Viavi Solutions Q1 2024 Earnings Call Transcript

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November 2, 2023

There are 8 speakers on the call.

Operator

Hello, everyone. My name is Alexis. Welcome to VIAVI Solutions First Quarter Full Year 20 24 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

I'll now turn the line over to Pam Abbant with VIAVI Solutions' Interim CFO. Please go ahead.

Speaker 1

Thank you, Alexis. Welcome to the VIAVI Solutions' Q1 fiscal year 2024 earnings call. My name is Pam Avant, Yabi Solutions' Interim CFO. Also joining me on today's call is Ola Kakin, our President and CEO. Please note this call will include forward looking statements about the company's financial performance.

Speaker 1

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 Please also note that unless we state otherwise, all results except revenue are non GAAP. We reconcile these non GAAP results to our preliminary financial GAAP financials and discuss their usefulness Let's start with our quarterly financial results.

Speaker 1

Fiscal Q1 revenue came in at Revenue was down sequentially 6% and down 20.1% on a year over year basis. Operating profit margin of 12.4 percent was slightly below our guidance range of 12.7 percent to 14.2%, up by 70 basis points from the prior quarter and down 9.30 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 point 1 $1 sequentially and down $0.14 year over year. The current fully diluted share count was 224,200,000 shares during the quarter, down from 230,400,000 shares in the prior year. Cash flow from operations for our Q1 was $50,300,000 versus $26,600,000 a year ago.

Speaker 1

Now moving to our quarterly results by business segment for Q1. Starting with NSE. NSE revenue came in at $170,400,000 above the low end of our guidance range of $167,000,000 to $183,000,000 and down 22.2 percent year over year, primarily as a result of weaker spend in the service provider market. NE revenue at $150,000,000 declined 23.7% year over year. SE revenue at $20,400,000 declined 8.9% from last year.

Speaker 1

NSE gross Profit margin at 63.6 percent increased 150 basis points sequentially and decreased by 110 basis points year over year. Within NSE, NE gross profit margin at 63.1 percent 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 percent 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 volume and less favorable product mix. Now turning to OSP.

Speaker 1

Driven by higher demand for the anti counterfeiting and 3 d sensing products, 1st quarter revenue came in at $77,500,000 slightly above the high end of our guidance range of $73,000,000 to 77 $1,000,000 and was down 15.1% year over year. Gross profit margin at 52.5 percent declined 4 20 basis points year over year. Operating margin at 37.8 percent also exceeded the high end of our guidance range and declined 4.50 basis points year over year. Now turning to the balance sheet. The ending balance Our total cash and short term investments was $544,500,000 up $27,400,000 compared to the prior year.

Speaker 1

As previously mentioned, operating cash flow for the quarter was $50,300,000 an increase of $26,800,000 from the prior quarter and an increase of $23,700,000 year over year. In addition, Capital expenditures during the quarter of $6,700,000 were down from the $14,800,000 in the prior year when we were completing construction of our new facility in Chandler. In addition, during fiscal Q1, We repurchased 1,000,000 shares of our common stock for $10,000,000 As you may recall, in September As of last year, we announced a new common stock repurchase program for up to $300,000,000,000 At the end of fiscal Q1 2024, we had $224,800,000 available into this program. Now on to guidance. We expect our first our fiscal second quarter 2024 revenue to be in the range of $240,000,000 to $260,000,000 Operating profit margin is expected to be 11.2 percent, plus or minus 160 basis points and EPS to be $0.06 to $0.10 We expect NSE revenue to be approximately $177,000,000 plus or minus $8,000,000 with an operating profit margin of 2% plus or minus 200 basis points.

Speaker 1

OSP revenue is expected to be approximately $73,000,000 plus or minus $2,000,000 with an operating profit margin of 33.5 percent plus or minus 100 basis points. Our tax expense is expected to be around $8,000,000 plus or minus $500,000 for the 2nd quarter as a result of jurisdictional mix. We expect other income and expenses to be a net expense of approximately $3,000,000 and the share count is expected to be around 222,000,000 shares. With that, I will turn the call over to Oleg.

Speaker 2

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 NSE, we saw a mixed performance.

Speaker 2

The demand for our field fiber cable, service enablement and wireless lab products came in weaker than expected due to tight spend and CapEx environment at Tier 1 service providers. The demand for Lab Fiber, Avionics and Ofcom products was robust and continued to see good momentum. The net result was NSE revenue coming in slightly below the midpoint of our guidance. Now turning to OSP. OSP Business segment results came in slightly better than expected, With both revenue and profitability exceeding our expectations, the results were driven by stronger than expected demand for both 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.

Speaker 2

We're also seeing slightly softer 3 d sensing demand after strong Q1 orders. Looking into early calendar 2024, We expect the following demand dynamics for our major product areas. 1st, is continued slow recovery in service provider spend impacting our field instruments business. The second, continued weaker demand for our anti counterfeiting products A tight fiscal policy slowed down the inventory consumption by major customers. 3rd, beginning of recovery of wireless lab products As major wireless NAMs continue 5 gs product development and increase 6 gs investment.

Speaker 2

4th, Accelerated the recovery in our fiber lab and production product demand, driven by strong optical demand by data center, Optical NAMs, Optical Module and Semiconductor customers. 5th, growing service enablement product demand as our new architecture gains And last but not the least, growing demand for our avionics, Milero and resilient P and T products. Despite the near term macroeconomic headwinds, our long term growth strategy thesis built around 5 gs and 6 gs wireless, Fiber, new service enablement product portfolio, 3 d sensing and emerging resilient P and 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, Thank you, everyone. Thank you, everyone.

Operator

We will now begin the question and answer session. The first question comes from the line of Mehdi Hosseini with SIG. You may proceed.

Speaker 3

Yes. Thanks for taking my question. Oleg, do Do you have any plans to take additional costs out of OpEx? And if not, How do you see near term, would last earnings call I was under the impression that your customers at least on a wireline May I be bottoming, but it seems like demand has weakened and just want to get a feel How are you looking at the end market demand outside of a smartphone? Thank you.

Speaker 2

Sure. Thanks. We have taken out I'm not a believer of death by 1,000 cuts taking out a little bit at a time. We have taken a major step earlier in the year. We've taken out about $30,000,000 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.

Speaker 2

And in terms of the outlook, we actually see while the service provider still continues to be a bit anemic, We're actually seeing it stabilizing, and our lab and production test business is actually starting to recover. So I think the 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 the overall margins.

Speaker 2

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're not planning any further OpEx reductions. I think we've 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.

Speaker 4

Thank you.

Operator

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

Speaker 4

All right. Thank you. Hey, Oleg, can you talk about linearity sort of from service provider orders in the quarter and particularly how things looked Late in the quarter and anything you talked about early October?

Speaker 2

Sure. I think the If anything, linearity has been pretty good. Nobody has been decommitting. I mean, I would say, Converting orders into bookings is taking a bit longer, but that's the result of lower that's the lower demand. Before you could get things within a quarter, now it takes you a bit more than a quarter.

Speaker 2

But with that said, I think the nobody has been canceling, nobody been Pulling back, I mean, they are still once they place the orders, they take the orders. And we're seeing actually We're not expecting usually in the December quarter, you always have some budget flush. I don't think we're 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 of a strong June kind of December quarter, weak September, March quarter.

Speaker 2

So I think there's less, I would say, kind of budget flushing or Trying to use it or lose it going on. It's people ordering equipment just as they need it 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 the I'll say the first Two quarters of fiscal I mean, if I look at the December 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 the they were able to cancel and push out big ticket items With various NAMs, they're getting back to operational optimization, and We're actually seeing more willingness to spend money on getting more out of what they've got versus just climbing down completely.

Speaker 4

Great. I appreciate that color. I guess our 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 higher speed, like very high speed data center business Part of that lab that you're talking about?

Speaker 2

Yes. So I'd say, it's a story of 2 different labs. So if you look at the wireless space, clearly, we are seeing the results of major wireless NAMs. I'd 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 still got a lot of 5 gs and 6 gs products that they are working on and they are We'll be placing orders. So in that area, we've seen weakness.

Speaker 2

The second area of weakness has been in, I'd say in the last two quarters, is anything related to storage, also storage both semiconductor and disk drive Our providers kind of pulled back on some of the investment, but we expect that to be coming back as well as the 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're actually starting to see that coming now.

Speaker 2

That's why I said between the time people talk about it and the Time they start placing orders, there is 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 we think storage and wireless will be coming back in the March quarter.

Speaker 4

Super helpful. And I look forward to following up I'm more on that offline. I guess my last question for here though would be about, you already mentioned the March quarter maybe being a 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 And made some comparisons to early 'twenty three, sort of exiting 'twenty four. And how do you feel about that now? Because it seems like things are a little bit weaker on

Speaker 2

Well, I mean, remember, telecom's side weakness is relative. We were the first ones to see Everything go tight, which was in September 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 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 item has been canceled or pushed out, It's kind of going getting back to business and trying to get more with what they've got.

Speaker 2

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 cable Deployment and network upgrade. And I think the initial revenue and it will start Following in the March quarter. So in that respect, the MSOs are doing and moving forward with their network upgrades. I think the big service price in North America are still a bit anemic.

Speaker 2

But in Europe and Asia, I mean, we're 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 6 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've kind of took a pullback, reassessed their budgets, their CapEx and now they're coming back.

Speaker 2

And We think the areas in the 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're actually feeling pretty good. We're getting very good Traction for our new architecture and a very nice design win in some of the most challenging areas against truly who is who In the space, so I think in that particular space, we think we're going to pick up share in the coming year. So overall, where I'm sitting is on the NSE side, I think the worst is 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.

Speaker 2

On the OSP side, We saw very strong demand on 3 d 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 are selling their products. If the sales are very strong, particularly in Asia, We may see more upside to the December March quarter. At this point, it's too early to tell.

Speaker 2

And on the anti counterfeiting, I think between the inventory builds during COVID and tighter fiscal environment, I think the inventories are unwinding slower, so we expect to see a weaker demand and thus a greater level of underutilization and some Gross margin pressure in that business unit in the coming 6 months.

Speaker 4

Okay. Fantastic. That's a lot of the great commentary. Thank you.

Speaker 2

Sure. Thanks.

Operator

Thank you for your question. The next question comes from the line of Tim Savageaux with Northland Capital Markets. You may proceed.

Speaker 5

Hi, good afternoon. Sorry about that. Quick question on the kind of outlook. You mentioned something about March being less seasonal. And I'm not sure how 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 3 d sensing and it sounds like on the currency side, but at this point, Are you meaning to talk about March being less seasonal?

Speaker 5

Could March be up given some of the dynamics that you're seeing?

Speaker 2

I think it's a bit early to tell. I think in the NSE, 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, in March quarter. And we do think we're going to see some leaven production recovery. But I think at this point, it's too early to tell.

Speaker 2

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 flush, 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's 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 3 d sensing and we continue to expect more anemic demand on anti counterfeiting.

Speaker 2

But obviously, I've 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 NSE business maybe conversely slightly up. So net net roughly flattish March quarter is the early expectation, but I think it's too early to truly call it.

Speaker 5

Understood. No, but I appreciate the color. Following up on the network enablement side and given some of the Trends you've noted in terms of service provider spending weakness. I'm going to it would seem to follow that And I know you've broken this down from time to time over time about lab versus field split, but It would seem that you're more lab heavy these days given that field weakness. A, would you say that's right?

Speaker 5

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?

Speaker 2

So I think in general, we've been we used to be Significantly more present in the service provider. We have obviously grown our lab business a lot more in the last 6 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's probably more like 60%, 40%, Maybe 55, 40 it's still about maybe 60, 40, 50 five, 45 split between the field instruments being a little bit better bigger And lab being smaller, that's a big change from about seventythirty that we had a few years back. The other thing is I mentioned earlier about But how we think about March quarter, some of the when you look at our EPS range for this quarter, That assumes higher commissions because our current booking velocities, we're expecting Much stronger bookings in this quarter.

Speaker 2

So we pay we 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

Speaker 1

Thank you for your question.

Operator

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

Speaker 6

Great. Thanks. So I was hoping we could start off with a little bit of a sense of what the break is between 3 d And non-3d OSP, I'm assuming that it's somewhere around $20,000,000 $21,000,000 So in the September quarter for 3 d, is that in the ballpark?

Speaker 2

It's a little bit higher, closer to $24,000,000

Speaker 6

$24,000,000 Okay, great. Thanks. And A

Speaker 2

little over 20 plus.

Speaker 6

Normally that declines sequentially.

Speaker 4

If it's

Speaker 6

a little stronger, What gives you the confidence that it's not going to decline more sequentially?

Speaker 2

So we are expecting some decline into this Quarter. But in the near term, we I mean, looking at our current forecast, We are seeing revenue to be around maybe $3,000,000 $4,000,000 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 It's coming out of the 3 d sensing, but there's other elements of 3 d sensing market that are playing into it.

Speaker 4

Well, so just

Speaker 2

And we're already 1 month into the December quarter. So Yes, we're already 1 month in December quarter.

Speaker 6

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

Speaker 2

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

Speaker 6

Okay. If we could go

Speaker 2

to the income statement But if I say the main customer is the main customer.

Speaker 6

Yes. If we could go to the income statement, you talked about the $30,000,000 in cost savings coming out earlier in the year. As we look at the $118,000,000 in OpEx in the quarter, is that the right level that we should 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.

Speaker 2

So this is 118 is about on the lower end side. So in the December quarter, as I said, we actually have a it's 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 $4,000,000 increased guidance for December quarter is the commissions on bookings On the revenue that will likely land in the March quarter. And in the March quarter, It will be roughly we expect to be about the same level as December, but for different reasons.

Speaker 2

It's more of a 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 $1.18 to $1.22 is the range depending on the quarter.

Speaker 6

Great. Thanks.

Speaker 2

Sure. Thanks.

Operator

Thank you for your question. The next

Speaker 7

This is Kiran on for Meta. 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. 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

Speaker 2

Well, I mean, I'd say telecom globally is weaker, but The difference is that you're on life support or you're working wounded. And I would say relatively speaking, Europe is doing probably the best. Latin America is 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.

Speaker 2

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 a pullback across the world, less the least in Europe, then I would say, Asia, Then Latin America, roughly on par and then North America is the most impacted.

Speaker 7

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 Maybe high level, how you look at the run rate of that business? Has that come down a little bit?

Speaker 7

Or do you sort of expect it to revert back as sort of demand normalizes?

Speaker 2

I think we expect the core business to be on the lower end of the $50,000,000 range For the quarter.

Speaker 7

Okay. Perfect. That's helpful. Thank you. Thank you very much.

Operator

Thank you for your question. There are currently no further questions in queue. So I'll now turn the line back to the team for any closing or additional remarks.

Speaker 1

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

Operator

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

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