Viavi Solutions Q3 2023 Earnings Call Transcript

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May 2, 2023

Key Takeaways

  • Q3 fiscal 2023 revenue was $247.8 million, down 21.5% year-over-year, with non-GAAP EPS of $0.08 missing the prior-year and initial guidance ranges.
  • VIAVI approved a restructuring plan impacting ~5% of its global workforce, expecting charges of $10–50 million and delivering approximately $25 million in annual cost savings by June 2023.
  • Cash and short-term investments rose to $586.6 million, boosted by a $113.8 million convertible note exchange and a $30 million stock repurchase, bolstering liquidity ahead of upcoming debt maturities.
  • Management noted early signs of recovery in field instruments and stabilization in lab production revenues, after a pronounced pullback in lab spending drove much of Q3’s decline.
  • For Q4, guidance calls for revenue of $252 million ± $10 million, a non-GAAP operating margin of 11.2% ± 120 bps, and EPS of $0.07–$0.09, with ongoing headwinds in lab products offset by stabilizing network instrument demand.
AI Generated. May Contain Errors.
Earnings Conference Call
Viavi Solutions Q3 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

Hello. My name is Jean Louis. Welcome to the VIAVI Solutions F3Q 'twenty three Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer I will now turn the conference over to Sagar Habar, Head of Investor Relations, VIAVI Solutions.

Operator

Please go ahead.

Speaker 1

Thank you, Jean Louis. Welcome to VIAVI Solutions' Q3 fiscal year 2023 earnings call. My name is Sagar Hebbard, Head of Investor Relations for VIAVI Solutions. Joining me on today's call are Oleg Haikin, President and CEO and Henk Dodson, CFO. 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 estimation. We encourage you to review our most recent annual report and SEC filings, particularly the risk factors discussed 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.

Speaker 1

We reconcile these non GAAP results to our preliminary GAAP financials and discuss their usefulness and limitation 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 dotinvestor.vyavysolutions.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.

Speaker 1

I would now like to turn the call over to Henk.

Speaker 2

Thank you, Sagar. Fiscal Q3 2023 was a challenging quarter. After a pullback in service provider 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 247,800,000 dollars down 21.5 percent year over year, albeit at the high end of our recently updated guidance range of $246,000,000 to $248,000,000 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 our updated guidance range of 10.5% to 11.5%. EPS at $0.08 was down from $0.14 in 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 point 12 dollars The current share count was 225,300,000 during the quarter, down from 236,800,000 shares in the prior year.

Speaker 2

The tax rate at 24% as well as other income expense of $4,700,000 for the quarter arrived at levels consistent with our expectations. Cash flow from operations was $17,800,000 for the 3rd quarter versus $28,900,000 in the prior year period as a result of lower revenue levels. Year to date, cash flow from operations was $90,600,000 compared to $104,500,000 in the prior year. On February 1, 2023, the company approved a 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 affected and estimates it will incur Charges of between $10,000,000 $50,000,000 in connection with this plan, resulting into approximately $25,000,000 in annual savings.

Speaker 2

We anticipate substantial completion of this plan by June of 2023. Now moving on to our reported Q3 results by business segment, starting with NSE. NSE continued to be impacted by current macroeconomic headwinds with quarterly revenues of $177,300,000 declining 23.2% year over year. NE revenue of $149,600,000 declined 26.8 percent year over year, driven by the weakness in both service provider and network equipment manufacturing spending. SE revenue at 27 point $7,000,000 increased 4.5% from last year.

Speaker 2

MSE gross profit margin at 63.3% decreased by 110 basis points year over year. Within MSE, NE gross profit margin at 62% decreased 180 basis points from the prior year, primarily due to lower volume. SE gross profit margin at 70.4% 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%. Now turning to OSP.

Speaker 2

3rd quarter revenue at $70,500,000 was down 16.8% year over year. Revenue was near the high end of our initial guidance range of $67,000,000 $71,000,000 gross profit margin at 50.6 percent decreased 490 basis points On prior year, the result of lower volume in combination with start up costs related to our new facility in Chandler, 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 guidance 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 $586,600,000 up $96,900,000 sequentially. During the Q3, we were successful and exchanging 57 percent of our 2024 convertible notes into a new $250,000,000 face value convertible note maturing in 2026, generating $113,800,000 In proceeds, net of debt issuance costs.

Speaker 2

The $30,000,000 in repurchase of our common stock, we added net $84,000,000 in cash The latter in anticipation of retiring the remaining upcoming maturity of $68,000,000 in face value of our 2023 convertible notes in the 4th quarter. As mentioned earlier, operating cash flow for the quarter was $17,800,000 a decrease of $11,100,000 year over year, a result of lower revenues. In addition, we invested $10,800,000 in capital expenditures during the quarter compared to $18,100,000 in the Pipeline. During fiscal Q3, we repurchased 2,800,000 shares of our common stock The $30,000,000 under the share repurchase plan announced in September, leaving a remaining authorized balance of approximately $244,800,000 for repurchase. You may recall in September, we announced that the Board authorized a new common stock Repurchase plan for up to $300,000,000 and end of fiscal Q3 with a planned balance of up to 274 $800,000 for share repurchases.

Speaker 2

Now on to our guidance. We expect the fiscal Q4 2023, 2023 revenue to be approximately $252,000,000 plus or minus $10,000,000 Operating profit margin is expected to be 11.2 percent, plus or minus 120 basis points and EPS to be $0.07 to 0 point 0 $9 We expect NSE revenue to be approximately $187,000,000 plus or minus $8,000,000 with an operating profit margin of 4.5 percent plus or minus 150 basis points. OSP revenue is expected to be approximately $65,000,000 plus or minus $2,000,000 with an operating profit margin of 30.5 percent plus or minus 50 basis points. Our tax rate is expected to be around 25%. As a result of jurisdictional mix, We expect other income and expenses to reflect a net expense of approximately $4,500,000 The share count is expected to be around 222,000,000 shares.

Speaker 2

With that, I will turn the call over to Oraleck.

Speaker 3

Thank you, Henk. Fiscal Q3 2023 was a challenging quarter for VIAVI. The rapid slowdown that we saw in the service provider spend at the end of the fiscal Q1 has spread to our systems and semiconductor customers. 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.

Speaker 3

NE was down double digits percentage year on year and sequentially, reflecting weakness in our lab and field products. The pullback in R and D spend at network equipment 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 SC 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 are 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 lavin production business.

Speaker 3

We expect the stabilization recovery momentum to continue into the second half of calendar twenty twenty three. One bright spot is our avionics and resilient P and C businesses, which continue to see healthy demand from mail aero 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 3 d sensing demand was slightly lower.

Speaker 3

We expect fiscal year Q4 to be slightly down quarter on quarter, driven by lower demand for anti counterfeiting products due to post COVID Fiscal tightening. The 3 d sensing business is also expected to be somewhat weaker than seasonal due to lower demand for smartphones and supply chain transition to new phone model designs. That said, we expect stronger second half of calendar year 2023 driven by recovery in anti counterfeiting demand and seasonal strength in 3 d sensing. In conclusion, I would like to thank my VIAVI team for managing in this

Speaker 1

Thank you, Oleg. This quarter, we'll be participating at Rosenblatt's Virtual Tech Summit on June 8. John Louie, let us begin the question and answer session. We ask everyone to limit discussion to one question and one follow-up.

Operator

We will now begin the question and answer session. Your first question comes from the line of Michael Genovese of Rosenblatt. Please go ahead.

Speaker 4

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

Speaker 5

on the semiconductor side that you saw? Or what do you think that it tells us when they still have Doctor.

Speaker 4

Saad, that you saw it. What do you think that it tells us when they sit down spending about their own businesses, both for NEMs and Semiconductor Manufacturers.

Speaker 3

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. It took maybe 1 to 2 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 are some more of them had backlog in December. By March, they clearly saw big orders decline.

Speaker 3

And I think what often happens, there is a knee jerk reaction to slam on the brakes on spending. And we expected the lab equipment to be pulled back somewhat because As the lagging effect would get to the NAMs and semi companies, I think what I was surprised is that the size of slowdown. I expected maybe 15% kind of a pullback. I mean, we saw in some cases 30% to 40%. So it's been quite significant.

Speaker 3

It's not any one. It's pretty broad based. It's the wireless NAMS. It's networking NAMS. It's a somewhat broad range broad based semiconductor company storage, processing, You know, 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.

Speaker 3

And I think a lot of it is due to a significant backlog of the business That they are still building and I think probably to some extent sanctioning of Huawei You know that U. S. Carriers and European and U. S. NAMs are picking up some share and that may be driving some of that demand.

Speaker 3

But on the broad based communication ICs, storage ICs, processor ICs, all these companies

Speaker 4

Okay. Thanks for that. Just a clarification and my follow-up. I assume that in lab tests, That's not an area where inventory is ever really an issue, right? So it's not we're not seeing an inventory correction.

Speaker 4

We're seeing a sort of

Speaker 3

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 so well, let's say, on 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 a very hard drop in the March quarter.

Speaker 3

And in this quarter, we're seeing stabilization with maybe a little bit of the Uptake on the lab instruments. So things are starting to kind of come off because I think there is I think there was a general Shocking now and 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.

Operator

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

Speaker 6

Hi, good afternoon. That was a magnificent pronunciation. Speaking of bright spots, when you noted the field weakness back toward the end of last year, you noted 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?

Speaker 3

So March quarter, I mean, we saw cable players have kind of finalized their CapEx decisions. And they started releasing the orders, 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 They expanded in the June September quarter with maybe a little bit in December. So that is still, I mean, clearly they are trying to close the gap with a lot of fiber and also counter some of the 5 gs risk for consumer access.

Speaker 3

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

Speaker 6

Okay. And thanks for that. Switching over to the March quarter results. I mean to the extent you saw what looks to be about a 30,000,000 Dollar sequential decline in any way to break that down, I guess, between Greater than expected lab weakness or I'd imagine you normally see some seasonality on the field side, but Sounds like you said you might have seen some sequential growth on the field side. So if we look at those couple of moving parts there, What were the real drivers between field and lab?

Speaker 3

I would say on the field side, what we saw is stabilization And the June quarter is the beginning of recovery. Predominantly, the drop was from leaven production, which is very painful because this is revenue at much higher gross margins than average. So it also put the pressure on the mix. So predominantly, I would say a lion's share of the quarter on quarter drop was a drop in levered production. And we view this quarter, it's going to be largely stabilized and maybe even start recovering.

Speaker 3

So I'd say this quarter it's flat to slightly up, going to be 4 level production and beginning of recovery for the instruments.

Operator

Then the number one on your telephone keypad. Your next question comes from Meta Marshall. Please go ahead.

Speaker 7

Great. Thanks. Maybe just if we could get a rough mix of 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 recovery in one element of the business versus the other, if there's just any directional guidance that we could have there? I'll All guidance that we could have there?

Speaker 3

I will start and I'll turn it over to Henk. We've been working very hard over the last 6 years or so to reduce our dependency on the service provider of field instruments. One of our very bright stars was really significant growth in leaven 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 a great impact. And I'll turn to Henk to provide some general Hi, guys.

Speaker 2

Hi, Ola. Yes, typically, the mix within NE is more than 50% field, 55% or 45% what we call lab products, lab and production includes wireless components. In the March quarter, that 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've just discussed.

Speaker 7

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

Speaker 3

Well, there is going to be obviously new model launched as well as the older models will stay. But even in the new and 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 and OEMs that are trying to work down the Existing inventory, which is not that big, but also they are transitioning to the new model here. So of course, everybody wants to Consume whatever they have on hand and then do a switchover. And of course, as you know, the phone sales are down year on year.

Speaker 3

So Combination of lower demand and consumption of the whatever inventory anybody has on hand is what's muting some of the volume.

Speaker 7

Okay, perfect. Thank you. I'll pass it on.

Operator

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

Speaker 1

Thank you, Jean Louis. This concludes our earnings call for today. Thank you, everyone.

Operator

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

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