. Just one for me. Wondering if you could provide a little bit more color on the business, the Spirent business that you acquired. Was the margin profile on that business, you know, consistent with the overall business? Was it better or worse? When I'm thinking about modeling that, you know, post the 12 months when it turns accretive, do you think you can drive the margin in that acquired business in line with maybe your targeted 20% for NSC, or do you think you can do better? How should I think about that?

Speaker #10: What's the what's the margin profile on that business 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 , do you think you can drive the margin in that acquired business in line with maybe your targeted 20% for NSC , or do you think you can do better ?

Speaker #10: How should I think about that ?

Speaker #5: Well , so I think this that that business is both higher gross margin than the average NSC . And it's higher operating profit than average NSC .

Oleg Khaykin: I think that business is both higher gross margin than the average NSC, and it's higher operating profit than the average NSC. It's net-net accretive. I do believe that through integration and greater efficiency, we can actually expand their margins further. 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.

Speaker #5: 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 .

Speaker #5: And I think we do a thing on cost of goods . We should be doing a lot better because we have now greater scale in the parts procurement .

Speaker #5: And greater leverage of engineering and sales resources .

Speaker #4: And 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 .

Ilan Daskal: Andrew, just specifically on the gross margin, we see it in, you know, from the mid to high 60%, which is, as Oleg mentioned, definitely above our corporate average. It's a nice contribution there.

Speaker #4: So so it's a nice contribution there .

Speaker #10: Got it. And is that business seeing the same acceleration that you're seeing in the rest of your data center business?

[Analyst]: Is that business seeing the same acceleration that you're seeing in the rest of your data center business?

Speaker #5: 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 HSC , high speed Ethernet test that you sell to chip companies .

Oleg Khaykin: Yes. Probably not the same % because it's a much bigger from a much bigger base. Absolutely, they have a very exciting product called, there's a traditional HSC, high-speed Ethernet test that you, you know, sell to chip companies, the modules and systems, and enterprise data centers. There's a whole different flavor called AI HSC, which tests, generates AI workloads. You can test your network on how good it is to run the AI traffic and AI data. That piece is growing even faster.

Speaker #5: The modules and systems and enterprise data centers . And then there's a whole different flavor called AI , HSC , which tests , tests , generates AI workloads .

Speaker #5: So you can test your network on how good it is to run the AI traffic . And and the AI data . So that is that piece is growing faster .

Speaker #10: I see and wanted to ask one last question . Actually , on the data center business . I'm trying to think about that business in terms of units versus , you know , what other growth drivers you might have .

[Analyst]: I see. I wanted to ask one last question, actually, on the data center business. I'm trying to think about that business in terms of units versus what other growth drivers you might have. How much of that business is, if the number of switches being produced is doubling, tripling, what have you, how does that translate to benefits for you? Are you seeing most of your growth because of the growth in units in these products, or is it that there's just a lot more investment in R&D, new SKUs, new players in the space? How should I think of that?

Speaker #10: So how much of that business is . So , you know , if the number of switches being produced is doubling or tripling , what have you , how does that translate to benefits for you ?

Speaker #10: Are you seeing most of your growth because of the growth in units in these products , or is is it that there's just a lot more investment in R&D , new SKUs , new players in the space ?

Speaker #10: How should I think of that ?

Speaker #5: It's a combination . So when we talk about sales to the lab , i.e. to the R&D equipment , it's number of companies , number of projects , number of chips , and remember I also said the very fast product turn cycle right .

Oleg Khaykin: It's a combination. When we talk about sales to the lab, i.e., to the R&D equipment, it's a number of companies, number of projects, number of chips. Remember, I also said the very fast product churn cycle, right? Like every two, three years, next generation. That drives the more like the lab sales are driven by projects, right? It's a number of companies, number of projects, and how quickly one generation transitions to the next. When we talk about production, that is driven purely by units. The more units you're producing, the more you're shipping, the more you need to buy to set up more production lines. This is more like if you think about contract manufacturers, the more lines they add, the more equipment they need to buy.

Speaker #5: Like every 2 or 3 years . Next generation . So that drives the more like the lab sales are driven by projects . Right .

Speaker #5: 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 .

Speaker #5: So the more units you're producing , the more you're shipping , the more you need to buy to set up more production lines .

Speaker #5: So this is more like if you think about contract manufacturers , the more lines they add , the more equipment they need to buy .

Speaker #10: What's the split in your business between unit driven business versus project driven business ? On the data center side , roughly .

[Analyst]: What's the split in your business between unit-driven business versus project-driven business on the data center side, roughly? You know.

Speaker #5: You know , I , I , we don't really split it . That's , you know , dicing it very thin because it's effectively the same product , the same technology packaged into different box .

Oleg Khaykin: We don't really split it. That's dicing it very thin because it's effectively the same product, the same technology packaged into a different box.

Speaker #10: Got it . Thank you very much .

[Analyst]: Got it. Thank you very much.

Speaker #4: Thank you .

Oleg Khaykin: Sure.

[Analyst]: Thank you.

Speaker #2: Your next question comes from the line of Tim Savageau of Northland Capital . Your line is open .

Operator: Your next question comes from the line of Tim Savageaux of Northland Capital Markets. Your line is open.

Speaker #11: Hey good afternoon and congrats on the results and the guide . And I want to focus in on there in particular first on Spirent .

[Analyst]: Hey, good afternoon, and congrats on the results and the guide. I want to focus in on there in particular. First, on Spirent, you mentioned a larger base. Interested in what context you meant that. 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 2025 versus fiscal 2026. It seems like Spirent's got to be well above 50% exposed to data center, given what you're talking about.

Speaker #11: 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 .

Speaker #11: But it seems like Spierings got to be well above 50% exposed to to data center , given .

Speaker #9: What you're talking about .

Speaker #11: Is that fair to say ? Go ahead .

Oleg Khaykin: Yeah, what I.

[Analyst]: Is that fair to say? Go ahead.

Speaker #5: Yes . So I mean , the percentages gave it that's exiting this calendar year . It's like exiting December . The mix including now the new Spirent business .

Oleg Khaykin: Yeah. So I mean, the percentages gave it, that's exiting this calendar year. It's like exiting December, the mix, including now the new Spirent business. Now, in terms of their exposure, I would say if I define the data center ecosystem, I mean, lion's share of their business is a data center ecosystem. They also have, you know, an enterprise data center. I mean, I thought when I say data center ecosystem, it's chips, modules, systems, and hyperscalers. They also have the enterprise, like, say, financial insurance and other companies with their own who test their own firewalls and things like that. That's a, I would say, probably like an 80/20 split, probably.

Speaker #5: Now in terms exposure , I would say if I define the data center ecosystem , I'm in line share of their business is data center ecosystem .

Speaker #5: And but they also have , you know , enterprise and enterprise data center . So I mean , I talk when I say data center ecosystem .

Speaker #5: It's chips , modules , systems and hyperscalers . They also have the enterprise like say financial insurance and other companies with their own test , their own firewalls and things like that .

Speaker #5: So that's, I would say, probably an 80 over 20 split, probably.

Speaker #11: Okay . Well that makes sense . And looking at the organic guide , which is still pretty impressive , I guess , you know , 310 to 320 and understanding you're getting a healthier spirent contribution despite the shortened time period .

[Analyst]: Okay. That makes sense. Looking at the organic guide, which is still, you know, pretty impressive, I guess, you know, $310 million to $320 million, and understanding you're getting a healthier Spirent contribution despite the shortened time period, you know, and you explain that. As you look at that, and you kind of asked this a little bit before, we've seen some pretty good numbers in terms of what some of the big U.S. carriers are looking to spend in Q4. I might have looked at that organic number and thought, you know, an old-fashioned budget flush. Apparently not. It doesn't look like you're building much in there. Am I right? You know, for the traditional tier one telecom providers, are you looking at that to be flat or?

Speaker #11: You know , and you explain that . But as you look at that . And kind of ask this a little bit before , but we've seen some pretty good numbers in terms of what some of the big US carriers are spend in Q4 .

Speaker #11: You know , I might have looked at that organic number and thought , you know , an old fashioned budget flush . Apparently not .

Speaker #11: It doesn't look like you're building much in there . Am I right ? You know , for the , you know , traditional tier one telecom providers .

Speaker #11: Are you looking at that to be .

Speaker #5: Flat .

Speaker #11: To Q4 ?

Oleg Khaykin: For traditional Q3 to Q4, there are some fundamentals for traditional. Go ahead, sorry. For the traditional.

Speaker #5: No , there is some experimental for traditional sorry . So for the traditional so sorry guys . So for traditional there is some incremental growth .

[Analyst]: Sorry about that.

Oleg Khaykin: Sorry, guys. For traditional, there is some incremental growth, but I mean, I won't say budget flush. The incremental demand is coming from what I call the professional-grade kind of tier two, tier three focus players. You can call it budget flush, you can call it, but I think their stuff is driven by projects and contracts that they've signed with hyperscalers. What we are seeing now increasingly, what we used to call, you know, you'd have field instruments where we would sell 90+% to service providers, we're now seeing like a quarter up to a third of revenue is going into the whole data center-driven service provider ecosystem.

Speaker #5: 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 .

Speaker #5: Tier three focused players . I mean , you can call it budget flash . You can call it . But I think their stuff is driven by projects that they and contracts that they've signed with hyperscalers and , 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 .

Speaker #5: We're now seeing , you know , like a quarter up to a third of revenue is going into the whole data center driven service provider ecosystem .

Speaker #11: Okay. So, you look at that organic growth going from September to December.

[Analyst]: Okay. You look at that organic growth going September to December.

Speaker #5: Yeah . So we're all seeing 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 .

Oleg Khaykin: Yeah. We all see Verizon, AT&T saying that next year they're going to expand. If that happens, that will be just like a further tide that will raise all the boats.

Speaker #11: Got it . So it looks like anything good happening with the .

[Analyst]: Got it. It looks like anything good happening with the tier one.

Speaker #4: Tier one . You know team . You know also for we're not guiding for March , but it's not that we see anything .

Ilan Daskal: We're not guiding for March, but it's not that we see anything materially different going into March.

Speaker #4: You know materially different you know going March .

Speaker #5: So you 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 .

Oleg Khaykin: The only thing I say about tier ones, every quarter % drop in interest rate frees up an awful lot of cash for them to do things. There's a lot of pent-up demand. Basically, it's like they've been sweating the assets for the last three to four years. These things, like anything else, wear out. They need to be updated. I do think as they're getting a little bit, they're feeling better and more comfortable with the debt load, the interest load. They've all been sending all the right signals. That's actually quite encouraging. That's a positive thing for us. It would be a further, I would say, accelerator or a boost to the overall demand.

Speaker #5: And there's a lot of pent up demand . I mean , basically it's like they've been sweating the assets for the last 3 to 4 years .

Speaker #5: And you know , a lot , you know , these things like anything else , it wears out . It needs to be updated .

Speaker #5: And so I do think as they they're getting a little bit , they feeling better and more comfortable with the debt load . interest load and you know , I mean they've all been sending all the right signals .

Speaker #5: So that's actually quite encouraging . And that's that's a positive thing for us . It would be further I would say accelerator or a boost to the overall demand .

Speaker #9: Great .

[Analyst]: Great. Thanks very much. Congrats again.

Speaker #11: Thanks very much. Congrats again.

Speaker #12: Sure .

Oleg Khaykin: Sure.

Speaker #2: That concludes our Q&A session. I'll now turn the conference back over to Vibhuti Nayar for closing remarks.

Operator: That concludes our Q&A session. I'll now turn the conference back over to Vibhuti for closing remarks.

Speaker #3: Thank you . JL this concludes our earnings call for today . Thank you for joining . Have a good evening .

Vibhuti Nayar: Thank you, Jael. This concludes our earnings call for today. Thank you for joining. Have a good evening.

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