Andrew Spinola

Andrew Spinola sought clarification on the breakdown of Viavi Solutions' data center business across lab, production, and field segments, and asked about the factors influencing the flat sequential NSE operating margin guidance from fiscal Q2 to Q3 despite revenue growth.

Answer

CEO Oleg Khaykin stated that Viavi Solutions does not individually break down the data center business into lab, production, and field due to varying mix across quarters, but generally refers to it as the 'data center ecosystem.' He clarified that lab instruments are driven by R&D CapEx, production by volume demand, and field instruments by the number of data centers built. Oleg Khaykin noted that production is expected to see higher percentage growth, linked to increased unit volumes and capacity expansion. CFO Ilan Daskal explained that the flat NSE operating margin guidance is due to a mix effect and the reinstatement of fringe expenses (e.g., Social Security) in the first calendar quarter, which increases operating expenses.

Andrew Spinola from UBS requested a breakdown of Viavi Solutions' data center business across lab, production, and field segments, seeking guidance on modeling its long-term evolution, particularly the cyclicality of production versus the consistency of lab and growth of fiber monitoring. He also inquired about the rationale behind the flat sequential NSE operating margin guidance for Q3 despite an anticipated revenue increase.

Answer

Oleg Khaykin, President and CEO, explained that Viavi Solutions does not provide a granular breakdown of data center revenue by lab, production, and field due to dynamic quarterly mix shifts. He clarified that lab instruments are tied to R&D CapEx, production to volume demand, and field instruments to data center builds, projecting significant production growth over the next two years driven by capacity expansion and rapid technology cycles. Ilan Daskal, CFO, attributed the flat sequential NSE operating margin guidance for Q3 to a combination of product mix and the seasonal reinstatement of statutory fringe expenses in the first calendar quarter, which impacts operating expenses.

Andrew Spinola asked for the relative contribution from data center versus aerospace and defense to the strong Q1 outlook and inquired about the long-term operating margin potential for the NSE segment.

Answer

President and CEO Oleg Khaykin stated that both data center and A&D were strong contributors to the Q1 guidance but declined to provide a specific split. Regarding margins, he explained the long-term goal for NSE is to return to the mid-to-high teens and eventually 20% operating margin, driven by revenue growth. He noted that higher data center margins are largely offset by slightly lower A&D margins.

Andrew Spinola questioned the recent strength in the NSE business, asking if there was a pull-forward of service provider demand and whether the spending recovery trend remains intact despite a softer Q4 guide.

Answer

CEO Oleg Khaykin asserted there was no demand pull-in, noting that the March quarter was unseasonably strong for service providers, which he views as a sign of healthy, recovering demand. He and CFO Ilan Daskal attributed the conservative Q4 outlook primarily to potential order delays from tariff-related PO revisions, not a change in end-market demand. Khaykin specified that service providers are the most likely to see delays.

Andrew Spinola asked for a breakdown of the quarter's revenue upside, seeking to understand the contribution from the cyclical service provider recovery versus secular growth drivers. He followed up by asking about the potential upside in the fiber lab business, particularly its exposure to high-growth, AI-driven end markets.

Answer

President and CEO Oleg Khaykin attributed about one-third to one-half of the upside to a broad-based service provider recovery, with the remainder coming from diversification into fiber lab, production, and aerospace and defense. He elaborated that the fiber lab business could realistically double or triple over the next 3-4 years, driven by faster technology node migrations in datacom (spurred by AI) compared to the traditional telecom cycle.

Andrew Spinola asked about the timing of Keysight's wireline business, noting that R&D typically precedes hardware deployment by a few years. He questioned why the wireline business is picking up actively now with hyperscaler buildouts, what differentiates this timing, and what it implies for the visibility and longevity of this spending.

Answer

President and CEO Satish Dhanasekaran explained that the wireline business is benefiting from two dynamics: the immediate AI cluster and infrastructure buildouts by hyperscalers, which are driving the entire supply chain, and the longer-term secular trend of underlying technology waves across the compute, memory, storage, and infrastructure stack. He stated that Keysight is making significantly bigger contributions and participating in this long-term R&D trend, feeling good about both short and medium-term opportunities.

Andrew Spinola questioned the timing difference between Keysight's R&D business, which typically precedes hardware deployment by a few years, and the wireline business, which is seeing a pickup concurrent with active hyperscaler buildouts. He asked what this difference implies about the visibility and longevity of the current wireline spend.

Answer

Satish Dhanasekaran, President and CEO, explained that the wireline pickup is driven by two factors: the immediate impact of AI cluster and infrastructure buildouts by hyperscalers, and the longer-term secular trend of underlying technology waves across the entire AI stack. He stated that Keysight is making significant contributions and participating in this long-term R&D trend, feeling good about both short- and medium-term opportunities.

Andrew Spinola noted the strong international quarter but observed a deceleration in the U.S. business on the revenue side, despite robust software and services growth. He asked for color on the dynamics in the U.S. business. He also inquired about the shift towards more ten-year contracts, asking for details on take rates and the magnitude of the transition from five-year to ten-year deals, to better understand the outlook for 2026.

Answer

President Josh Isner clarified that the U.S. business is accelerating, with bookings being the key indicator for future domestic performance, and expects a strong Q4. CFO Brittany Bagley echoed that any quarter-to-quarter lumpiness is due to timing, and overall, the domestic business shows incredible strength. Regarding contract lengths, Josh Isner stated that normalized bookings (to five years) are also accelerating, and while more ten-year deals are closing, the growth is strong even when normalized. CEO Rick Smith added that the shift to longer contracts reflects growing customer trust and a desire for long-term partnerships with Axon.

Andrew Spinola noted the strong international quarter but observed a deceleration in the U.S. business despite robust software and services growth, seeking clarification on these dynamics. He also asked about the increasing trend of ten-year contracts, requesting color on the shift from five-year deals and its implications for understanding 2026 performance relative to the year-end contracted backlog.

Answer

President Josh Isner and CFO Brittany Bagley clarified that the U.S. business is accelerating on the bookings side, with revenue recognition being a timing factor, and strong execution is anticipated for Q4. Josh Isner and CEO Rick Smith confirmed an acceleration in normalized (five-year) bookings and an increase in ten-year deals, which they view as a positive indicator of customer trust and long-term commitment, emphasizing the importance of continued execution.

Andrew Spinola from UBS asked for more details on the recently announced contract in the gaming vertical, specifically which products were included in the deal.

Answer

President Josh Isner stated that the gaming contract is centered on video solutions, including body cameras and FUSYS. He also noted that there are future opportunities for less-lethal products within the gaming security space.

Andrew Spinola of UBS Group AG questioned the strategic rationale behind the Silvis acquisition, asking whether it represents an expansion into defense technology as a new business line or if it's expected to become a core component of the public safety portfolio, similar to the Avigilon acquisition.

Answer

Chairman & CEO Greg Brown described Silvis as a market leader that provides exposure to the new, fast-growing unmanned systems market while also being complementary to Motorola's core LMR and video businesses. EVP & CTO Mahesh Saptharishi highlighted Silvis's capabilities in spectrum monitoring for drone detection. EVP & CFO Jason Winkler noted the opportunity to add recurring service revenues.

Andrew Spinola of UBS asked a high-level question about the gross margin trajectory, wondering if it should be modeled as a steady increase with scale or as being flat before inflecting higher as revenue mix shifts.

Answer

CFO Jim Moylan explained that gross margin is heavily influenced by product mix. Currently, the mix is weighted toward lower-margin initial line system deployments (RLS) and early-stage pluggables. He expects margins to trend up over time as higher-margin capacity is added to these systems and pluggable costs decrease. He anticipates a return to the mid-40s range by fiscal 2027, but not in the next year.