Bill Ong - Head, Investor Relations Oleg Khaykin - President and Chief Executive Officer Amar Maletira - Chief Financial Officer.

Dmitry Netis - William Blair James Kisner - Loop Capital Markets Michael Genovese - MKM Partners Lee Krowl - B. Riley Jun Zhang - Rosenblatt Securities.

Good afternoon. My name is Jessa [ph], and I will be your conference operator today. At this time, I would like to welcome everyone to the Viavi Solutions Fiscal Third Quarter Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

[Operator Instructions] Thank you. Mr. Bill Ong, Head of Investor Relations, you may begin your conference..

Thank you, Jessica. Welcome to Viavi Solutions third quarter fiscal year 2018 earnings call. My name is Bill Ong, Head of Investor Relations. Joining me on today's call are Oleg Khaykin, President and CEO, and Amar Maletira, CFO. Please note, this call will include forward-looking statements about the company's financial performance.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from current expectations. We encourage you to review our most recent SEC filings, particularly the risk factors described in those filings.

The forward-looking statements, including guidance we provide during this call, are valid only as of today. Viavi undertakes no obligation to update these statements. Please also note that unless we state otherwise, all results except revenue are non-GAAP.

We reconcile these non-GAAP results to our preliminary GAAP financials and discuss their usefulness and limitations in today's earnings release. The release, plus our supplementary slides which include historical financial tables, are available on our website. Finally, we are recording today's call, and we'll make the recording available by 4:30 p.m.

Pacific Time this evening on our website. I would now like to turn the call over to Amar..

Thank you, Bill. We closed the acquisition of the AvComm and Wireless businesses on March 15. Hence Viavi's fiscal Q3 reported results into approximately two weeks of financials of the acquired businesses.

Viavi's revenue including the acquisition was at $219.4 million operating profit was at $33.2 million with operating margin at 15.1% and non-GAAP EPS at $0.13. The acquired businesses which were reported in the NE segment contributed $12.3 million of revenue in our fiscal Q3 and an operating profit of $4.1 million.

Please note that the revenue from the acquired businesses was queued towards the end of fiscal Q3 while the expenses were roughly linear within the quarter. Now excluding the acquisition, Viavi's fiscal Q3 results for the core business exceeded the midpoint of guidance in revenue, non-GAAP operating profit and non-GAAP EPS.

Revenue at $207.1 million exceeded our guidance midpoint of $200 million with NSE overachieving while OSP was slightly above the midpoint of our revenue guidance. Revenue grew 5.7% year-on-year driven by growth in our NSE business. Operating margin at 14.1% beat the 11.5% to 13.5% guidance range with both NSE and OSP contributing to the upside.

EPS at $0.11 exceeded our $0.08 to $0.10 guidance range and grew $0.02 from a year ago EPS of $0.09. Now moving to our reported Q3 results by business segment. Starting with NSE. NSE revenue at $157.1 million including $12.3 million from the acquired AvComm and Wireless businesses grew 18.9% year-on-year.

Excluding the acquisition NSE revenue at $144.8 million grew 9.6% year-on-year. This was driven by 10.9% growth in any revenue and 4.9% growth in our SE revenue. Any revenue growth excluding the acquisition was a result of strong performance in cable and fiber instruments partially offset by weak lab in production product demand.

SE revenue growth reflected strength and the business turnaround in the data center product line partially offset by the expected declines in the matured issuance products. SE's growth products versus matured products in the quarter reflected 80:20 revenue mix. NSE's reported gross margin at 64.7% was up 20 basis points year-on-year.

NSE operating margin at 6.1% which includes 2.3 percentage points benefit from the acquired business was up 940 basis points year-on-year. NSE's book to bill ratio excluding the acquisition was slightly below one. Now turning to OSP.

Revenue of $62.3 million increased 29.3% sequentially due to demand recovery for our anti-counterfeiting products and sequential growth in our 3D Sensing revenue.

However OSP revenue was down 2.5% year-on-year as the growth in 3D Sensing revenue was offset by declines in the anti-counterfeiting pigment business which benefited from a major bank note redesign a year ago. Based on a positive history of acceptance of 3D Sensing filters shipments.

We were able to recognize revenue upon shipment in fiscal Q3 and will now continue to do so going forward. OSP gross margins at 52.6% decline 480 basis points from a year ago, due to the lower volumes in the anti-counterfeiting business and unfavorable product mix with the ramp in 3D Sensing revenue.

The 560 basis points decline year-over-year in operating margin was a result of the gross margin decline. Now turning to the balance sheet.

Our total cash and short-term investments ending balance was $738 million operating cash flow for the quarter was $13.6 million in Q3, we repurchased $1.1 million of Viavi stock at a cost basis of $8.78 per share including commissions.

Off the $200 million authorized share buyback we've repurchased shares worth approximately $137.4 million as of the end of fiscal Q3. With regards to our original $650 million 2033 Convertible Notes that is portable and callable in August 2018. We have repurchased a total of $221.5 million in notional amount to date as of the end of fiscal Q3.

Specifically in Q3, we repurchased $22.5 million. Our remaining 2033 Convertible Note balance is $428.5 million. Our total outstanding debt of $888.5 million includes the $460 million 2024 Note. We'll continue to be opportunistic in repurchasing Viavi stock to offset earnings dilution from stock-based compensation.

Now to a guidance, which includes the acquired businesses? We expect fiscal fourth quarter 2018 revenue for Viavi to be in the range of $243 million to $267 million operating margin at 11.5% plus or minus 1% and EPS to be $0.08 to $0.12.

We expect NSE revenue to be at $205 million plus or minus $10 million with operating margins at 7.5% plus or minus 1%. We expect OSP revenue to be at $50 million plus or minus $2 million with operating margins at 28% plus or minus 1%. The OSP revenue guidance contains an immaterial amount of 3D Sensing revenue.

The lower operating margin guidance versus historical trends reflect the under absorption of manufacturing cost for 3D Sensing filters as customers transition to next year's product cycle. Since we have just in time manufacturing for 3D Sensing filters, we're prudently idling production during Q4 to avoid building excess inventory.

Our tax expense is expected to be approximately $4.5 million. We expect other income and expenses to reflect a net expense of approximately $1.5 million. Share count is approximately 230 million shares. Lastly, I would like to provide some guidance for the acquired AvComm and Wireless businesses for fiscal year 2019.

We expect this businesses to add about $205 million to $245 million of incremental revenue to core Viavi's business in fiscal year 2019. This includes deferred revenue write down related to purchase price accounting.

We expect the acquired businesses to have an operating margin of 14% to 16%, with gross margin in line with the corporate average of about 61%. The implied EPS equation is expected to be $0.11 to $0.14 in fiscal 2019.

This includes anticipated synergies realized in the first year of integration which would partially offset the profit impact from the deferred revenue write down. We expect overall synergies of $15 million to $20 million over 24 to 36 months period with most of the synergies expected to occur within the first 24 months.

With that I'll turn the call over to Oleg..

Thank you Amar. In the fiscal third quarter Viavi delivered a solid performance in its core businesses and successfully closed the recently announced acquisition of Cobham's AvComm and Wireless businesses.

Looking at the individual business segments; within any field instruments delivered strong results with all of its product lines growing year-on-year. Cable was the strongest driver of growth, followed by fiber instruments, helped by fiber to the home deployment and lastly, the access products which grows off a small base.

NE's 11 production business while showing a strong recovery from a tough Q2 was still meaningfully down from a year ago levels, driven by weak demand from our optical components customers. A bright spot was storage network task product line that show strong sequential and year-on-year growth driven by Gen 4 PCI Express products.

The SE business so a year-on-year growth, our data center product line was a particular bright spot with a revenue more than doubling from a year ago levels. We're pleased with its continued turnaround performance. Looking ahead for the rest of calendar 2018 for [indiscernible] NSE business.

We expect the demand for fiber and mature products to continue to be strong driven by fiber to the home build-out. The cable product demand is expecting to pullback some following several quarters of strong demand driven by DOCSIS 3.1 deployment in North America.

The access product line is expected to remain [indiscernible], as North American telecom service providers appeared to be delaying the deployment of higher speed G.fast technology until late calendar 2018 or sometime in 2019. That said, we're seeing a more aggressive G.fast deployment regionally in Europe.

The outlook for 11 production appears to have stabilized and we expect it to improve in the late calendar 2018 and early 2019 driven by 400 gigabit optical and 5G wireless adoption.

And lastly, the SE business is expected to remain roughly flat with the growth in the data center product line partially offsetting the expected continued decline in the mature products. In mid-March we've successfully closed a recently announced acquisitions of Cobham's AvComm and Wireless businesses.

The AvComm business delivers a rough test in calibration product and solutions to military, public safety and avionics customers. The Wireless business provides advance test and measurement products and solutions to wireless infrastructure OEMs and mobile network operators.

Both businesses have positive near-term outlook driven by 5G deployment on the wireless side and increasing spend in military public safety and avionics on the AvComm side. As we move forward, with the integration we expect to realize meaningful cost and revenue synergies.

Moving onto OSP; OSP revenue saw a strong recovery to about $62 million in Q3 from about $48 million during the December quarter driven by strong demand for both anti-counterfeiting and 3D Sensing products. We expect the anti-counterfeiting business to continue its positive recovery momentum into the Q4 and the second half of calendar 2018.

The outlook for 3D Sensing products is a different story. The 3D Sensing revenue in the June quarter is expected to be immaterial as our customers undergo a model year transition and consume existing inventory.

To avoid building excess inventories, we're choosing to idle our factory capacity during the June quarter and run only minimum production to maintain training and yield improvement efforts.

The net effect of these auctions will be a short-term operation on margin headwinds in the OSP business segments where we expect operating margins to dip into the high 20s from the 38% in Q3.

We expect the 3D Sensing to snap back to full volume production in the September quarter as we ramp production volumes to support multiple new customers and product models.

We also expect the second half of calendar 2018 and for the overall fiscal 2019 to have increased 3D Sensing demand and to be significantly involve the fiscal year 2018 volumes and revenue. Correspondingly, we expect a continuous recovery in OSP operating margins in the September and December quarters.

Next short-term volatility notwithstanding, we remain bullish on the 3D Sensing market and growth potential. We see strong interest in our 3D Sensing technology across multiple industries and applications and positive on its long-term potential for Viavi.

In conclusion, I would like thank the Viavi team for delivering a strong quarter and to welcome aboard the AvComm and Wireless employees. Finally I want to express my appreciation to our customers and our shareholders for their support. I will now turn the call over to Bill..

Thank you. This quarter we will be participating at the UBS Investor Bus Tour on May 24 taking place in our San Jose corporate office. We'll also be presenting at the Stifel Investor Conference on June 11 in Boston and the William Blair Investor Conference on June 12 in Chicago. Jessica, let's begin the question-and-answer session.

We ask everyone to limit discussion to one question and one follow-up.

Jessica?.

[Operator Instructions] Your first question comes from the line of Dmitry Netis from William Blair. Please go ahead..

Wanted to touch on couple of items, let's maybe touch the housekeeping items first as far as the guidance goes.

So in your June quarter's guidance of $50 million for OSP, it sounds like you're not assuming any 3D Sensing a de minimis 3D Sensing revenue which goes back to the question of your original guidance for the 3D Sensing side of things of $25 million for fiscal 2018, where does that shake out now with visibly no revenue in June quarter?.

Yes, so thanks Dmitry. So if you recall we said, no we will be roughly at $25 million for the entire fiscal year 2018 that was our estimate last quarter. And we are maintaining that estimate because that's exactly, we're already factored in the steep decline in shipment in March as well as June quarter in that number.

So when you look at the revenue that was recognized in our fiscal Q3 which was the March quarter it included the shipment that we did in the December quarter plus the shipment that we did in the March quarter.

The shipment that we did in the December quarter was roughly about 50% plus of the total shipment of filters for fiscal 2018 and the shipment that was did in March quarter was roughly about 5%. So that's how much of revenue that we've recognized in Q3.

So that was in line with what we were expecting, it was little bit higher because we had no expected that we were able to recognize the filters that we shipped in March quarter, but since we got the revenue recognition ruling, we were able to do that. So to answer your question, to summarize it.

We're still in line with $25 million, but most of the shipment happened in the September quarter and December quarter and because of the lag in the revenue recognition you saw a lot of revenue being recognized in the March quarter..

Okay, well so just to simply kind of put the numbers behind us. If it's 25 kind of still standing here and you did kind of mid single-digit kind of revenue in the December quarter, that sort of and assuming you have no revenue in the June quarter you'll be probably at the $17 million, $18 million level give or take in March.

Is that a fair assumption?.

I think the best way to estimate this is, I said plus roughly about 55% of the overall $25 million was recognized 55% to 60% was recognized in the March quarter. $13 million to $15 million ballpark range..

Okay, very good. Thanks Amar appreciated. And then moving onto Cobham, thank you for giving us the guidance there and talking about the synergies.

My understanding is you won't be including that there is some kind of offsetting impact as far as the deferred revenue recognition goes in the fiscal 2019 timeframe, but given sort of the 24-month period you mentioned all that synergy number $15 million to $20 million should start rolling into the model by the fiscal 2020, is that correct and if so, what are you assuming all else being equal that will translate as far as the EPS number goes..

So Dmitry, I think you said - our guidance already includes the deferred revenue write down that we have to take because of purchase accounting, so that is already part of our guidance..

We already backed it out..

We backed it out, right. Now there is a profit impact because of this deferred revenue write down in the first quarter which is fiscal year 2019 that is getting offset but the cost synergies that we're driving in fiscal 2019.

Now going into fiscal 2020, you'll see the cost synergies that we realize in fiscal 2019 plus the cost synergies that we realize in fiscal 2020.

So I think there is lot of earning's power here on this particular business assuming that the revenue remains stable, which we believe there's a likelihood that it will happen, I think there's a strong earnings power from these two acquired businesses in fiscal 2020..

Okay and then maybe last one, if I may and I jump off the line. And again that sort of goes to Cobham as well, your revenue number is roughly 220 sort of at the midpoint of the guidance for fiscal 2019. I think the biggest driver growth here that investors might be focusing on, is 5G wireless opportunity.

So there's been a lot of interesting data points with specific your collaboration with China Mobile for example as it comes to the 5G side of things and your relationship with, the Nokia deal that was mentioned with China Mobile as well and your relationship there on the Cobham side.

I presume your TM500 there as well for the [indiscernible] side of things, all that included.

Given that people are sort of raising the bar, the network been manufactured is starting to raise the bar in 5G and noting there, service provider partnerships, the four operators even here in the US are starting to talk about the trial activity right in the second half of 2018, all related to 5G.

I mean it seems like it's the rising tide, so I'd love to hear from you when - what the timing is, what your expectation is as it relates to Cobham and maybe core test to measurement business unit and the timing relative of the ramp in 5G as well.

Any of that you could address that would be helpful? And then give us sort of the sense of where that Cobham business may end up two, three, four years from now?.

Sure. Thank you Dmitry. So if we look at it where we are today, I mean what they have in the wireless business unit.

There's a mix of clearly 5G and 4G and even some of the 3G extensions and the 5G really just kind of started ramping in a past I'd say 12 months and clearly early on, a lot of it, if we look at where they're engaged our wireless business unit is pretty much engaged deeply and as a significant market share across the entire supply chain, the value chain.

So they're starting with the chips, the processors, the infrastructure ICs to the NEMs, the equipment manufacturers all the way to the service providers and various trials.

So clearly the single biggest bucket where we're seeing the business today is on the NEM side as they're preparing their systems for launch and it's mainly on the engineering point at this point in time, where they're proving their systems and making sure that they're working, but also we're increasingly starting to see service providers wanting to acquire the systems to integrate into their trials.

So obviously as the production starts ramping, then we'll be seeing also a lot of these products migrating to production.

So if I were to say where we're today it's kind of, I'll say it's probably not quite in the midpoint but in the first third of the rollout, heavily focused on the technology developers and now starting to see, the service provider is coming into the picture.

I'd say towards the end of the year, we'll heavily at the kind of equipment NEMs as well as the service providers and from there on, as it goes into high volume production it will be obviously production testing..

Okay, thank you very much. I'll take the rest offline. Thanks guys. Appreciated..

Your next question comes from the line of James Kisner with Loop Capital Markets. Please go ahead..

So just quick housekeeping. I don't think I've dropped off for a second, so I'm sorry if you answered this, but did you give the - what you expected for the Q4 contribution from Cobham.

I know you gave the year and then also the deferred revenue impact, do you have an idea what that besides the whole is for this year?.

No I think, so we have James you didn't miss anything, we didn't give any color. We plan not to breakout those two businesses because they were very tightly integrated into our NSE business, but since this is our first time let me give you a little additional color, but going forward I think this will all roll into our T&M business.

So what we're expecting when you look at our midpoint of our NSE guidance which is $205 million [ph].

In that we're expecting a core NSE business to actually grow year-on-year about 7% to 9% so sequentially when you think about our business, our four instrument business which is what we call is NE, should grow anywhere between say 9% to 11% and our SE business should be flattish to say decline slightly, so that's how - you can back into this numbers and come up with what the AvComm and Wireless business will look like in Q4 of 2018.

Also keep in mind, but in this number of Q4, 2018 that we're guiding for AvComm and Wireless there's also a deferred revenue [indiscernible] that we're taking, so don't use that an extrapolated to what the revenue number should look like for fiscal 2019..

[Indiscernible] impact over $20 million, is it over $10 million?.

Say it again?.

The deferred revenue impact, can you help us understand how big that's going to be and [indiscernible] formula like all the deferred revenue and Cobham's balance sheet kind of disappears, right? Like what's the?.

Well not all, not all will disappear and I won't start getting into the details here. But it's - there deferred revenue sitting on the - there are two pieces of business, there is more deferred revenue sitting on the wireless piece of business because of the nature of the business there and there's less of that on the AvComm side of the business.

So typically, give or take in this kind of purchase accounting you take a [indiscernible] from anywhere from 70% to 30%. Right..

Okay, all right, that helps. So I'm going to just turn to the recently announced Sprint T-Mobile deal.

Obviously more interesting for you with the acquisition of Cobham I think, but I'm just wondering if you could give us kind of your exposure historically to those two carriers just really roughly, is it below 5% reach [indiscernible] does your exposure increase to Cobham.

I mean would you anticipate perhaps a disruption like you normally see before and after the deal. It was just announced, but any thoughts would be helpful..

For us, they're pretty minor customers. I mean, it's nowhere near the percentages you're assuming. We're fairly small revenue with each, but you know I actually see it more as an opportunity because anytime you merge two networks, you got to integrate them, you got to rationalize them, that's where you get some need for instrumentation.

So I don't really see it as any kind of revenue threat. It may actually be an opportunity but at this point it's too early to tell..

Okay and last one, do you have any visibility to any changes the competitive environment filters, any update there at all? Thanks..

Well as far as I can see, I mean we still have all the products we had and we picked up a whole bunch more. So in the particular special replay I know there's number you all been talking about it, but frankly I haven't seen anybody having any major success..

Thank you very much..

Your next question comes from the line of Michael Genovese from MKM Partners. Please go ahead..

So given what you said about the 3D Sensing in fiscal 2018 before I just want to check.

I'm calculating based on those assumptions for core OSP that your revenues were up about 14% sequentially something in that ballpark is that correct?.

Well I think it's up double-digit..

Okay and then on the - and can you give us any help in the 2019 outlook for $25 million in 3D Sensing ballpark the kind of growth that you saw?.

As I said on the - you heard our guidance on 2018 was about $25 million, but we expect in 2019 is significantly more than that as we go into production with multiple models and multiple customers. I mean today our business is highly volatile linked to one product.

As the technology proliferates deeper and broader in the industry the volatility will decrease and we'll add a number of new models as well as new customers which will smooth out, somewhat but also will significantly increase our run rate and we actually aiding capacity going into the September quarter..

Okay, great and then finally.

I don't think you have much exposure to China and I think it's through the lab part of the NE business, but could you publicly here talk about what your exposure to China is?.

Well I think - well by China you probably thinking ZTE, the sanctions and things like that, is that right?.

Well just in general..

China economy in general..

Yes exactly..

Our China exposure is not that big, it's in single digits and the particular accounts at risk, its low single digits..

Great. Thanks very much..

Your next question comes from the line of Dave Kang from B. Riley. Please go ahead..

This is Lee Krowl filling in for Dave Kang. Thanks for taking my questions and congrats on your quarter. Two questions, first I guess on the 3D Sensing you guys mentioned multiple customers just out of curiosity from a revenue timing standpoint.

Do you expect a similar revenue recognition dynamic that you have with your first customer where you ship ahead of revenue?.

No I don't believe that to be the case, I think we have now established a good track record here. In fact the - when you look at the product quality etc. it was a very positive trend, we saw in the last three quarters.

So no I think we will be able to recognize revenue as we shipped because it is the same type of 3D Sensing technology that we'll ship to other customers..

Okay and then on the NSE business. You guys mentioned the book-to-bill below 1 just kind of curious if you could provide a little bit more color on the dynamics driving the book-to-bill below 1..

Well I think in this industry a clearly December quarter was a very strong booking quarter its end of the calendar year.

The first quarter is seasonally the weakest quarter in fact, I think this is the first March quarter in many years JDS or Viavi actually did not miss it's guidance which is in itself tells you how unpredictable the first quarter generally is.

And a lot of the telecom and service providers trying to get their budgets figure out and what it's going to be, so as a result the releases in bookings are generally weaker in the March quarter. So I'd say there's really nothing specific beyond just seasonality and that I can point out to..

Got it. Thanks guys..

Your last question comes from the line of Jun Zhang from Rosenblatt Securities. Please go ahead..

So my first question is about, could you comment on volume of 3D Sensing field from android camp and also now smartphone sector, gaming or automotive in the second half, the calendar in second half this year. And also if the gross margin of field related product related to the volume of [indiscernible] shipments. Thanks..

Sure, so it's predominantly obviously our guidance on our fiscal 2019 it's heavily driven by the mobile phones. And clearly the android camp is coming in, but fairly unevenly, I guess this 3D Sensing technology is proving to be a lot more challenging than many people estimating.

So some of the do have it working, some of them are still trying to get it to work and some are deferring it by several months behind. But net-net, they will all be coming in during the fiscal 2019 whether it will be in the fall or in the spring. I mean it really depends on the particular model and particular OEM.

We expect majority of our volumes in 3D Sensing to be with the leader in 3D Sensing.

In terms of gross margins we don't comment on gross margins, but we did comment that the operating profitability and then you can assume the gross margins significantly lower than our usual OSP operating margins such as anti-counterfeiting, but they're meaningfully above the overall company operating margin..

Okay, great and also could you share with us about the current market share you have in the 5G testing market. And how should we think about how big market of 5G testing could grow over the next few quarters. Thanks..

Well I think we play in very early adopter [indiscernible] and there we're in the out saying - in the 80s in the terms of the - not gross margin, the market share.

And traditionally the wireless business unit always plays at the bleeding edge and early adopter and they always maintain very high share for all the new technologies in new product course introduction and so on and so forth.

Where they normally don't play if technology becomes more mature and migrates into field instruments, they don't play in that market but guess what that's where Viavi is very strong at.

So we're actually hoping to parlay our leadership in the lab and production space with our 5G technologies and bring out a family of field products to follow through and enable the same customers for deploying the systems into that. So that's part of our market expansion and market share growth strategy for the wireless business..

Okay cool..

Viavi - [indiscernible] very little in the wireless space..

Okay, great. Thanks a lot..

There are no further questions at this time. Mr. Ong I turn the call back over to you..

Thank you, Jessica. That concludes our earnings call for today. Thank you everyone..

This concludes today's conference. You may now disconnect..