Viavi Solutions VIAV Introduction
VIAVI Solutions is a newer company in my portfolio that I have added to recently. The company makes optical testing products. VIAV is the “cousin” to Lumentum as both companies are spin-offs from JDS Uniphase in 2015. Lumentum is a customer of Viavi for testing their Optical Circuit Switch OCS product. Viavi says they have “all” of the optical transceivers companies as customers. It is also likely that Coherent and Google may be customers for their optical switches, but this is unconfirmed as a full customer list is not disclosed.
Revenue and profitability metrics have shown nice growth,
Revenue over the last year: 291M → 299 → 369 → 407 → 443
Corresponding to yoy revenue growth rates: +15% → +26% → +36% → +43% → +53%
EBITDA over last year: 35M → 43 → 61 → 80 → 93
Net income over the last year: 8M → -21 → -48 → 6 → 33
Gross margin in the current quarter was 61%, with a gross margin range of 58% to 62% over the last year. On the balance sheet the company has 650M of cash, and 699M of debt.
Currently the market cap of Viavi Solutions is 11.6B making the run-rate P/S 6.5 for the stock. I view the valuation as quite reasonable as Lumentum has a run-rate P/S of 24.2, albeit with LITE having higher top line growth.
The company is guiding next quarter revenue for 450 - 460M, which would be +54% yoy growth at the top end. It is worth knowing that the next quarter for Viavi going calendar Q2 to Q3 is their slowest typically. In the past going Q2 to Q3 they had either slightly sequentially down revenue or a small uptick.
The company makes infrastructure tools that are used in high speed communication networks. Products are used for building, validating, troubleshooting, and monitoring networks. Management has mentioned the strong demand for lab and field instruments in data centers.
Viavi has been telling investors about how testing intensity is increasing. This is because transceivers 400G and below, did not require as extensive testing. However, as the complexity of transceivers has increased, these transceivers now require extensive testing.
Top highlights from the company’s latest earnings call and tech conferences,
- Operating margin of 24%, which was versus a guidance range of 22.3% - 23.2%
- Operating margin grew +280 bps qoq, and +960 bps yoy
- Next quarter operating margin now guided to 27.1%
- EPS of 0.34 vs guidance of 0.29 - 0.31, increase of 0.07 sequentially
- Data center ecosystem customer demand “remains very strong”
- “Expect continued robust growth” in data center for next several quarters
- Customer adoption 1.6T transceivers is ramping testing demand, 800G is currently the biggest driver
- CPO revenues expected to begin this fall, with some recognized in current quarter
- 500M+ quarter will “come a bit sooner than were were originally thinking”
- “Cousins” with Lumentum, market share testing for OCS is “extremely high”
- The industry move to CPO sees VIAVI content per port going up
- More is being packed into a module, one things goes wrong and it’s a throw away module
Overall I am finding Viavi Solutions to be a compelling growth stock with a reasonable valuation. The company has many of the top players in optical as customers which are ramping up their testing. Data center related revenues are the fastest growing segment for the business.
Any feedback on the stock VIAV is welcome!