Investors Are Underestimating The Transformation Of Viavi Solutions, Inc.

Summary

• VIAV trades at a discount to its testing peers despite its increasingly attractive position in the transition from lab to field deployments for 5G and its emerging 3D sensing opportunity.
• VIAV's acquisition of Cobham makes it a leader in the field test and measurement equipment market which is 4x the size of its traditional lab testing business.
• VIAV is well-positioned to benefit from the proliferation of 3D sensing beyond Apple devices. Its acquisition of RPC Photonics added to VIAV's bill of materials in this new market.
• In order to prepare for the densification of 5G, fiber installations are increasing to carry the anticipated demand which is a growth driver for many of VIAV's businesses.

The predecessor company of Viavi Solutions (NASDAQ:VIAV), JDS Uniphase, split into two component pieces, Lumentum (LITE) and Viavi, in 2015. Since then, the companies operated separately with the exception that VIAV owned shares in LITE for several years. Initially, it appeared LITE kept all of the exciting growth businesses and VIAV was left with the lessor remnants plus some shares of LITE and significant NOLs. However, VIAV's management did an excellent job narrowing the focus of the company and positioning it for future growth. They transformed the mix of business from 100% of revenue coming from mature, no growth businesses to more than 50% of revenue now from secular growth markets. Management achieved this through both targeted M&A and internal development. The company has spent more than $1.3B to position VIAV for significant growth opportunities ahead in three primary markets: 5G test and measurement, fiber deployments, and 3D sensing.

Background

In September 2016, VIAV's management embarked on a journey to turn around the company. They started by improving VIAV's market positions in the segments it already operated in and layered on strategic acquisitions to further transform the company. Since 2016, VIAV has acquired 4 companies for roughly $630M including Trilithic, Cobham/Aeroflex, RPC Photonics, and 3Z Telecom. Each of these acquisitions helped the company expand expertise in its strategic end markets or to diversify into adjacent markets.

In October 2017, VIAV acquired Trilithic merging two leaders in test and measurement solutions for cable service providers (CSPs). In the press release, VIAV's management described the benefits of the deal as bringing together its:

portfolio of fully featured field testers, lab systems and assurance solutions now bolstered by Trilithic's range of technician-friendly installation and troubleshooting instruments and leakage systems. The combination creates more scale to address markets globally, offering solutions in the headend/hub, network operating center and

Analyst’s Disclosure:I am/we are long VIAV, DY, MTZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.