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Viavi CEO sees 'tectonic shift' in operator spending

According to Oleg Khaykin, the CEO of network-testing and monitoring equipment supplier Viavi, it is both the best of times and the worst of times.

"On one hand it's the best of times, because now you have visibility of a big backlog," Khaykin said during Viavi's quarterly conference call, according to a Seeking Alpha transcript. The company this week released its fiscal fourth-quarter 2021 earnings. "But it's also the worst of times because you cannot get all the product you need when you need it. "

He said that fiber and 5G operators have officially opened their checkbooks and are now spending heavily to improve their networks following a pandemic that shifted the value of broadband connections from the need-to-have category and into the must-have category. However, that spending has been hindered by ongoing component shortages.

Nonetheless, the demand remains, according to Khaykin.

"What we have seen in the last, say, six months is a significant, and I mean really tectonic shift in North America among operators, with a lot of the media focus and content going right out of the window and refocusing on the core business in building and operating networks," he said.

Khaykin explained that operators ranging from AT&T to Verizon have begun spending heavily to improve their networks, a shift that dovetails with their general retreat from offering advertising and video services.

Financial analysts generally agreed with Khaykin's assessment.

"We upgraded Viavi [shares] to "buy" on June 17 because our checks suggested a building positive demand cycle for fiber and 5G test [equipment]," wrote the financial analysts at WestPark Capital in a note to investors this week. In our opinion, the [Viavi] 4QFY21 report suggests our reasoning was sound."

MKM Partners analysts concurred.

"Viavi is benefiting from a number of favorable secular tailwinds, ranging from deeper fiber-optic buildouts, 5G wireless buildouts, and growing adoption of 3D-sensing solutions beyond the consumer smartphone market. The only impediment standing in between Viavi driving strong upside relative to investor expectations is the degree of component shortages, which we eventually expect will normalize in 2H22," wrote the analysts.

The analysts at MKM Partners continued: "The message from operating results and management's tone is clear, Viavi's operating outlook has hit an inflection point, and we see Viavi's operating model, and thereby profitability, far exceeding investor expectations."

Overall, Viavi reported revenues of $310.9 million during its most recent quarter, a figure up 16.6% year-over-year. The company's earnings per share were up 108.3% during the same period. Those results were largely above most Wall Street expectations.

The EXFO situation

Tempering Viavi's positive figures were indications that its pursuit of an acquisition of rival EXFO may have ended in failure. Viavi has been working for months to attract interest from EXFO with increasingly valuable merger proposals.

However, during his company's quarterly conference call this week, Khaykin suggested that Viavi would not pursue EXFO any further if the company's shareholders voted Friday against Viavi's latest offer.

If EXFO's shareholders vote to reject Viavi's offer, "then they get what they deserve, which is selling their shares subpar," he said.

That appears to be exactly what EXFO's shareholders did on Friday. The company announced that its shareholders "overwhelmingly" approved a plan by EXFO founder Germain Lamonde to take the company private. That move essentially represents a rejection of Viavi's merger proposals.

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Mike Dano, Editorial Director, 5G & Mobile Strategies, Light Reading | @mikeddano

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