Good day, everyone. Welcome to the Viavi Solutions National Investor Call. At this time, all participants are in a listen-only mode. Later we'll take your questions. Your host today is Massimo Arpino. He'll provide an introduction to the company. Massimo, the floor is yours.
Great. Thank you. Hi, everyone. This is Massimo Arpino from Stifel Investment Banking. Thank you all for joining the call and for your interest in this opportunity. We're here to discuss a follow-on offering for an extremely exciting company with an incredible value creation story called Viavi Solutions. The company's presenters today are President and CEO, Oleg Khaykin, Chief Financial Officer, Ilan Daskal, and Head of Investor Relations, Vibhuti Nayar. I'll take two minutes here to walk through the format of the call and the offering, and then management will take over. Just to level set, the roadshow presentation can be accessed on Net Roadshow, so please do pull the presentation up if you can so that you can follow along as management walks through the deck.
In terms of the format for this call, the first half will be dedicated to management walking through the presentation to explain the story and the offering. Once management gets through the presentation, the call will be opened up for Q&A. Before I turn it over to the team, let me briefly summarize the terms of the offering, which can be found on page 3 of the presentation if you're following along on NetRoadshow. The issuer, as I mentioned, is Viavi. The offering is for $500 million of common equity, 100% primary shares. There's a standard 15% over-allotment. Use of proceeds are to pay down the company's $450 million Term Loan B and for general corporate purposes. The lockup is 60 days, and the book runners are Stifel and Needham.
From a process standpoint, we've confidentially marketed the deal and are planning to price the offering today. If you'd like to place an order, please do so with your Stifel or Needham contact as soon as possible. With that, I'll turn it over to Viavi CEO, Oleg Khaykin. Oleg, the floor is yours.
Thank you, Massimo, good afternoon to those of you on the West Coast, and good evening to those of you on the East Coast. I would like to go through the presentation. I'm starting with the company overview slide. On my slide, it's slide number 4, going to number 5, Viavi at a glance. For those of you who may not be familiar with Viavi, 10 years ago, JDS Uniphase split itself into Lumentum and Viavi. Viavi is the business that inherited test and measurement products and the Optical Security and Performance Products. Today, we are trailing 12-month $1.366 billion in revenue.
Our most recent quarter, we were over $400, so we're actually currently running at about $1.6 billion in revenue run rate. We have over 4,100 employees worldwide with a very rich patent portfolio of over 3,300 patents. Our overall composite gross margin around 61%, higher than 61% on test and measurement, in the 50s for the Optical Security and Performance Products. The business is divided into two business units, Network and Service Enablement, that's about 75% of the revenue, and the Optical Security and Performance Products, that's roughly 25% of revenue. On the Network and Service Enablement, the biggest segment, and the one that's growing the fastest is data center ecosystem and enterprise.
That's our test solutions that are going to the semiconductor vendors, optical modules, OEMs, manufacturing, production tests, for all those customers, and last but not the least, the actual hyperscalers. The second biggest segment is the service providers. That has been traditionally the biggest market segment when I joined. It's continued to grow, but it's obviously a like a low single digit, fairly low growth business, but it continues to be pretty profitable and we continue to participate in it. The area where most of our resources and investment is focused is the data center. The last element is the aerospace and defense. That's the market that we decided to diversify into about 6, 7 years ago.
The focus there is on the alternative GNSS technologies that enable you to navigate in a GPS denied environment where you have spoofing and spamming. It's a very unique technology, and Viavi is one of the fastest-growing technology and market leaders in that space. On the optical security products, the biggest product segment there is the thin-film optics and pigments that we develop for anti-counterfeiting features on the world's currencies, followed by the 3D sensing that goes onto the mobile phones for Face ID and identification, followed by the automotive ADAS LiDAR and other applications.
Last but not the least, aerospace and defense, mostly, lower orbit satellites, various NASA test probes, deep space probes, and, of course, the conventional military aircraft, missiles and various intelligent munitions. That's the company overview. I'm gonna go into investment highlights, page 8 in my presentation. The key highlights is Viavi is well aligned with the market tailwinds.
As I mentioned, two of our fastest-growing segments, adding up to about 60% of revenue and growing, are in the what I call AI data center ecosystem, supplying everybody from the advanced semiconductor developers to optical module developers and manufacturers, to the optical systems manufacturers and the hyperscalers themselves, for both their hyperscale data center operations, as well as various vertically integrated products that they are developing. The second part is the aerospace and defense focused on the fastest growing what we call Resilient PNT market segment, where you operate in a GPS-denied environment.
Of course, having been watching the news in the past, several years, we are all aware of the rise of the drones, and Viavi is very much right in the center of this whole growth trends with our resilient timing and positioning and inertial navigation systems. The, a whole non-military movement to autonomous vehicles, whether it's air, ground, sea, or undersea operations. We play very well into all those segments. Good alignment with key things. We're also a major player in the wireless infrastructure, even though the wireless market is somewhat stagnant right now.
We all know that we can't live without wireless and, as the AI moves to the edge, we expect wireless segment to start ramping up to 5G plus, 6G, and a lot of the AI RAN applications where we are well prepared to take advantage of it. We are successfully capitalizing all these growth trends. We have redeployed a lot of our R&D and go-to-market assets into those markets and we are funding the growth accordingly. The segments we are playing in, we have a significant competitive advantage with a deep moat, with a deep technology knowledge and multi-generational engagement with our customers. You know, often there is a significant incumbency advantage for the each next generation. I'll talk about it later.
Overall, our financial profile is very attractive. Gross margins north of 60%, and as our revenue grows, we have seen significant operating leverage and rapid expansion of our operating income. We have done a number of M&A transactions, all of them been pretty successful. The most recent ones and the biggest one have been very successful. In fact, you know, we raised about 7 months ago, $600 million Term Loan B to acquire the Spirent High-Speed Ethernet business that was being divested by Keysight and acquisition of Inertial Labs, which is the inertial navigation systems for alternative GNSS environment. Both of these acquisitions have been very successful, growing very rapidly, generating a lot of cash. We have actually retired already $150 million of that debt.
That's a very high-cost debt. It's between 6 and 6.5% interest, and we're doing this financing to retire the rest. When we started this deal, our stock was in the teens. We felt it was very much undervalued. We saw great momentum building behind our revenue profile and funnel, and we figured that at a later time we would be able more than easily retire that debt at a near future. Last but not the least, we are a very strong management team with multiple companies that we've run and restructured and very experienced board members with many industry leaders. Now moving on to the major growth drivers over the next decade to talk about how Viavi is positioned to take advantage of the key trends.
Well, I really think about there's like 4 biggest things we see today. Clearly, everybody's talking about AI revolution, high-performance computing, and quantum computing. We are smack in the middle of all of these trends, touching every link in the value chain. Of course, none of these things are viable without very good fiber interconnect, and we are seeing the rise of fiber everywhere. Fiber moving deeper and deeper into data center, replacing copper in the back plane, and rise of what I call professional, service provider, professional-grade fiber operators like Lumen and Zayo and others who are investing heavily into high performance fiber networks to interconnect all these data centers. It plays very well to our traditional strength and our portfolio. The other element, wireless.
While the wireless is still somewhat stagnant, the reality is we all know where it's all heading once the data centers are built and interconnected with a lot of fiber. The next thing will be to monetize all this AI, most of the monetization will happen through your mobile device. Well, the interesting thing is the mobile network is completely unprepared and totally not ready for AI workloads, we expect the next big wave of investment will happen on the edge with inference and the upgrading the wireless edge to handle AI workloads. Viavi is the market leader in the infrastructure test and emulation for leading wireless equipment manufacturers. That piece of the business is still kind of in a holding pattern.
I expect it in the near future that it should start getting momentum as AI moves closer and closer to the edge. Last but not the least, we talked about resilient networks and PNT. We have all seen the chaos that has been caused with GPS jamming and spoofing and disruption of all the networks, there's a great growth in the awareness of the need to secure the critical network, mission-critical networks, and a lot of the military capabilities to operate in the GPS-jammed environment. Viavi is one of the leaders in that field, today supplying alternative to GNSS solutions to drone makers, aircraft makers, various munitions makers, as well as the industrial, agricultural, and mining autonomous machinery vendors.
Looking at the company TAM page 10 in my deck. You know, if you think about it, we started out with a core servicing mostly telecom customers. That's the Viavi core. We are a very strong market leader in that space, servicing close to 200 service providers around the world. We are a leader in the anti-counterfeiting and 3D sensing. That market is somewhat finite and at this point, fairly slow growth. Several years ago we started, you know, looking how can we accelerate our growth. We looked at the what I call adjacencies, which we call Viavi Speedboats. These are the areas that play very well to our expertise and are adjacent to our areas in the market where we sell our products.
It's things like data center ecosystem, next-generation wireless network, and, you know, automation of telecom service providers. That kind of expanded our market TAM quite significantly. The diversification effort that we undertook to get into aerospace and defense, that has added a significantly bigger TAM, about $12 billion today, probably growing to $18 billion by the end of decade, with the whole autonomous, you know, vehicles, airborne, land-based, sea-based, and underwater vehicles. That combination of all of these, we're now effectively addressing a market segment that is more than 10x of our original market size when I took over this company 10 years ago.
That's what's actually our diversification efforts, both in Viavi Speedboats and diversification is what's driving our year-on-year growth, and it's where we made most of our acquisitions. Page 11, it talks a bit more about all the key segments, the data center ecosystem, aerospace and defense, service providers, and Optical Security and Performance, and it lists some of the biggest, our end market vertical segments. I mean, clearly in data center it's hyperscalers, AI infrastructure, semiconductor vendors. The security in aerospace and defense, it's Position, Navigation and Timing, the drones, avionics, and mission-critical communications. With the Optical Security and Performance, it's the currencies, it's mobile phones, and aerospace and defense.
You can see, page 12, how by focusing on our diversification and accelerating into more, a more attractive adjacencies, how much our revenue mix has changed in the last 10 years, while we have grown the overall business. Today, you know, when we started out, we were 85% to 90% service provider on the networking side, with about 10% enterprise and defense. Today we are 45% and growing in the data center ecosystem, which includes advanced semis, optical modules, optical system vendors, and the hyperscalers. Followed by the service providers, which is growing, but it's relatively much smaller today 'cause the growth is low single digits. Last but not the least is aerospace and defense has been growing also very much.
I would point out that our data center has in Q3 2026 benefited from about $50 million incremental revenue from the Spirent acquisition. If I look at the pre-Spirent, both aerospace, defense, and data center have been growing by high double digits. Going to page 13. You know, as I mentioned earlier, our market positions, I mean, you can see it in the margins, it's a high barrier to entry, very engineering intensive, multi-generational customer relationship on various product roadmaps, and very strong IP portfolio, which we are not afraid to enforce and defend vigorously. In key areas, especially when it comes to the optical networking, we are a market leader with a broad portfolio and high barriers to entry.
Let me just tell you, one of the areas where we are very excited about this whole AI data center. It's page 14, and you can see what's driving the growth and evolution. It's not just Of course, clearly huge spend is one thing. The second thing is the rapid replacement of technologies and shortening of the life cycles. That means that anybody who has an incumbency has an inherent position to win at each subsequent generation. Here you can see in the old days, you know, 20 years ago, it took 8 years to go from 10 gig to 100 gig, and it was driven by telecom.
It took about 6 years to go from 100 gig to 400 gig, and it was driven by telecom mostly, but we had the new players come on the horizon called cloud data centers. It was a kinda, I would say, early last decade. Then towards the end of last decade, we had a new vendor showing up on the horizon, the AI data centers, I guess, starting in earnest in the early 2020s, and we saw going from 400 gig to 800 gig took all but 3 years. What's even faster, going from 800 gig to 1.6 terabits took only two and a half years. We expect two and a half year to be the new norm.
What you see today is the AI data center ecosystem is what's driving all the technology roadmap, with the telecom being on the trailing edge. What's very interesting, it's not only that you have to redesign and buy all new equipment as you move from node to node to node, you also should not forget that every time you go up in the network speed, you're doubling the network speed, you need to double chip-to-chip interconnect 'cause everything has to communicate faster. Viavi is also one of the market leaders in the PCI Express. Combination of, it's basically, I would say yin and yang. The two go always together. You increase the network speed, you need to increase interconnect.
We are seeing, I mean both of our customers buying both of these solutions from Viavi. What's happening here is it's not one sells and it goes away. It's overlay. Today, if I look at just today, this quarter, the 800 gig is the highest volume seller, followed by 400 gig, followed by 1.6 terabit. 1.6 Tb is in a very steep growth mode is being adopted. If we look fast-forward next year, I would probably say 800 gig will still be the biggest volume runner with a very close 1.6 behind, followed by 400 gig.
Three years from now, 1.6 terabits will be the biggest volume runner, with 800 gig next, with some 400 gig and perhaps 3.2 coming on the horizon. You know, everything just stacks up on top of each other. As you go from the lab into the production, there's a significant expansion of capacity taking place with all these technologies then percolating from the lab to production and ultimately into the data center. In fact, today, our traditional field instruments that we used to sell to service providers, a year ago, you know, 90%-plus of their revenue came from service providers.
As of last quarter, it's anywhere between a third to 40% of their revenue is coming from the data center, and the business has grown by more than 50% year-over-year. It tells you that data center is the new normal. They are the new leaders in the technology definition and technology adoption. Our customers, it's pretty much who is who. I mean, it's all the leading players on the semiconductor side, I mean, leaders in AI inference and the training chipsets, leaders in all the optical ICs, leaders in optical modules, and the optical cross-connect switches. Last but not least, the hyperscalers themselves, which, depending on which one it is, are both a semiconductor customer, module customer, system customer, and a data center customer.
You can see revenue-wise geographically, it's about 44% Americas, 31% APAC, and 25% EMEA. That's the geographical revenue. We'll talk about it later about our unique position, having inherited close to $6 billion of NOLs from JDS Uniphase. We actually structure all our revenue flows and profit capture that as much of it as possible falls in the U.S., where it's fully shielded against taxes, and I'll talk about it more. Looking at the growth profile, I mean, really things in earnest started right around Q1 of 2025, so it's September 2024. You can see, as the data center really started to kick into high gear, our revenue's been growing every quarter after quarter.
In the Q2 of 2026, we have benefited from Spirent, a partial quarter of Spirent coming into Viavi, and the last quarter, we crossed the $400 million revenue target. Re-revenue per quarter with a full quarter of Spirent High-Speed Ethernet business, roughly $50 million. If you take $50 million from there, it'd be $350, and compare it to the Q3 in fiscal 2025, you can see significant growth rate even without Spirent on the base business. Of course, you can see our gross margins have been fairly stable, inching up from high 50s to low 60s as the mix and volume have been growing.
Even more interesting is you gotta see the significant operating leverage taking place, going from 10% operating profit to 21% exiting last quarter and going higher as we guided this quarter. Let me explain to you what drives it. It's page 17. I call it the money slide. That's really the one that shows you the tremendous potential of the Viavi profit generation as we continue to scale our revenue. You look at the comparison quarter-on-quarter. Q3 of FY 2025, which was March quarter 2025 to March quarter 2026, we had a 43% revenue growth. Even if you back out $50 million for Spirent, you can see significant quarter-on-quarter organic growth. With I think in both of these quarters, Inertial Labs was already included.
Then you look at it, 43% revenue growth resulted in nearly double or 79% growth in the operating income. Okay? Clearly, you know, your factories are better loaded, your R&D sales and G&A is fairly, you know, stable. It doesn't need to grow, you know, linearly scale with the revenue. Yes, there is some things like commissions and the annual cost of living adjustments so on and support. You see net net 79 significant operating leverage between the revenue and operating profit. Then for most companies, there's very little difference between operating profit and net income. Whereas for us, there is a further operating leverage between net operating profit and a net income.
The reason for that is as more and more of our profit lands in the U.S., we have close to $6 billion of NOLs in various flavors. Some of it is set up as amortizable assets, some of it as the traditional NOLs that fully shields this profit against the revenue, I guess, or against the taxation. As a result, when the dollar lands in the U.S., the dollar goes straight to the bottom line, to the EPS, so there is no leakage. Which brings us to the point of financing. When most companies pay interest on debt, they say, "Oh, well, we're still getting a very nice tax shield." Well, we have 0 tax shield. It's totally useless for us. That money does not do anything for our EPS.
However, if we retire this debt and we save $35 million to $40 million in interest, that goes right to the bottom line. As a result, it's accretive immediately to our EPS. I hope the people have understand this very well. Little bit of a history. We have extensive experience with M&A. When JDS split into Viavi and Lumentum, some of the early M&A was really more around consolidating test instrument market and getting tech in acquisitions for various technologies. Our first big deal was a strategic deal buying wireless measurement business from Cobham. That's the old Aeroflex business. When I joined Viavi was predominantly copper and fiber.
We saw very quickly that close to $200 million of copper was gonna go away over the next decade, and today it's mostly gone. Fiber was gonna be a major driver of growth. There's really two major technologies that we live with in the world. There's a fiber, and there's a wireless communication. Acquiring the business from Cobham gave us a strong position in the wireless space and also inherently got us into aerospace and defense. As we learned about the business, we saw opportunities for growth. We identified early on that the whole GPS era is gonna come to an end in terms of reliability, positioning, and security. We decided to embark on building a strong position in the Resilient PNT, positioning, navigation, timing. We did an acquisition of Jackson Lab.
It was more of a small acquisition that gave us the leading position in the secure timing. By acquiring Inertial Labs last year, we also added motion sensor technology. Combining timing and motion sensor gives you effectively inertial navigation that is independent of GPS. As we got deeper and deeper into data center, we noticed that Viavi was very strong in layer 0, layer 1, but we were largely absent from layer 2 to layer 7 of the network. Acquisition of High-Speed Ethernet test business from Spirent gave us a layer 2 to layer 7. Today we are a full stack portfolio, and in that market we are, together with the Keysight market leaders, split market roughly, about 40% to 45% to 45% of the market share. Okay.
As I mentioned, those 2 big acquisitions we did last year, Spirent and Inertial Labs. Spirent was $425 million. Inertial Labs was $150 million. Altogether, it was about $575 million. There was also an earn-out, a very aggressive revenue growth that Inertial Labs put out there. We said, "Well, if you hit it, I will pay you for it." They actually exceeded their aggressive growth targets. As I said, this business continues to grow very profitably, and both of these businesses are accretive to the operating margins for Viavi.
To fund this transaction, we did a very expensive debt, but we wanted to make sure it's a very flexible debt that we could retire at will. Indeed, we retired $150 million of that $600 million as of last quarter. This also we saw our equity value effectively more than quadruple, pentuple, actually. At this point, it made a very good sense to do a secondary equity issue to retire this very expensive debt. As we saw today, the 10-year bond yield was one of the highest rates, and we believe we're gonna see higher inflation and thus very much higher financing costs. The Term Loan B was a SOFR plus, I think, 2.25%.
Retiring that is not only smart, it's also very good for our balance sheet. The next slide just shows you an overview of our management team. Very experienced, come from leading companies, you know, in the industry and technology as well as industrial. You can see our board members come from many different market-leading companies. To summarize the investment highlights, as I said, I've showed you how well we are aligned with the market tailwind and capitalizing on the growth trends with a significant technological and market positioning advantage. Our customer base is who's who and expanding. As optics moves closer and closer to silicon, we're seeing new opportunities emerging in this whole area of semiconductor packaging and test, as well as the fiber optic cable manufacturing.
Those are the 2 new markets that we have not played prior to this whole AI, data center emergence and the re-revolutionary technologies that it's driving. Our financial profile is very attractive with significant operating leverage, with expanding both operating and net income margins as our revenue grows. We are very disciplined at doing M&A. We don't go crazy. We don't buy PowerPoint companies. We buy companies with proven technology for revenue and market position. At last but not the least, a very strong management team, myself included, I guess, and very experienced and a knowledgeable board. A final slide. What does it mean? Just to recap again. This is our balance sheet as of the end of March quarter.
You see this $450 million Term Loan B. It's after we paid off $150 million from cash on hand and operating profits. The intent is to retire all of this debt, Term Loan B, leaving the remaining $400 million senior notes and the convertible debt on the books to deal with later. More importantly, it's taking our leverage ratio from 3.9 to 0.3, giving us significant flexibility and gunpowder should we find an attractive M&A opportunity. I would like to reiterate that this transaction is not linked to any pending M&A. It's purely really rebalancing the balance sheet. With this, I will open to Q&A.
Oleg, we have no questions at this time. Back over to you for any additional or closing comments.
Well, it appears that I was thoroughly clear in presentation and everybody's got no questions, and I fully understand it. I'd like to thank you for your interest and your participation in this call. If you have any questions or follow-up interest, please contact our bankers, Stifel and Needham. Thank you very much. Have a good day.