Bullish management. We hosted a virtual non-deal roadshow with Viavi this week. We view CEO Oleg Khaykin as one of the best leaders in the sector. We believe him to be measured and balanced when he communicates. In other words, we have not known Oleg to be promotional. Therefore, it was notable how bullish Viavi's comments were related to Network Enablement instruments and Service Enablement software. Management also sounded incrementally more positive, compared to the last earnings call, on its 3DS business in FY21.

Reiterating Buy. VIAV shares are flat YTD, versus the S&P up 20%, despite double-digit NSE revenue growth for the last three quarters and record Viavi operating margins of 21.3% in FY21. In early CY21, the company started talking about a "supercycle" in NSE driven by Fiber, Optical and 5G. There is strong demand for Fiber Access, which looks sustainable, and 5G deployments are accelerating towards their likely peak-run rate in 2023 or 2024. Because of high OSP operating margins, and high NSE incremental margins, there is leverage in the model. We are also positive on Viavi's plan to retire convertible debt and buy back stock, thereby lowering share count and avoiding future dilution.

3DS sounds incrementally better. The day after our meetings, Bloomberg reported Apple (APPL, Not rated) cut orders to suppliers due to weakening iPhone demand. However, from our conversation with Viavi hours before, we do not believe the report to be true, at least not for all suppliers. On the last earnings call, Viavi guided 3DS sales down 10%-15% for FY22, with 2HFY22 likely to be flat year-over-year. This week, Viavi said it thinks overall iPhone 13 supply has improved and demand looks solid. The company implied it could possibly see better than seasonally normal, and better than flat, 3DS sales in 2HFY22.

VIAV

Viavi Solutions, Inc.

Technology

We Like The Combination of Good Revenues and Margins With Lower Share Count

Upgrading To Buy: Time To Get More Excited About Testing Fiber, Optical and 5G