Hello, everyone. My name is Alexis. Welcome to the Viavi Solutions First Quarter Full Year 2024 Earnings Call. [Operator Instructions]. I will now turn the line over to Pam Avent, Viavi Solutions Interim CFO. Please go ahead..

Thank you, Alexis. Welcome to Viavi Solutions' First Quarter fiscal year 2024 earnings call. My name is Pam Avent, Viavi Solutions Interim CFO. Also joining me on today's call is Oleg Khaykin, our President and CEO. 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 Solutions'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. Let's start with our quarterly financial results. Fiscal Q1 revenue came in at $247.9 million, slightly below the midpoint of our guidance range $240 million to $260 million.

Revenue was down sequentially 6% and down 20.1% on a year-over-year basis. Operating profit margin of 12.4% was slightly below our guidance range of 12.7% to 14.2%, up by 70 basis points from the prior quarter, and down 930 basis points from the prior year.

EPS at $0.09 met the low end of our guidance range of $0.09 to $0.11, down $0.01 sequentially and down $0.14 year over year. The current fully diluted share count was 224.2 million shares during the quarter, down from 230.4 million shares in the prior year.

Cash flow from operations for our first quarter was $50.3 million versus $26.6 million a year ago. Now moving to our quarterly results, by business segment for Q1. Starting with NSE.

NSE revenue came in at $170.4 million, above the low end of our guidance range of $167 million to $183 million, and down 22.2% year-over-year, primarily as a result of weaker spend in the service provider market. NE revenue at $150 million declined 23.7% year-over-year. SE revenue at $20.4 million declined 8.9% from last year.

NSE gross profit margin at 63.6% increased a 150 basis points sequentially, and decreased by 110 basis points year-over-year. Within NSE, NE gross profit margin at 63.1% decreased 140 basis points from the prior year, primarily due to a combination of lower volume and product mix.

SE gross profit margin at 67.2% increased 110 basis points from last year, driven by richer product mix. NSE's operating profit margin at 0.9% came in below our guidance range of 3% to 5%, as a result of lower volumes and less favorable product mix. Now turning to OSP.

Driven by higher demand for the anti-counterfeiting and 3D sensing products, first quarter revenue came in at $77.5 million, slightly above the high end of our guidance range of $73 million to $77 million, and was down 15.1% year-over-year. Gross profit margin at 52.5% decline 420 basis points year-over-year.

Operating margin at 37.8% also exceeded the high-end of our guidance range and declined 450 basis points year-over-year. Now turning to the balance sheet. The ending balance of our total cash and short-term investments was $544.5 million, up $27.4 million compared to the prior year.

As previously mentioned, operating cash flows for the quarter was $50.3 million an increase of $26.8 million from the prior quarter and an increase of $23.7 million year-over-year.

In addition, capital expenditures during the quarter of $6.7 million were down from the $14.8 million in the prior year when we were completing construction of our new facility in Chandler. In addition, during fiscal Q1, we repurchased 1 million shares of our common stock for $10 million.

As you may recall, in September of last year, we announced a new common stock repurchase program for up to $300 billion. At the end of fiscal Q1 2024, we had $224.8 million available into this program. Now onto guidance, we expect our fiscal second quarter 2024 revenue to be in the range of $240 million to $260 million.

Operating profit margin is expected to be 11.2%, plus or minus 160 basis points, and EPS to be $0.06 to $0.10. We expect NSC revenue to be approximately $177 million, plus or minus $8 million. With an operating profit margin of 2% plus or minus 200 basis points. OSP revenue is expected to be approximately $73 million plus or minus $2 million.

With an operating profit margin of 33.5% plus or minus a hundred basis points, our tax expense is expected to be around $8 million, plus or minus half $1 million for the second quarter as a result of jurisdictional mix.

We expect other income and expenses to be a net expense of approximately $3 million, and the share count is expected to be around 222 million shares. With that, I will turn the call over to Oleg. .

Thank you, Pam. During the September quarter, our end-market spend environment continued to be challenging, particularly with the service providers in North America. In view of these continued headwinds, our revenue came in slightly below the midpoint of our guidance with stronger OSP demand helping to offset weaker telecom service provider revenues.

Our EPS came in at the low end of our guidance range, driven by lower volume and higher taxes due to less favorable geographic revenue mix. With NSC, we saw a mixed performance.

The demand for our field fiber, cable, service enablement and wireless lab products came in weaker than expected due to tight span and CapEx environment at tier-1 service providers. The demand for lab fiber avionics and op coms products was robust and continue to see good momentum.

The net result was NSC revenue coming in slightly below the midpoint of our guide. Now turning to OSP. OSP business segment results came in slightly better than expected, but both revenue and profitability exceeding our expectations. The results were driven by stronger than expected demand for both counterfeiting and 3D sensing products.

Looking ahead, at the December quarter, we expect revenue to be seasonally down, primarily due to lower anti-counterfeiting demand as our customers work to adjust their year-end inventories. We also seeing slightly softer 3D sensing demand after strong Q1 orders.

Looking into early calendar 2024, we expect the following demand dynamics for our major product areas. First is continued slow recovery in service provider spend impacting our field instruments business. The second continued weaker demand for our anti-contributing products. A tight fiscal policy slowed down the inventory consumption by major customers.

Third, beginning of recovery of wireless lab products as major wireless NEMs continue 5G product development and increase 6G investment. The fourth accelerated the recovery in our fiber lab and production product demand driven by strong optical demand by data center, optical NEMs, optical module, and semiconductor customers.

Fifth, growing service enablement product demand as our new architecture against instruction and acceptance with major customers. And last but not the least, growing demand for our avionics, Mil/Aero and resilient P&T products.

Despite the near-term macroeconomic headwinds, our long-term growth strategy thesis built around 5G and 6G wireless fiber, new service enablement, product portfolio 3G sensing and emerging resilient P&T technology remains intact.

In conclusion, I would like to thank my Viavi team for managing in this challenging environment and express my appreciation to our employees, customers, and shareholders for their support. With that, I will now turn it over to operator for Q&A. .

[Operator Instructions]. The first question comes from the line of Mehdi Hosseini with SIG. You may proceed..

Thanks for taking my question. Oleg, do you have any plans to take additional costs out of OpEx? And if not, how do you see near term would last time -- last earning call was under the impression that your customers, at least on a wire line may be bothering, but it seems like demand has weakened.

And just want to get a feel for how you are looking at the end market demand outside of the smartphone. .

Sure, thanks. We have taken out, I'm not a believer of depth by a thousand cuts, taking out a little bit at a time. We have taken a major step earlier in the year. We've taken out about $30 million in OpEx, and we have just completed, I would say there's maybe a little bit left, but most of it has already been factored in.

And in terms of the outlook, we actually see, while the service provider still continues to be a bit anemic, we actually seeing it stabilizing. And our lab and production test business is actually starting to recover. So, I think, with that, I think we are good for now with any further OpEx reductions.

The area where we have a bit of a challenge is clearly, our OSP business unit. That's the area where we have factories with a lot of fixed assets. So clearly lower loadings lead to a bit more underutilization and as a result, a bit lower margins, which puts the pressure on of the overall margins.

But as the -- we are working diligently to bring the inventories under control as our customers and ourselves try to adjust inventories to the new equilibrium. We think we are in pretty good position in managing soft lending, so to say, and to start the recovery. So, the short answer, we are not planning any further OpEx reductions.

I think we have implemented all the changes we need to implement. We have a little bit more remaining to be implemented from the original plan, but that's about it for now..

The next question comes from the line of Michael Genovese with Rosenblatt Securities. You may proceed..

Thank you.

Oleg, can you talk about, linearity sort of from service provider orders in the quarter and particularly how things look late in the quarter and anything you need to talk about early October?.

Sure. I think the -- if anything, the linearity isn't pretty good. Nobody has been decommissioning. I mean, I would say, converting orders into bookings is taking a bit longer, but that's the result of lower demand, before you could get things within a quarter, and it takes you a bit more than a quarter.

But, with that said, I think nobody has been canceling. Nobody been pulling back. I mean, they are still -- once they place the orders, they take the orders. And we are seeing actually -- we are not expecting usually in the December quarter, you always have some budget flush. I don't think we are seeing any of it this year.

But on the positive side, we are seeing a probably stronger than seasonal demand into the March quarter. Things are being up a lot more linear than kind a strong June kind of December quarter weak September, March quarter. So, I think, there is less, I would say kind of budget flushing or trying to use it or lose it going on.

People ordering equipment just as they needed to kind of real time, just in time. And I think the initial shock and the restructuring has been kind of worked out and everybody is getting back to within the new operating environment, deciding what they need and placing orders as necessary.

I think I will say the first two-quarters of fiscal, I mean, if I look at the, December and kind of March quarter of this fiscal year, a year ago, there was a lot of order cancellation as many service providers were trying to get their CapEx under control.

Now that they were able to cancel and push out big ticket items with various NEMs, they are getting back to operational optimization and, we are actually seeing more willingness to spend money on getting more out of what they have got versus just coming down completely..

Great. I appreciate that color. I guess, the second question is, you talked about the lab business already starting to recover.

Could you give more color on what's driving that? And is the newer or higher speed like, very high-speed data center business, part of that lab that you are talking about?.

So, I would say, it is a story of two different labs. So, if you look at the wireless space, clearly, we are seeing the results of major wireless NEMs. I would say, there is still a very tight environment, but we do expect the demand to start coming back early next calendar year.

Because in the end everybody's still got a lot of 5G and 6G products that they're working on, and they are will be placing orders. So, in that area, we've seen weakness.

The second area of weakness has been in I'd say in the last two quarters is anything related to storage, also a storage both semiconductor and this drive providers kind of pulled back on some of the investment, but we expect that to be coming back as well as in next generation products needs to be launched.

The area that's been pretty strong and actually has been up year on year is the very high speed. So, about a quarter ago people asked me about do I see any demand with related to the hyperscale data center for AI? And at that point we didn't really see it. We actually starting to see that coming now.

That's why I said between the time people talk about it and the time they start placing orders, there's always some lag. So that piece of business for us is actually doing very well and we are seeing robust demand from the system providers the data center operators and the semiconductor companies that play in that space.

So, I mean, so if I say about 11 production, it's much stronger on high speed optical transport and a bit weaker in storage and wireless. But if we think storage and wireless will be coming back in the March quarter. .

And I look forward to following up on more on that offline. I guess my last question for here though would be about you already mentioned the March quarter maybe being a lit little bit more linear and less seasonal with December.

But can you just talk about the second half of the year? Because you're pretty bullish on the second half of the year and made some comparisons to early ‘23, sort of exiting ‘24. And just how do you feel about that now? Because it seems like things are a little bit weaker on the telecom side. .

Well, I mean, remember, telecom's side weakness is relative. We were the first ones to see everything go tight, which was in September and December of last year. A lot of the NAMS didn't see it happening until June, and let's say September quarter because they have non-cancelable, non-refundable orders.

So, and while the service providers were working to cancel or push out a lot of the equipment spend, the first thing they did is they really tightened up on operating expenses. Now that the big-ticket items being canceled or pushed out, it's kind of going, getting back to business and trying to get more with what they've got.

So, in that respect, the dialogue we are seeing is much more constructive in that area. In particular, we are expecting to see some reasonable spend in the cable deployment, and a network upgrade and I think the initial revenue and it'll start flowing in the March quarter.

So, in that respect, the MSOs are doing in moving forward with their network upgrades. I think the big service price in North America are still a bit anemic but in Europe and Asia, I mean, we are seeing a bit better environment. So obviously, it's not as good as it was I'd say a year, year and a half ago.

But it's from where I'm sitting, it's a better situation than it was a year ago where for six months it was crickets. Nobody was doing anything.

So at least we have the dialogue and things are moving forward, and I think the initial shock for a lot of 11 production, the semi companies, module companies, system companies, they kind of took a pulled back, reassessed their budgets, their CapEx, and now they're coming back.

And within the areas in a high speed optical and ethernet is going to be quite strong in the -- we expect to be quite strong in the first half calendar year. The wireless, we expect it to start recovering and coming back. And on the service enablement, our software business, we actually feeling pretty good.

We are getting very good traction for our new architecture and a very nice design win in some of the most challenging areas against truly who in the space. So, I think in that particular space, we think we're going to pick up share in the coming years. So overall, where I'm sitting, it's on the NSC side.

I think the worst behind it is now we just need to determine how is it going to be kind of gradual recovery, a little bit stronger recovery in some areas, weaker in the others, it remains to be seen. On the OSP side. We saw very strong demand on 3D sensing in the September quarter. I think it's too early to tell how the December is going to come in.

I think, our major customer is probably going to look at -- see how well they're selling their products. If the sales are very strong, particularly in Asia, we may see more upside to the December and March quarter. At this point, it's too early to tell.

And on the anti-counterfeiting, I think, between the inventory bills during COVID and tighter fiscal environment, I think the inventories are unwinding slower. So, we expect to see a weaker demand and as a greater level of under-utilization and some gross margin pressure in that business unit in the coming six months. .

The next question comes from the line of Tim Savageaux with Northland Capital Market. You may proceed..

Quick question on the kind of outlook, you mentioned something about March being less seasonal, and I'm not sure how the order, the magnitude of some of the businesses, the lab businesses that you're seeing growth in.

Clearly, you're going to have some headwinds seasonally on 3D sensing, and it sounds like on the currency side, but at this point, or you mean to talk about March being less seasonal? Could March be up given some of the dynamics that you're seeing?.

I think it's a bit early till, I think in the NSC there's a chance that March will be flat to up. I mean, as I said, we expect some pretty strong cable demand to come in March quarter. And we do think we are going to see some 11-production recovery. But I think it's, at this point it's too early to tell.

But the mere fact that some of the normally you see quite a bit of orders being pulled in into December quarter, because of budget flash. We're not seeing that there as a result, people just placing orders to when they need the product versus when they have the money to spend.

And in that respect, we think, the general strength that we see in December, which results in a bit weaker March, I think is largely absent. So, the March bookings are already in and there's still obviously a lot of work to be done, but there is a good chance that March will be flat, maybe even slightly up on NSE side.

On the OSP side, I think it will be, slightly down because that's usually, the weaker quarter for 3D sensing and we continue to expect more anemic demand on anti-counterfeiting. But obviously, I have been surprised in the past. I mean, we don't get much visibility from central banks around the world.

And, I mean, at least our operating assumption right now is that, OSP business will be slightly down from the December quarter and the NSE business maybe conversely slightly up. So, net roughly flattish, March quarter is the early expectation. But I think it is too early to truly call it..

Understood. I appreciate the color. Following up on the network enablement side, and given some of the trends you have noted in in terms of service provider spending weakness. I am going to -- it would seem to follow that, and I know you have broken this down from time to time over time about lab versus field split.

But it would seem that you are more lab-heavy these days, given that field weakness. A, would you say that's right? Can you give us kind of a current estimate of where that breakdown stands? And of that lab business how material is your 800-gig high speed optical stuff relative to that total..

So, I think in general, we have been -- we used to be like significantly more present in the service provider. We have obviously grown our lab business a lot more in the last six years. So, I mean, while we are still not quite there, I would say, the field instruments is, let me just kind of do a quick math here.

It is probably more like a 60-40 maybe 55-45. It is still about maybe, 60-40, 55-45 split between the field instruments being a little bit better, bigger, and lab being smaller. That's a big change from about 70-30 that we had a few years back. The other thing as I mentioned earlier about how we think about March quarter.

Some of the -- when you look at our EPS range for this quarter, that assumes, a higher commission because our current booking velocity. We are expecting much stronger bookings, in this quarter.

So, we pay -- or at least we reserve commissions in the quarter of bookings, and that obviously, as the bookings come in much stronger than the revenue, some of it carries over as the starting backlog into the next quarter that gives us a little bit more comfort with the March quarter. But that's response to your question..

The next question comes from the line of Alexander Henderson with Needham. You may proceed. .

So, I was hoping, we could start off with a little bit of a sense of what the break is between 3D and non-3D OSP.

I am assuming that, it is somewhere around $20 million, $21 million in the September quarter for 3D, is that in the ballpark?.

It's a little bit closer to $24 million. .

Normally that declines sequentially, if it's a little stronger.

What gives you the confidence that it's not going to decline more sequentially?.

So, we are expecting some decline into this quarter. But in the near term, I mean, looking at our current forecast, we are seeing revenue to be around maybe $3 million to $4 million down for the total OSP.

And that's largely coming out of the -- some of it coming from the anti-counterfeiting and some of the other is coming out of the 3D sensing, but there's other elements of 3D sensing market that are playing into it. We already one month into December quarter..

Is there another piece of the business that's kicking in other than the standard customer?.

Well, I mean the, the standard customer, there's also some industrial customers in that space. I'd say, the main customer is the main customer. .

If we could go to the income statement, you talked about the $30 million in cost savings coming out earlier in the year is as we look at the $118 million in OpEx in the quarter, is that the right level that we should be anticipating in the December quarter, or will it step up because of commissions? And if it's not going to have a seasonal decline in the March quarter, is that again the right level for the March quarter?.

So, this is $118 million is about on the lower end side. So, in the December quarter, as I said, we actually have a -- it is one of these things, you don't get the revenue, you get bookings, so there's a significant step up in bookings.

So, a big chunk of that $4 million increased guidance for December quarter is the commissions on bookings on the revenue that'll likely land in the March quarter.

And in the March quarter, it would be roughly, we expect to be about the same level as December, but for different reason, it's more of statutory accruals that you do beginning of the year, the FICA and all that stuff. And then by the June quarter, we expect it to come down a bit somewhat.

So, I'd say during the year you're kind of looking between $118 million to $122 million is the range depending on the quarter. .

The next question comes from the line of Meta Marshall with Morgan Stanley. You may proceed. .

This is Karan on Meta Marshall. I guess just on the telecom side and service provider side, just regionally, I know you mentioned that North America is weaker and areas like Europe is a little bit stronger.

Is there anything you'd call out on this quarter in terms of trends beyond that? And I guess do you expect sort of Europe to revert back to North American trends or do you expect them to continue to outgrow and outperform?.

Well, I mean, I'd say, telecom globally is weaker, but the difference is are you on life support or you are working wounded? And I would say relatively speaking, Europe is doing probably the best. Latin America actually continues to be fairly resilient. Asia is doing pretty well. It's North America is really the area that's struggling quite a bit.

And I think a lot of it is driven by the heavy debt load that North American service providers are carrying. But generally, we've seen pullback across the world less the least in Europe than I would say, Asia than Latin America, roughly on par. And then North America is the most impacted. .

Okay, thank you. That makes sense.

And then sort of on the currency side of your business, just given sort of the headwinds you outlined, are there any changes to maybe high level how you look at the run rate of that business? Has that come down a little bit or do you sort of expect it to revert back as sort of demand normalizes?.

I think, we expect the core business to be on the lower end of the $50 million range per quarter. .

[Operator Instructions]. There are currently no further questions in the queue, so I'll now turn the line back to the team for any closing or additional remarks..

Thank you. I think with that, we can end the call..

That concludes the conference call. Thank you for your participation. You may now disconnect your line..