Viavi Solutions (VIAV)

Network testing solutions company Viavi Solutions (NASDAQ:VIAV) reported revenue ahead of Wall Streets expectations in Q3 CY2025, with sales up 25.6% year on year to $299.1 million. On top of that, next quarter’s revenue guidance ($365 million at the midpoint) was surprisingly good and 22.1% above what analysts were expecting. Its non-GAAP profit of $0.15 per share was 14.2% above analysts’ consensus estimates.

Company Overview

Once known as JDS Uniphase before its 2015 rebranding, Viavi Solutions (NASDAQ:VIAV) provides testing, monitoring and assurance solutions for telecommunications, cloud, enterprise, military, and other critical networks and infrastructure.

Measurement and inspection instrument companies may enjoy more steady demand because products such as water meters are non-discretionary and mandated for replacement at predictable intervals. In the last decade, digitization and data collection have driven innovation in the space, leading to incremental sales. But like the broader industrials sector, measurement and inspection instrument companies are at the whim of economic cycles. Interest rates, for example, can greatly impact civil, commercial, and residential construction projects that drive demand.

Viavi's competitors in the network testing market include Anritsu, EXFO, Keysight Technologies, NetScout Systems, and Spirent Communications. In the optical security and performance products space, they compete with companies like Giesecke & Devrient, Merck KGA, Materion, and Coherent.

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Viavi Solutions struggled to consistently increase demand as its $1.15 billion of sales for the trailing 12 months was close to its revenue five years ago. This wasn’t a great result and is a sign of poor business quality.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Viavi Solutions’s annualized revenue growth of 4.7% over the last two years is above its five-year trend, but we were still disappointed by the results.

This quarter, Viavi Solutions reported robust year-on-year revenue growth of 25.6%, and its $299.1 million of revenue topped Wall Street estimates by 1.7%. Company management is currently guiding for a 34.8% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 27.6% over the next 12 months, an improvement versus the last two years. This projection is eye-popping and implies its newer products and services will catalyze better top-line performance.

Viavi Solutions has best-in-class unit economics for an industrials company, enabling it to invest in areas such as research and development. Its margin also signals it sells differentiated products, not commodities. As you can see below, it averaged an elite 60.5% gross margin over the last five years. That means Viavi Solutions only paid its suppliers $39.48 for every $100 in revenue.

This quarter, Viavi Solutions’s gross profit margin was 58.8%, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Viavi Solutions has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 8.1%, higher than the broader industrials sector.

Analyzing the trend in its profitability, Viavi Solutions’s operating margin decreased by 8 percentage points over the last five years. Even though its historical margin was healthy, shareholders will want to see Viavi Solutions become more profitable in the future.

This quarter, Viavi Solutions generated an operating margin profit margin of 2.5%, down 2.3 percentage points year on year. Since Viavi Solutions’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Viavi Solutions, its EPS declined by 5.9% annually over the last five years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.

We can take a deeper look into Viavi Solutions’s earnings to better understand the drivers of its performance. As we mentioned earlier, Viavi Solutions’s operating margin declined by 8 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Viavi Solutions, its two-year annual EPS growth of 16.9% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.

In Q3, Viavi Solutions reported adjusted EPS of $0.15, up from $0.06 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Viavi Solutions’s full-year EPS of $0.56 to grow 27%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Viavi Solutions has shown impressive cash profitability, enabling it to ride out cyclical downturns more easily while maintaining its investments in new and existing offerings. The company’s free cash flow margin averaged 8.5% over the last five years, better than the broader industrials sector.

Taking a step back, we can see that Viavi Solutions’s margin dropped by 7.1 percentage points during that time. Continued declines could signal it is in the middle of an investment cycle.

Viavi Solutions’s free cash flow clocked in at $22.5 million in Q3, equivalent to a 7.5% margin. This result was good as its margin was 4.9 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends trump fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Viavi Solutions historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7.6%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Viavi Solutions’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Viavi Solutions reported $549.1 million of cash and $791.6 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $215.2 million of EBITDA over the last 12 months, we view Viavi Solutions’s 1.1× net-debt-to-EBITDA ratio as safe. We also see its $26.1 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by Viavi Solutions’s optimistic EPS guidance for next quarter, which blew past analysts’ expectations. We were also glad its revenue guidance for next quarter trumped Wall Street’s estimates. Zooming out, we think this was a good print with some key areas of upside. The stock remained flat at $18.15 immediately after reporting.

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Viavi Solutions doesn’t pass our quality test. To begin with, its revenue growth was weak over the last five years. And while its admirable gross margins indicate the mission-critical nature of its offerings, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, its declining EPS over the last five years makes it a less attractive asset to the public markets.

Viavi Solutions’s P/E ratio based on the next 12 months is 25.5x. This multiple tells us a lot of good news is priced in - you can find more timely opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $19 on the company (compared to the current share price of $18.15).