Viavi Solutions Q1 2025 Earnings Call Transcript

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Provided by Quartr
October 31, 2024

There are 9 speakers on the call.

Operator

Hello, everyone. My name is Tamika, and welcome to VIAVI Solutions Fiscal First Quarter 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I will now turn the conference over to Vyatnavi Nayar, Vyavi Solutions, Head of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Tamika. Good afternoon, everyone. Welcome to VIAVI Solutions' fiscal Q1 2025 earnings call. My name is Vibhuti Nayar, Head of Investor Relations for VIAVI Solutions. With me on the call today is Oleg Haykin, our President and CEO and Ilan Bhaskar, our CFO.

Speaker 1

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 guidance that we provide during this call, are valid only as of today. VIAVI undertakes no obligations to update these statements.

Speaker 1

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. Finally, we are recording today's call and will make the recording available on our website by 4:30 p.

Speaker 1

M. Pacific Time this evening. With that, I would now like to turn the call over to Ilan. Ilan?

Speaker 2

Thank you, Bibudi. Good afternoon, everyone. Now I would like to review the results of the Q1 of fiscal year 2025. Net revenue for the quarter was $238,200,000 which is slightly below the midpoint of our guidance range of $235,000,000 to $245,000,000 Revenue was down 5.5 percent sequentially and on a year over year basis was down 3.9%. Operating margin for the 1st fiscal quarter was 10% at the low end of our guidance range of 9.9 percent to 11.7 percent.

Speaker 2

Operating margin decreased 90 basis points from the prior quarter and on a year over year basis was down 2 40 basis points. EPS at $0.06 at the midpoint of our guidance range of $0.05 to $0.07 and was down $0.02 sequentially. On a year over year basis, EPS was down $0.03 Moving on to our Q1 results by business segment. NSE revenue for the 1st fiscal quarter came in at $159,400,000 which is around the low end of our guidance range of $160,000,000 to $168,000,000 This was mainly driven by slower order pace from service providers for field instruments. On a year over year basis, NSE revenue was down 6.5%.

Speaker 2

NE revenue for the quarter was $141,600,000 which is a 5.6% year over year decline as a result of continued conservative spend by service providers and NEMS. SE revenue was $17,800,000 and declined 12.7% from the same period last year, driven mainly by conservative spend by enterprise customers. NSE gross margin for the quarter was 60.9%, which is 2 70 basis points lower on a year over year basis. NE gross margin was 60.9%, which is a decrease of 220 basis points from the same period last year due to lower volume and product mix. SE gross margin was 60.7%, which is a decrease of 6.50 basis points from the same period last year as a result of lower revenue.

Speaker 2

NSE's operating margin for the quarter was negative 4.6%, which is a 5.50 basis points decline on a year over year basis. NSE operating margin was below our guidance range due to low revenue and gross margin fall through. OSB revenue for the 1st fiscal quarter came in at $78,800,000 which was above the high end of our guidance range of $75,000,000 to $77,000,000 primarily driven by anti counterfeiting and 3 d sensing. On a year over year basis, revenue was up 1.7%, driven by strength across all products. OSB gross margin was 55.3%, up 2 180 basis points from the same period last year and was primarily driven by higher volume.

Speaker 2

OSP's operating margin was 39.6%, which is an increase of 180 basis points on a year over year basis as a result of the higher gross margin fall through. OSP operating margin exceeded the high end of our guidance range of 33% to 35%. Moving on to the balance sheet and cash flow. Total cash and short term investments at the end of Q1 was $497,900,000 compared to $496,200,000 in the Q4 of fiscal 2024. Cash flow from operating activities for the quarter was $13,500,000 versus $50,300,000 in the same period last year.

Speaker 2

During the quarter, we purchased 2,000,000 shares of our stock for about $16,400,000 The fully diluted share count for the quarter was 224,000,000 shares, down from 224,200,000 shares in the prior year and versus 224,200,000 shares in our guidance for the 1st fiscal quarter. CapEx for the quarter was $7,300,000 versus $6,700,000 in the same period last year. Moving on to our guidance. For NSE, we are seeing signs of recovery and normalization of seasonality trend and expect a stronger second fiscal quarter. For OSB, we expect a seasonally weaker second fiscal quarter, mainly driven by softer demand in anti counterfeiting products.

Speaker 2

We expect the near term demand for anti counterfeiting products to be on the softer side as the end customers work down their inventories. For the 2nd fiscal quarter of 2025, we expect revenue in the range of $255,000,000 $265,000,000 Operating margin is expected to be 12.4 percent, plus or minus 100 basis points, and EPS to be between $0.09 and $0.11 We expect NSE revenue to be approximately $188,000,000 plus or minus $4,000,000 with an operating margin of 4.8 percent plus or minus 100 basis points. OSB revenue is expected to be approximately $72,000,000 plus or minus $1,000,000 with an operating margin of 32.3 percent plus or minus 100 basis points. Our tax expenses for the 2nd quarter are expected to be around $7,000,000 plus or minus $500,000 as a result of jurisdictional mix. We expect other income and expenses to reflect a net expense of approximately $3,500,000 and the share count is expected to

Speaker 3

be

Speaker 2

around 224,000,000 shares. With that, I will turn the call over to Oleg. Oleg?

Speaker 4

Thank you, Ivan. During the September quarter, our revenue came in at the lower end of our guidance range, with stronger OSP demand partially offsetting weaker NSE demand. The EPS was at the midpoint of our guidance range. On the positive side, we are seeing many of the NSE's traditional end markets showing signs of stabilization. We believe it marks the beginning of NSE recovery and expect it will continue into the second half of fiscal twenty twenty five.

Speaker 4

Now let's look at in more detail at each of our businesses, starting with NSE. The NSE revenue in fiscal Q1 declined on a year over year basis, driven by softer demand for field instruments and wireless products. Lower September quarter demand notwithstanding, we are seeing positive signs around order stabilization, which imply the beginning of recovery in Q2 and continuing into second half of fiscal twenty twenty five. A bit more color on individual product segments. A decline in Sealed Instruments was driven by lower demand from North American cable and service providers.

Speaker 4

At the same time, there are signs of stabilization and improved order momentum leading to demand recovery starting in the December quarter and continuing into the second half of fiscal twenty twenty five. In addition, we're also seeing stabilization in our wireless business and expect it to start recovering in the second half of fiscal 2025, which is earlier than previously anticipated. Fiber 11 production demand was slightly down. September quarter notwithstanding, we expect to see significant growth in this business for the remainder of fiscal 2025, driven by high demand for our 800 gig and recently launched 1.6 Terabit fiber and high speed Ethernet products. Our Mil Aero business continued its robust year on year growth driven by growth in mission critical products, including communication, avionics and P and C.

Speaker 4

Lastly, SC was down year on year primarily driven by lower enterprise customer spend. Looking ahead for NSC, we expect a seasonally stronger Q2 across all product segments with continued gradual recovery momentum in the second half of fiscal twenty twenty five. Now turning to OSP. During the fiscal Q1, OSP grew on a year over year basis, driven by higher demand for anti counterfeiting and 3 d sensing products. Overall, OSP results exceeded the higher end of our guidance range.

Speaker 4

For OSP, we expect a seasonally weaker second fiscal quarter, mainly driven by softer demand for anti counterfeiting products. We expect the near term demand for anti counterfeiting products to be on the softer side as the end customers work down their inventories. In summary, Q1 notwithstanding, we expect Q2 rebound to be the beginning of gradual recovery. Despite the challenging environment over the last 2 years, VIAVI has continued to invest in advanced products and technologies to maintain our industry leadership. With that in mind, I would like to recognize the VIAVI team for achieving 2 major milestones during the September quarter.

Speaker 4

The first milestone is the launch of the Valor Lab in Chandler, Arizona, which will provide test as a service for Open RAN ecosystem. The second milestone is the release of industry's first 1.6 terabits per second high speed Ethernet testing for AI workloads. These two achievements position VIAVI well for the leadership in wireless, data center and high performance computing market segments. Lastly, I would 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.

Operator

Thank Your first question is from the line of Ruben Roy with Stifel.

Speaker 5

Thank you. Thanks for taking my questions. Hi, Oleg and Ilan. Oleg, thanks for going through some detail on the segments and sort of the order momentum. Wondering if you could just drill into any a little bit further and talk about linearity through the quarter, Were the bookings fairly linear?

Speaker 5

Or did that pick up towards the end of the quarter? And then I had 2 quick follow ups. Thank you.

Speaker 4

Sure. Well, I mean, as we start a quarter, we have a backlog and then there is some expected orders that come in within the quarter. And I would say that largely linearity was pretty much as we expected, but we did have several major service providers indicated they would prefer to start taking product in the 2nd fiscal quarter, that some of the revenue in NSE got pushed out. But what also was very evident is a much bigger engagement and orders looking at the Q2, Q3 and a little bit even further into Q4 from not only NAMS and semiconductor vendors, but also from service providers. And we've seen a number of very interesting dynamics emerge.

Speaker 4

I was talking for the last, let's say, year and a half about this, what I would call, a Mexican standoff between all the operators, where they are all signaling to each other that they're not really investing, they're not spending. And what we have seen change during this quarter is a number of big events. I mean, first of all, you saw AT and T became very vocal and very aggressive about their upcoming fiber deployment in calendar 2025. Then we saw Verizon went out and actually reentered the fiber market buying Frontier into which they dumped their fiber assets, what about 8 years ago or so. And, of course, as the upper telecom players are becoming aggressive in fiber, it actually spurs a lot of the cable providers to accelerate their plans to upgrade or at least make their networks more competitive.

Speaker 4

With all of that, it's actually all of a sudden everything went from talk and no action to a lot of action and a lot of discussion on orders placements and things like that, which truly marked a big pivot in the behavior among the operators. And what's also was very interesting is the wireless operators all of a sudden came out of hibernation. I guess when it rains at first and also starting talking about accelerating 5 gs densification and deployment and actually starting placing field equipment or field test equipment orders, which is usually a good indication of them deploying equipment and expanding the network. So in that respect, we believe we expect to follow-up from the wireless NAMS in second half of the fiscal year probably to be stronger demand than we initially anticipated. If you may remember, last quarter, we kind of thought wireless was the middle of next calendar year for recovery.

Speaker 4

I think now we are a bit more positive on it and think it's going to be more of a fiscal second half, which is the first calendar half of next year. So hopefully that gives you a bit more perspective. And by the way, we are seeing the same thing now being mirrored in EMEA and other geographic markets. So I think maybe the interest rate cuts in September was one of the critical catalysts that spurred a lot of the money being released into the network upgrades and maintenance.

Speaker 5

That's great. Thanks for all that detail, Oleg. And you hit on sort of my follow-up, but I guess, just to make sure I understand on the wireless side and sort of the sooner than expected modest recovery. I was going to ask if that was sort of project based. Obviously, we're hearing about AT and T and ORAN, but it sounds like it's broader than that.

Speaker 5

And I guess if we're thinking through that earlier than expected recovery as we look ahead to the second half of your fiscal year, would you say and maybe Elon you could chime in that we should think about seasonality any differently as we think about the second half? That's all I have. Thank you.

Speaker 4

Well, I mean as you know, generally for us, 1st fiscal quarter and 3rd, they are the weaker ones. Clearly, to the extent a lot of these indications materialize in the March quarter, NSE may be a little bit stronger seasonally than would be otherwise, because we do see some of the orders, I mean, believe it or not, with this rapid order placement, as much as there is inventory in the channel, it's never the perfect inventory in a channel. And for some of the more specialized parts, we actually have lead times longer than 8 to 10 weeks. So that kind of puts these orders more into the March quarter rather than being able to execute them in the December quarter. So I think it's a bit too early to say, but there's definitely an opportunity for NSE to be stronger in the March quarter than normally would be.

Speaker 2

And Ruben, I would add that we continue obviously to monitor the macro environment, I mean post election and the kind of interest rates kind of dynamics. I mean, Oleg mentioned earlier that the first kind of Fed move, I mean, probably was the inflection point. But we have to see kind of how it continues from here and that will be another factor. So generally speaking, we are thinking about momentum continuing, but we have to continue to monitor the macroeconomic.

Speaker 5

Sure. Understood. Thank you. Thank you.

Operator

Your next question is from the line of Ryan Kuntz with Needham.

Speaker 2

Thanks for the question.

Speaker 6

Great to hear carriers coming alive here with cable and fiber and as well as even wireless, which is a bit of a surprise. But maybe can you touch on your comments around Europe a little more? And is there it sounds like there's a little movement there, number 1. And the second question is about your 1.6t opportunity with data centers and the AI builds. Can you maybe unpack those a little bit for us?

Speaker 6

Thank you.

Speaker 4

Sure. So we'll just take it as 2 questions, Ryan. So there's no freebies, but it's all right. You can always ask that. So EMEA well EMEA was never as bad as North America, but also we do see I mean the fiber never really went down because there's a lot of state sponsored activity to keep rolling out fiber in Europe.

Speaker 4

But I would say the wireless was particularly hard hit in Europe. And we do see fiber continues to be doing fairly well in Europe and improvement in North I mean in many ways it looks like European carriers kind of look at North America what North America is doing and then they kind of follow it. So in that respect, I'd say, we've seen this coupled behavior, right? If U. S.

Speaker 4

Goes down, Europe goes down. If U. S. Goes up, Europe goes up. So I think it's in a way it's kind of bit of a herd mentality.

Speaker 4

On the 1.6 Terabit, that is of course all driven by AI and data centers. An interesting thing, up until 400 gigabit per second, it was all driven by telecom operators. And generally transition node to node was about, I'd say, 4 to 6 years, like from 100 gig to 400 gig and then so on and so forth. What we are seeing with the data centers, that transition period is more like, I would say, 2 to 4 years. And it's currently ramping very rapidly with 800 gigabits and already a lot of design activity and a lot of pressure to start sampling the 1.6 Terabits.

Speaker 4

And that is all being driven by data centers. So while the telecoms drove 400 gig deployment and then of course data centers kind of joined in on it or piggyback on it, The 800 gig and 1.6 terabits, I would say is 100% driven by chip vendors, by module vendors and system vendors who are all being driven by the AI data center operator. So in that respect, I think we are already selling this quarter some of the 1.6 terabit systems mainly to the leading, I won't say which companies, but leading player equipment and semiconductor vendors. And I expect that will accelerate into the next year, but 800 gig is now really entering the high volume production.

Speaker 6

Are these at the 1.6 t, are these new customers to you or customers you've always had, they just are taking a bigger slice of the pie?

Speaker 4

It's a mix. So it's clearly on the semiconductor and NAMS. These are the same customers. But what we are increasingly seeing is the all these dozens of fiber optic module vendors in Asia.

Speaker 6

Is that just for production then mostly for them, but they're module makers?

Speaker 4

Initially, the first 1.6 is of course for development. And as they then we'll transition into the production. I'll say probably late next calendar year. I think most of the $25,000,000 will be driven by R and D CapEx for $1,600,000,000 with maybe initial production orders for 1.6 towards the end of the calendar year.

Speaker 6

Got it. Super helpful. Thanks, Oleg. And on the you mentioned briefly the enterprise world, sounds like that's still fairly soft. Is that more around Wi Fi testing typically?

Speaker 6

And what's that environment been like?

Speaker 4

Well, this is mainly our enterprise service assurance. It's a software. And reality is most of our customers in that space are big financial services, healthcare, institutions type customers and we've just been seeing a much more conservative enterprise software spending environment at least for our type of products. So it's and there you can have 1,000,000 plus orders. All it takes is 1 or 2 of them push out and it actually drives quite a bit of volatility.

Speaker 6

Got it. Great. That's really helpful. That's all I have for now. I'll get back in

Speaker 2

the queue if I need some other question. Thank you.

Speaker 5

Sure. Thank you.

Operator

Your next question is from the line of Michael DeNovetz with Rosenblatt.

Speaker 4

Great. Thanks. Oleg, can you talk at all

Speaker 3

about cable? How big is your exposure to cable now? And are you seeing a pickup in those orders for the next quarter and beyond?

Speaker 4

Hi, Mike. Sure. So I mean, the cable is proceeding with upgrades. I mean, the clearly, they've had some delays due to some architectural and system level and software delays from their network vendors. But I think it's finally the train is starting to move in the second quarter like starting in the second quarter.

Speaker 4

We had some initial sales in the September quarter. I think more coming up now and later. And increasingly, I mean, cable is becoming a bit more muted for us because more and more of the cable orders are fiber orders. So they are all kind of becoming part of our fiber customer base. But I think there's probably one more cycle where you're going to see coax testers and all our coax testers are now hybrid fiber and the copper.

Speaker 4

But I would my expectations is what I'm seeing from a lot of cable vendors, they're starting to look more and more as the service providers. They're investing a lot more into the assurance kind of high to ensure higher performance of their networks. They're investing much more into fiber. And incredibly, they're actually even going further than many of the traditional fiber service providers by deploying things like optical monitoring systems to actually which gives you a much higher level of availability and reliability of your fiber optic network. So we are seeing cable going from kind of moving up in the world in terms of the high performance networking.

Speaker 4

And I wouldn't be surprised if within a year we don't really start we'll still call them cable because they are origin, but they are really becoming very much in line with companies like Zayo, Frontier and other fiber operators.

Speaker 3

Great, very helpful. And I also want to echo that it's great to see service provider in the U. S. Certainly moving in the right direction here. That being said, 3 d sensing these days gets very little attention and maybe because it's kind of boring, but let me just ask you for any update, anything we should be thinking about in 3 d sensing, what's going on in the market there?

Speaker 3

Thanks a lot.

Speaker 4

So, I mean, well, I mean, it's still very much our anchor customer. I mean, they're doing pretty well. And but it's for us, it's a fairly saturated market. So, I mean, we grow if they grow. But we are now seeing and I mentioned it earlier in the year, we are seeing some early adoption by Android players in China in particular, not so much in Korea, but China of 3 d sensing and it's initially on the high end models to the extent that it will move more into mid range and down.

Speaker 4

And if that happens, it actually could become a quite exciting market for us. But at this point in time, it's too premature to talk about.

Speaker 3

Appreciate it. Thank you.

Operator

Your next question is from the line of Meta Marshall with Morgan Stanley.

Speaker 7

Great. Thanks. Maybe a couple of questions. So first question, just on is there any changes on how we should think about kind of the run rate of the OSP business? Any changes to kind of volumes to reprints or how we think about that business?

Speaker 7

And on the second question, just on SE, understand kind of the enterprise commentary, but just kind of what are some of the green shoots you're seeing on the SE side of the business? Thanks.

Speaker 4

Okay. Sure. So I would say in OSP, in terms of run rate, clearly the way we talk about it is the base business, which is the intake counterfeiting, I would say it's kind of industrial mill aero piece kind of base and then we talk about 3 d sensing. So I think I already provided color on 3 d sensing. I think it's very much going with the dynamics of our lead customer for that business.

Speaker 4

And I don't see it really changing. Going forward, I think it's usually stronger in the first half of the fiscal year and it's a bit weaker in the second half. Although it's no longer as asymmetric as it used to be. So it's more maybe like, let's say, 55%, 45%, 60%, 40% split between half and half. On the anti counterfeiting, I think there is several things.

Speaker 4

I would say in the near term, there may be a bit of the lower demand and it's coupled with some currency redesigns at major economies and they want to consume all the inventory of the older products that they have before they place new orders. Then there is also obviously some sanctions that have hit a number of markets. There were, I'd say, we used to make maybe probably around $7,000,000 $8,000,000 a year. So that kind of goes away. So I'd say in the near term, we think the anti counterfeiting to be more on the conservative side of the spend probably at least for the first half of next calendar year.

Speaker 4

And then we do see a number of new designs and new products once the old inventory cycle through and the new nodes go into production, we expect it to rebound more to its traditional run rate. And then on SE, so I'd say SE is a story of 2 cities. I mean, the enterprise, on one hand, it's a very margin rich, good product, but we've seen we saw it initially in the March quarter. As I said again, in September, it's taking longer to get customer acceptances. The spend velocity is a lot slower.

Speaker 4

So it's a bit on the softer side. On the interestingly wise on telecom side, the operators and what I will say more on the private networks, there we are seeing very strong momentum in the business development funnel in orders, which will start converting into revenue in the second half of our fiscal year and then beyond. And I would say, AIOps is really driving a lot of interest in our products and we do think we will get next year into comfortably in the 20s in terms of quarterly run rate and from there on moving higher as the more and more customers start taking acceptance of the AIOps product and kind of basically you do the land and you expand and then you get different. So the initial acceptances are starting to take place in calendar 2025 and from there on there will be geographic expansion and the breadth of products, domain products that we are selling expansion.

Speaker 7

Great. Thanks so much. Sure.

Operator

Your next question is from the line of Tim Savageaux.

Speaker 8

Okay. Good afternoon. Hopefully, I don't get bounced off again here. Before I say congratulations on the outlook in particular, took a while, but you do seem to be syncing up with this overall positive environment, especially around fiber spend, but more broadly as well. And as you look at that and what's setting up to be a strong finish to the year for most of the big carriers, You might want to historically call that a budget flush, although you seem to be characterizing it as more sustained than that with visibility over multiple quarters.

Speaker 8

I wonder if you could provide some color on that in terms of what you're seeing in terms of the carriers finishing the year strong, but also extending that recovery and what kind of visibility you have there?

Speaker 4

So, I mean, I think it's probably less of a budget flash where I would probably say it's pent up demand because they really haven't done anything in 2 years. While when they start spending it a bit feels like a feels like a budget flash because all of a sudden everybody says I need it and I need it now. Well, 3 months ago you said you didn't even want to talk, right? So there is some of that, but the reality is they also quickly realizing that there is some lead times. I mean, I would not say that there is a shortage of components.

Speaker 4

It's just when you don't order anything for a long time to get every while you probably can get 95% of what you need, there is always something that probably has some lead time. So I think there's to me that is just fundamental base business just getting back to what it should have been running as a maintenance much into the extent they expand the networks and do more build outs, it's actually all positive. Because what it does, it basically lifts the base business of VIAVI because then it makes our, I would call them speedboats, our much faster growing segments really add to this whole acceleration, things like our avionics and aerospace business, military business, the fiber 11 production businesses, these are all becoming quite interesting. And we're now even starting to see customers approaching 6 gs topic, which is for advanced development is very positive. But also seeing the 5 gs densification finally starting at least the talk around it is starting to pick up, that's all positive things.

Speaker 4

So in that respect, we feel pretty good about NSE finally turning the corner.

Speaker 8

Got it. Good to hear. And if I could follow-up on lead times, I imagine they vary across your business. I would imagine the bigger machines and lab and production tests are a little longer. But if you could if you want to talk field versus lab or what have you, talk about kind of where your lead times are right now and imagine they're historically pretty short on the fiber field side.

Speaker 8

Is that changing given your reference to lead times there? Or is it really just a matter of logistics and getting the machine cranked back up?

Speaker 4

Well, actually, so the more mainstream kind of field product is, the lead times are not extensive. I mean, there's a ton of inventory of semiconductor devices and connectors and all that stuff out there. Where we do feel lead time is a big deal is on the bleeding edge products like 1.6 Terabit, 800 Gigabit. There you need to get things like SerDes, right? And as you can imagine, they're all in very high demand and their lead times are you can tell anywhere within 3 to 6 months and we tell everybody the more of a bleeding edge product you want, place orders now or deal with lead times that may be not as comfortable for you.

Speaker 4

So I'd say on the leading node product and node products like 3 nanometer and more aggressive than that, you probably have some, I'd say, 3 to 6 months lead time. On anything 400 gig and below you can get a turnaround pretty quickly.

Speaker 8

Great. Thanks very much.

Operator

Sure. At this time, there are no further questions. Presenters, I'll hand the call back over to you for any closing remarks.

Speaker 1

Thank you, Tamika. This concludes our earnings call for today. Thank you, everyone. Have a good afternoon.

Operator

This concludes today's call. Thank you for joining. You may now disconnect your lines.

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Viavi Solutions Q1 2025
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