Hello. My name is John Louis. Welcome to the Viavi Solutions 3Q 2023 Earnings 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].

I would now like to turn the conference over to Sagar Hebbar, Head of Investor Relations, Viavi Solutions. Please go ahead..

Thank you, John Louis. Welcome to Viavi Solutions’ third quarter fiscal year 2023 earnings call. My name is Sagar Hebbar, Head of Investor Relations with Viavi Solutions. Joining me on today's call are Oleg Khaykin, President and CEO, and Henk Derksen, 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 our current expectations and estimations.

We encourage you to review our most recent annual report and 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 supplemental earnings slides, which include historical financial tables, are available on Viavi's website at www.investor.viavisolutions.com. Finally, we are recording today's call and will 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 Henk..

Thank you, Sagar. Fiscal Q3 2023 was a challenging quarter. Also, the pullback and service providers demand earlier in the year. And with more muted revenue patterns for OSP, we are now experiencing weaker spending for lab products within our network enablement segment. As a result, fiscal Q3 revenue came in at $247.8 million, down 21.5% year-over-year.

I'll be it at the high end of our recently updated guidance range of $246 million to $248 million. Viavi's operating profit margin of 11.4%, decreased by 4.8% from the prior quarter and 10.1% from the prior year came in at the high end of updated guidance range of 10.5% to 11.5%.

EPS at $0.08 was down from $0.14, the prior quarter and $0.22 from the prior year and came in below the initial guidance range for the quarter of $0.10 to $0.12. The current share count was 225.3 million during the quarter down from 236.8 million shares in the prior year.

The tax rate at 24% as well as other income expense of $4.7 billion for the quarter arrived at levels consistent with our expectations. Cash flow from operations was $17.8 million for the third quarter versus $28.9 million in the prior year period. As a result of lower revenue levels.

Year-to-date, cash flow from operations was $90.6 million, compared to $104.5 million in the prior year. On February 1, 2023, the company’s growth restructuring and workforce reduction plan to improve operational efficiencies and better align the company's workforce with the current business needs and strategic growth opportunities.

The company expects approximately 5% of its global workforce to be effective, and estimates it will incur charges of between $10 million and $50 million in connection with this plan, resulting into approximately $25 million in annual savings. We anticipate substantial completion of this plan by June of 2023.

Now moving on to our reported Q3 results by business segments. Starting with NSE. NSE continue to be impacted by current macroeconomic headwinds with quarterly revenues of $177.8 million declining 23.2% year-over-year.

Any revenue of $149.6 million the client’s 26.8% year-over-year, driven by the weakness in both service provider and network equipment manufacturing spending. SE revenue at $27.7 million increased 4.5% from last year. NSE gross profit margin at 63.3% decreased by 110-basis points year-over-year.

Within NSE, NE gross profit margin at 62% decreased 180-basis points on the prior year primarily due to lower volume. SE gross profit margin at 17.4% increased 130-basis points from last year, primarily due to an improved product mix. NSE operating profit margin at 1.4% was below our initial guidance range of 7.2% to 8.2%.

According to speak, first quarter revenue at $70.5 million was down 16.8% year-over-year, revenue was near the high end of our initial guidance range of $67 million, $71 million gross profit margin at 50.6% decreased 490-basis points from prior year result of lower volume in combination with startup costs related to a new facility and Jennifer, the operating profit margin of 36.6% benefited from a year-to-date reversal of variable incentive compensation and as a result exceeded our initial dynamic range of 29.5% to 31.5%.

Now turning to the balance sheet, the ending balance of our total cash and short-term investments was $586.6 million, up $96.9 million sequentially.

During the third quarter, we were successful in exchanging 57% of our 2024 convertible notes into a new $250 million face value convertible note with dueling in 2026, generating $113.8 million in proceeds net of debt issuance costs.

The $30 million in repurchase of our common stock, we added net $84 million in cash to the balance sheet, the latter in anticipation of the tiling the remaining upcoming maturity of $68 million in face value of our 2023 convertible notes in the fourth quarter.

As mentioned earlier, operating cash flow for the quarter was $17.8 million, a decrease of $11.1 million year-over-year, but there's a lot of lower revenues. In addition, we invested $10.8 million in capital expenditures during the quarter, compared to $18.1 million in the prior quarter.

During fiscal Q3, we repurchased 2.8 million shares of our common stock, but 30 million under the share repurchase plan announced in September, leaving is the main thing all ties balance of approximately 244.8 million for the purchase.

You may recall in September, we announced that the board authorized a new common stock purchase plan for up to $300 million and end of fiscal Q3 with a plan bonds of up to 274.8 million for share repurchases. Now on to our guidance, we expect the fiscal fourth quarter 2023 revenue to be approximately $252 million plus or minus $10 million.

Operating profit margin is expected to be 11.2% plus or minus 120-basis points and EPS to be $0.07 to $0.09. We expect NSE revenue to be approximately $187 million plus or minus $8 million with an operating profit margin of 4.5% plus or minus 150-basis points.

Always fee revenue is expected to be approximately $65 million plus or minus $2 million with an operating profit margin of 30.5% plus or minus 50-basis points. FX rate is expected to be around 25% as a result of jurisdictional rates, we expect our income and expenses to reflect a net expense of approximately $4.5 million.

The share count is expected to be around 222 million shares. With that I'll turn the ball over to Oleg..

Thank you, Henk. Fiscal third quarter 2023 was a challenging quarter for Viavi. The rabid slowdown that we saw in the service providers spent at the end of the fiscal first quarter has spread to our systems and semiconductor customers.

The Viavi revenue and non-GAAP operating margins came in below the lower end of our initial guidance range driven by weakness in our NSE segment. NSE declined year-on-year as well as on a sequential basis primarily driven by our NE business segment.

NE was down double-digit percentage urine year and sequentially reflecting weakness in our lab and field products. The pullback in R&D spend at network equipment manufacturers was much higher than anticipated leading NSE revenue and non-GAAP operating profit margins to come in below the lower end of our initial guidance.

This was partially offset by stronger demand for our optical lab products driven by the development of high-speed optical infrastructure, including 800 GigE. Our SE business segment grew 4.5% year-on-year in line with our expectations.

Looking ahead, we believe our NSE business bottomed out in Q3, and we're starting to see some early signs of recovery. Specifically, during this quarter, we are seeing initial signs of recovery for field instruments and stabilization and gradual recovery for some lab and production fee.

We expect this debilitation recovery momentum to continue into the second half of calendar 2023. One bright spot is our avionics and resilient PNC businesses, which continue to see healthy demand from male arrow customers. Now turning to OSP, OSP decreased year-on-year and sequentially consistent with our guidance.

While core OSP came in slightly ahead of our expectations. The 3D sensing demands was slightly lower. We expect fiscal year fourth quarter to be slightly down quarter-on-quarter driven by lower demand for anti-counterfeiting products due to post-COVID fiscal tightening.

The 3D sensing business is also expected to be somewhat weaker than seasonal due to lower demand for smartphones and supply chain transition to new form model designs. That said we expect stronger second half of calendar year 2023 during my recovery and anti-counterfeiting demand and seasonal strains and 3D sensing.

In conclusion, I would like to thank by Viavi team for managing this challenging environment and express my appreciation to our employees, customers, and shareholders for their support. I will not turn the call over to Sagar..

Thank you, Oleg. This quarter. We'll be participating at Rosenblatt virtual Tech Summit on June 8th. John Louis, that has begun the question-and-answer session. We ask everyone to limit this question, to one question and one follow-up..

[Operator Instructions] Your first question comes from the line of Michael Genovese of Rosenblatt. Please go ahead..

Thank you, very much. Oleg, I'm trying to figure out what kind of implication we should draw from this, kind of, sudden a big slowdown in lab tests? Basically, what does it mean for the OEMs? Because, as you said, the field test is seems fairly solid going forward.

And just trying to understand, is it more on the semiconductor side that you saw it? Or what do you think that it tells us when they slow down spending about their own businesses, both for NAMs and semiconductor manufacturers?.

Well, if I look at it, so think of it this way, right? Initially, the service providers kind of slammed on the brakes in September quarter, took maybe one to two quarters to percolate it to the NAMs.

And then to the semi players, because, in September, they still delivered because they had a, backlog, there's some more of them had backlog in December by March, they clearly saw big orders decline. And I think what often happens, there is a knee jerk reaction to slammed on the brakes on spending.

And we expected the lab equipment to be, pulled back somewhat because, as does lagging effect would get to the NAMs and semi companies. I think I would I was surprised is that the size of slowdown. I expected maybe 15%, kind of pullback. I mean, we saw in some cases 30% to 40%. So, it's been quite significant. It's not anyone.

It's pretty broad-based It's the wireless NIMs. It's networking NIMs, it's somewhat broad range, some broad base, semiconductor company’s storage processing communication. The only area that was a bright spot is the high-performance optical gear, and that piece of the business continue to be doing really well.

And I think a lot of it is due to a significant backlog of the business that they're still building. And I think, probably, to some extent sanctioning of Huawei. U.S. carriers and European -- European and U.S. names are picking up some share, and that may be driving some of that demand.

But on a broad-based communication, I see storage, I see processor, I see all these companies, so meaningful pullback, as well as the telecom, data comm, and wireless networking gear manufacturers..

Just a clarification and my follow-up. I assume that in lab test, that's not an area where inventory is ever really an issue.

So, it's not, we're not seeing an inventory correction, we're seeing sort of a demand there?.

No, there is no inventory. It's very much driven by programs. So, I think the way I look at it, it was a knee jerk reaction to hit the brakes on span.

We are seeing the so well, let's say on that field instruments, we saw, December quarter was kind of like bottoming out quarter and we start seeing things kind of gradually starting to recover in the March quarter. I would say the lab instruments appear to be very hard, dropped in the March quarter.

And in this quarter, we think stabilization was maybe a little bit of the uptake on lab instruments. So, things are starting to kind of come off because I think there was a general shock and now an overreaction, which was kind of surprising, because we said told everybody in October, hey, it's coming.

It's just a matter of how quickly it percolates into the supply chain. And I think March was a very hard quarter..

Your next question comes from the line of Tim Savageaux. Please go ahead..

Hi, good afternoon. That was a magnet differentiation. Speaking of bright spots, when you noted the field witness back toward the end of last year. The cable is a bright spot at that point.

I wonder, if you can give us an update on what you've seen out of the cable market in the March quarter recently and what your expectations are for the balance of the year?.

So, March quarter, I mean, we saw cable players have kind of finalize their CapEx decisions. And they started releasing the order, so communicating orders in March and kind of finalized orders early this quarter. And we already expect to see some revenue this quarter being shipped and in the fiscal Q1.

Generally, cable players, they pretty much blow through whatever they're going to spend. They spend it in the June and September quarter will maybe a little bit in December. So, there is still I mean, clearly, they are trying to close the gap with a lot of fiber and also counter some of the 5G risk for consumer access.

So that's been a positive and it's mostly North American story..

Okay. Thanks, for that. Switching over to the March quarter results. And to the extent you saw what looks to be about a $30 million sequential decline in any way to break that down, I guess between greater than expected lab weakness or, I'd imagine you'd normally see some seasonality on the field side.

But as you said, you might have seen some sequential growth on the field side.

So, we look at those couple of moving parts there, what were the real drivers between them lab?.

I would say on the field side was we saw a stabilization. And the June quarter is the beginning of recovery. Predominantly, the drop was from level production, which is very painful, because this is revenue at much higher gross margins than average. So, it also puts the pressure on the mix.

So predominantly, I would say a lion's share of the quarter-on-quarter drop, was dropped in less than production. And we've used this quarter, it's going to be largely stabilized, and maybe even start recovering. So, I'd say, this quarter, it's flat to slightly up, going to be further up in production and beginning of recovery for the instruments..

[Operator Instructions] Your next question comes from Meta Marshall. Please go ahead..

Great. Thanks. Maybe just if we could get a rough mix of the any business between lab production and field instrumentation, if there's any kind of like rough buckets just to kind of help us contextualize when we are seeing recovering one element of the business versus the other.

If there's any directional guidance that we could have there?.

I'll start and I'll turn it over to Henk. We've been working very hard over the last six years or so to reduce our dependency on a service provider or field instruments. One of our very bright stars was really significant growth in love and production. So, it actually got to the point where it's a meaningful share of our revenue.

That's the sharp pullback during the March quarter was great impact. And I'll turn to Henk to provide some general guidance..

Yeah, typically the mix within NE is more than 50% fields 55% to 45% for what we call lab products, labs, and lab and production includes wireless components. In the March quarter was slightly different. It was closer to 60%, 40%. So that sort of speaks to the significance of the decline that we saw in that lab business as we discussed. .

Okay. Perfect.

And then on the 3D sensing died, you guys noted just kind of some headwinds and fiscal Q4 a new phone model designs, I just, is there a change and content that we should be mindful of or it's just, the or don't know what model it is, you just they're not holding as much inventory of any filters?.

Well, there is going to be obviously new model launched as well as the older models will say but even in the new in the old models, some of the modules are being redesigned, and they're going to use the newer even though the same size by more advanced, higher performance filter.

So, all the contract manufacturers in OEMs that trying to work down the existing inventory, which is not that big, but also, they are transitioning to the new model year. So of course, everybody wants to consume whatever they have on hand and then do a switchover. And of course, as, the phone sales are down year-on-year.

So, somebody should have more demand and a consumption of whatever inventory anybody has on hand is what's muting some of the volume..

There are no further questions at this time. I will turn the call back over to Sagar Hebbar, Head of Investor Relations..

Thank you, John Louis. This concludes our earnings calls for today. Thank you, everyone..

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