Viavi Solutions Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 10, 2023

There are 8 speakers on the call.

Operator

Hello, everyone. My name is David. Welcome to the VIAVI Solutions 4th Quarter and Full Fiscal Year 2023 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 session.

Operator

I'll now turn the conference over to Henk Doerksen, VIAVI Solutions' CFO, please begin.

Speaker 1

Thank you, David, and welcome to VIAVI Solutions' 4th quarter fiscal year 2023 earnings call. My name is Henk Doerksen, PIAVI Solutions' CFO. Also joining me on today's call is Oleg Heikin, our President and CEO. Please note that 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.

Speaker 1

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. Yavi 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.

Speaker 1

The release plus our supplemental earnings slides, which include historical financial tables, are available on VIAVI's website at www.investor.

Speaker 2

Viavisolutions.com.

Speaker 1

Finally, we are recording today's call and will make the recording available by 4:30 pm Pacific Time this evening on our website. Let's start with our quarterly financial results. Fiscal Q4 revenue came in at $263,600,000 slightly ahead of the high end of our guidance range of $242,000,000 to $262,000,000 up sequentially by 6.4% and down 21.4% on a year over year basis. Operating profit margin of 11.7 percent near the high end of our guidance range of 10% to 12.4% increased by 30 basis points from the prior quarter and decreased 9.6% from the prior year result of leverage on lower revenues. EPS at $0.10 ended above the high end of the guidance range of 0 point 0 $7 to 0 point 0 $9 up 0 point 0 $2 sequentially and down 0 point 14 dollars year over year.

Speaker 1

The current share count was 223,600,000 during the quarter, down from 231,300,000 shares in the prior year. Cash flow from operations was $23,500,000 for the 4th quarter versus CAD 73,600,000 in the prior year period. Fiscal 2023 was a challenging year for Yavi. The full year revenues decreased from record levels of $1,300,000,000 in 2022 to $1,100,000,000 in fiscal 2023, down 14.4%, a result of an overall slowdown in service providers, network equipment manufacturer and semiconductor spend. NSE full year fiscal revenue came in at $801,200,000 down 15.6% year over year from $949,100,000 OSP also experienced contraction as central banks digested Currency inventory builds during COVID, reducing revenues from $343,300,000 in 20.22 to $304,900,000 in fiscal 2023 or down 11.2%.

Speaker 1

Mainly because of lower revenues, VIAVI's full year 2023 operating profit margin at 15.6 percent declined 6.6% from 22.2% in 2022. Within our NSE segment, operating profit margins declined 8% from 15.6% in 2022 to 7.6% in 2023. Within our OSP segment operating profit margins reduced from 40.5% in 2022 to 36.5 percent in 2023, which also includes the impact of start up costs related to our new facility in Chantec. Full year 2023 EPS at $0.55 decreased 42.1 percent or $0.40 on record EPS levels of $0.95 in 2022. Despite headwinds, cash flow from operations and $63,000,000 in free cash flow compared to $105,600,000 free cash flow in fiscal 2022, While further improving our balance sheet by retiring the remaining 2023 convertible notes and partly exchanging the 2024 notes Comparable terms, we continue to execute on our capital allocation strategy and deployed CAD 83,900,000 towards our share repurchase program and $67,300,000 towards acquisitions.

Speaker 1

EBITDA's average share count during the year reduced from 231,300,000 to 223,600,000 shares. As a result of the change in short term outlook early in fiscal 2023, we announced a restructuring program in February of this year accumulated into a reduction of approximately 5% of the labor force, with a non recurring expense of $12,000,000 is expected to result in net operating expense savings of $28,000,000 on annual basis. Finalization of this plan is below our original expected non recurring expense of $15,000,000 and better than originally anticipated savings commitment of $25,000,000 Reduced levels of operating expenses in combination with an improved capital structure, will allow us to benefit from more meaningful operating and financial leverage as revenue recovers. Now moving to our reported Q4 results by business segment, starting with NSE. NSE revenue came in at $197,900,000 exceeded our expectations of $179,000,000 to $195,000,000 albeit down 19.6% year over year.

Speaker 1

NE revenue of $173,300,000 improved 15.8% sequentially and declined 22% year over year. SE revenue at $24,600,000 increased 2.5% from last year. NSE gross profit margin at 62.1% decreased by 280 basis points year over year. Within MSE and e gross profit margins At 61.5 percent, decreased 270 basis points from the prior year, primarily due to leverage on lower volume in combination with product mix. SE gross profit margins at 66.3% decreased 500 basis points from last year, primarily due to unfavorable product mix.

Speaker 1

NSE's operating profit margin at 5.8% was near the high end of our guidance range of 3% to 6%. Now turning to OSB. 4th quarter revenue at $65,700,000 ended up slightly ahead of the midpoint of our guidance range of $63,000,000 to $67,000,000 and down 26.3 percent year over year. Gross profit margin at 46.6 percent decreased 9.3% year over year, slightly lower than expected, mainly a result of leverage on lower revenue. Now that the Chandler start up costs are behind us And as revenue returns, we expect the gross profit margins to normalize to historical levels.

Speaker 1

The operating profit margin of 29.5 percent came in slightly below the guidance range of 30% to 31% and declined 9.1% year over year. Now turning to the balance sheet. The ending balance of our total cash and short term investments was $525,600,000 down $39,300,000 compared to the prior year. During the Q4, the company repaid the remaining $68,100,000 principal value of 2023 convertible notes as well as a $600,000 semiannual interest payment for a total of $68,700,000 At the end of the Q4 2023, we're left with an outstanding balance of $96,400,000 on the 2024 convertible notes that we are planning to pay down with cash on the balance sheet during the upcoming quarters. Our balance sheet is strong.

Speaker 1

We improved the quality of our debt by reducing our convertible notes exposure, adding long term fixed rate debt, and as a result extended maturities at a lower cost. As mentioned earlier, operating cash flow for the quarter was $23,200,000 an increase of $5,400,000 from the prior quarter and a decrease of $50,400,000 year over year. In addition, we invested $7,400,000 in capital expenditures during the quarter compared to $10,800,000 in the prior quarter by year quarter. During fiscal Q4 and in addition to retiring convertible notes, As mentioned before, we repurchased 1,000,000 shares of common stock for $10,000,000 under the current share repurchase program. On a full year basis, we repurchased 7,300,000 shares of common stock for a total of $83,900,000 and returned over 100 percent of free cash flow generation in fiscal 2023 to our common shareholders.

Speaker 1

As you may recall, in September, we announced that the Board authorized a new common stock repurchase program for up to 300,000,000 As of the beginning of fiscal 2024, we have $234,000,000 available under this program. Now on to our guidance. We expect the 1st fiscal quarter 2024 revenue to be in the range of $240,000,000 of $260,000,000 Operating profit margins is expected to be 13.5 percent plus or minus 70 basis points, an anticipated improvement of 180 basis points sequentially and EPS to be between $0.09 to $0.11 We expect NSE revenue to be approximately $175,000,000 plus or minus $8,000,000 with an operating profit margin of 4% plus or minus 100 basis points. OSP revenue is expected to be approximately $75,000,000 plus or minus 2,000,000 with an operating profit margin of 35.5 percent plus or minus 50 basis points. Our tax expense is expected to be around $8,000,000 or 26% for the Q1, a result of jurisdictional mix.

Speaker 1

We expect our income and expenses to reflect a net expense of approximately $4,000,000 The share count is expected to be around 224,000,000 shares. With that, I will turn the call over to Oleg.

Speaker 3

Thank you, Henk. During 2023 fiscal Q4, we saw initial signs of stabilization and gradual recovery. Despite the slowdown in overall service provider spend, some service providers have begun to free up funds for network maintenance and optimization, which benefits Viale's NSE business segment. As a result, our fiscal Q4 revenue came in slightly above the higher end of our guidance, and we expect the stabilization and recovery momentum to continue throughout the fiscal year. NSE revenue declined year on year, but grew sequentially driven primarily by our NE business segment.

Speaker 3

NE was up double digits percentage sequentially, reflecting a rebound in demand from cable service providers upgrading their networks. Demand for 11 production test equipment from wireless And fiber NAMS and semiconductor companies saw gradual recovery from the lows in the March quarter. Opcom business continued to perform well, driven by robust demand from the avionics and milaero customers. Our SE business segment grew 2.5% year on year in line with our expectations. Now turning to OSP.

Speaker 3

The OSP demand environment continues to be challenging. That said, the Q4 revenue came in slightly better than expected, helped by stronger demand for anti counterfeiting products. 3 gs sensing revenue was impacted by seasonally lower demand for smartphones and the supply chain transition to new phone models. Fiscal 2023 was a very challenging year for VIAVI. Early in the fiscal year, NSE demand experienced a rapid slowdown in orders from service providers.

Speaker 3

The slowdown pattern was broad based across all customers and geographies. The slowdown in spend by service providers then spread to the network equipment manufacturers and semiconductor companies, further impacting demand for our NSE products. The OSP business unit started the fiscal year strong, but saw demand for its 2 major products impacted by macroeconomic headwinds. The demand for anti counterfeiting products was impacted by the inventory corrections as governments dialed back fiscal stimulus and 3 gs sensing was impacted by weaker demand for smartphones. Despite the disappointing year, VIAVI continued to invest in new technologies and applications, expanding into higher growth markets such as resilient P and T and initiated and completed the restructuring program to reduce expenses.

Speaker 3

These initiatives combined with our strong position in our traditional markets are expected to result in strong operating and financial leverage as our revenue rebounds. In conclusion, I'd like to thank my VIAVI team for managing in this challenging environment and express my appreciation to our customers and shareholders for their support. With that, I will now turn it back to operator for Q and A. Thank

Operator

We'll take our first question from Mehdi Hosseini with Susquehanna. Your line is open.

Speaker 2

Yes, thanks for taking my question. I just want to go back to your comment regarding service providers. To what extent do you have visibility? Are we reaching a point where your guide reflect a minimum investment? And then on the optical side, Just curious to hear what you think with the upcoming product cycle in the smartphone, How do you see that compared to the prior year upgrades?

Speaker 3

So, thank you, Mehdi. So the first one is, let's put it this way, there are signs of life and multiple discussions with service providers. I mean, it took them about 6 months to put a hold and cancel backlog and a lot of CapEx. When we announced in October, Remember, they can effectively 0 us out within a month because it's mainly coming out of OpEx. But for a lot of big capital items, they have normally a 6 Monthly time that they cannot cancel.

Speaker 3

So, as of March quarter, pretty much all the big spend has been put under control and a lot of the backlog has been CapEx has been pushed out. And now as they are stepping back, they are looking, okay, well, I still got to run my network because there's things Accumulating and people are screaming for supplies. So we are seeing more and more conversation around upgrading equipment and the providing their network maintenance and optimization folks with tools to manage the network. So I think if you ask me that question, let's say, 3, 4 months ago, it was all crickets. They're silent.

Speaker 3

It was silent. And right now there's clearly some are more dynamic and aggressive than the others. Like I say, cable guys are actually Very aggressive in upgrading their networks, but also we are seeing Select mobile network and fiber network operators returning back and doing optimization and upgrades. So I think this momentum will continue to pick up through our fiscal year. Now with respect to the 3 gs sensing, I'd say this coming year, I mean, it's kind of hard to predict the coming year.

Speaker 3

I mean, the market for the our prime application is fairly Saturated. I mean, we are now in both front and rear cameras. So really, the revenue is really driven more by Total market demand and I think what we are seeing is somewhat more sluggish, smart forward demand than we saw, let's say, a year ago. And I think in that respect, we're taking a more cautious outlook on the volumes that are going to be You mind this fiscal year?

Speaker 2

Can I ask a follow-up question?

Speaker 3

Sure.

Speaker 2

Just looking into calendar year 2024, I want to hear your opinion in terms of the catalyst. I personally don't see an urge to install equipment or upgrade Equipment for 5 gs plus there is plenty of fiber underground. What else could happen with service provider, with Cable operators that could at least entice them for some technology upgrade. And tell me if I'm not thinking about this the right way.

Speaker 3

Well, I think I tend to agree with you. But remember, we don't depend. Actually, our business is driven more by turning on what you already got and starting to putting it into exploitation, right? So in that respect, yes, there's plenty fiber in the ground, there's plenty equipment in the warehouse, but every time we turn on a circuit or you Put it in production or put the equipment into exploitation. You do need field Operations to do the work and the maintenance of the network and things like that are an ongoing thing.

Speaker 3

And as you have bad weather or you have wear and tear, you constantly got to be doing something to your network. So in that respect, We are more more money gets spent on OpEx to get more of what you got. That's actually very good for us. When somebody is building network, it's very good for us. What's not so good for us is when they are kind of in between.

Speaker 3

So I think the service providers had to take the equipment deliveries they took. They probably now wish they probably now have a bit excess of the equipment, some of it sitting in a warehouse. But little by little, once you have it, you've got to put it into operation. And that's what's driving demand for our products. Now the second element is competition.

Speaker 3

All it takes is your biggest competitor Announced that they're going to be more aggressive than you are. Well, whether you want it or not, you're going to have to Respond appropriately. So and we are seeing in at least in the mobile space, It's a three way, the proverbial Mexican standoff. And when you have more than 2 strong operators, there is a very strong Tendency to cheat, try to do a little more and of course the other 2 are watching. So I think as much as everybody in their logic says, hey, We are better off doing nothing if we all agree on it.

Speaker 3

It inevitably takes one person to try to pull a fast one and the rest respond accordingly. Now in case of the I think cable operators, they're seeing it as a very good opportunity for them, since I think many of them are healthier Than telecom operators. I think they have they're taking an opportunity to upgrade the speeds on their network to be More competitive against the fiber and definitely tried to avoid Wireless broadband stealing their customers. So I think the competitive pressure is probably the single biggest thing that keeps service providers spending money whether they want it or not.

Speaker 2

Okay, great. Thanks for the details.

Speaker 1

Thank you.

Operator

Next, we'll go to Tim Savageaux with Northland Capital. Your line is open.

Speaker 4

Hi, good afternoon. Couple of questions here. First, I'm guessing I'm trying to reconcile your commentary about stabilization and growth throughout the year with your Q1 guide for NSE where you got it down a fair bit after a better than expected Q4. Anything going on in there that would reconcile those 2 seemingly conflicting comments? And then I'll are you seeing seasonality in the 1st part of your fiscal year or What have you and I'll follow-up from there.

Speaker 3

So I mean, if you take the, I would say, last couple of years out, Where during COVID, there was a supply constraint, customers wanted to take product anytime you could deliver it. So I think in that respect, The usual seasonality that we have in NSE, whereas you have March September are the down quarters And June December are the stronger quarters. That was like for the last couple of years, it's almost became a nonevent because Whenever you had a product, somebody wanted to take it. Now I see with the lead times collapsing and effectively You can place the usual order and take delivery within the same quarter. We see the ordering cadences back to what traditionally was where the September March quarters are generally the lower end of the demand range and the June December are the higher end of the demand range.

Speaker 3

So I think what we see, We are it's all within, I would call, normal way of business. Clearly, it's not a run rate is not as high as it was a year ago, But it's following the same kind of fluctuations. But also I'm looking at the booking funnel and the opportunity funnel And it is a hell of a lot healthier than I would say it was in the March quarter of this year, where everything was just shut down. So The level of conversations, the engagements, negotiations that is going on, it leads to Expectations that we're going to see continuous gradual recovery. The second element is the NAMS and semiconductor companies After retrenching in the first half of the calendar year, we are seeing the competitive pressure and new product introduction driving continuous quarter on quarter increase in the lab spend.

Speaker 3

And that's obviously the second Element of our NSE business that was kind of down. It was about a quarter lagging the service providers When it went down and I think it's finally starting to come back also lagging about by a quarter the service providers. And then the last but not the least, I think the on our service enablement business, the software business, we feel pretty good about the momentum and the opportunity funnel that we are seeing for our new solutions. And in that respect, I mean, even though those things take longer lead times To go from booking into revenue, it's nevertheless a positive momentum.

Speaker 4

Got it. And to follow-up, I don't know if this is contributing to this improving funnel either on the service provider side or NEM side, but what are you seeing around 800 gig And a high speed connectivity either inside or outside the data center in terms of current trends for VIAVI?

Speaker 3

So I think that is a very so that's I remember we've been selling 800 gig into lab for quite a while. It's now moving to what I would call production, although still there's a lot of tests, there's a lot of fiber operators. I mean, there's both actually. I mean, I'm not so sure How much there is an 800 gig right now happening in the data center, but we are seeing a lot of interest from the Fiber operators to test and play with the 800 Gig to interconnect various data centers. I mean, right now, it's in the 400 gig as a norm, but there's Early discussions and testing going on with the 800 gig and some are talking about terabit.

Speaker 3

I don't know, terabit is maybe a little too far out, But 800 gig is something that is on the drawing board. But right now, the name of the game is 400 gig within the network. That's what's shipping today. The 800 gig is really more around the I would call Even though it's been in the lab for a while with service providers and it's really select service providers not the mainstream. This is now entering what's called testing proof of concept stage.

Speaker 3

And those are usually also service providers that are very tight strapped for cash and liquidity. But when it comes to that, This is one area they want to spend the money because their idea is if they can directly interconnect hyperscale data centers Without bypassing 3rd parties, they feel they can grab some good business.

Speaker 4

Okay. Thanks very much.

Speaker 5

Sure.

Operator

Okay. Next we'll go to Michael Genovese with Rosenblatt Securities, your line is open.

Speaker 5

Great. Thanks. Oleg, I want to follow-up on Tim's questions. First of all, with 800 gs inside the data center, in for instance AI clusters, I think we thought that there were design wins that you maybe spoke about mid quarter. Maybe I mean, my understanding was maybe it's not driving the current business, but it's an interesting growth driver for the future.

Speaker 5

Are we understanding that correctly? Are we Ahead of ourselves

Speaker 3

there. Well, I mean, the this is when we talk about design wins, it's usually a NAM that's selling equipment that they are using in the lab and in production to do both. 1 is produce the systems and second, produce the modules to those systems. So but I don't think this is at least this quarter was that much of a demand in that respect. But we are seeing end market interest for that.

Speaker 5

Okay. And I guess I want to follow-up on Tim's other And then ask my question, I just have one. But the follow-up would be like, I just want to crystallize that I think what I heard Is that any the upside in any in the June quarter largely came from cable? And even though that the Final business opportunities has greatly improved versus 6 9 months ago. Any guide is sequentially down because of seasonality and not for any other reason.

Speaker 5

Is that generally right?

Speaker 3

Yes, that's pretty much right. And I would say the upside, I mean, it came clearly cable, but we also had some major wireless NAMs doing their annual purchase. We have several major NAMs that at various parts during the year take significant deliveries.

Speaker 5

Okay. And then just my question, I know you don't give guidance more than a quarter at a time, unless you're giving 3 year CAGRs. But if 'twenty two was a $1,300,000,000 in the 90s of non GAAP cents And then this last year was 1.1 and below 60. I'm just wondering, I mean, we've got the Q1 guide and it is what it is, But there's the sense that things should strengthen throughout the year. So I mean, do you envision this year sort of looking In between those 2 years or more like one or the other, if you could comment any kind of thoughts there?

Speaker 3

Yes. So the way I look at it, Usually, you have a year you're starting strong and then it gets weak. Just because our fiscal year ends in June, right? So now if you take the opposite mirror image like kind of the first half of the year as it continues to recover, It's almost like you end up with the 2 mirror images of the same thing. So if you think about 2023 Full year was slightly about $1,100,000,000 I mean from our purely You're right.

Speaker 3

We cannot see beyond 1 quarter. But as we but we have to operate to a certain scenario. So we're taking a fairly Conservative look, let's say, hey, let's say this year will be demand wise a mirror image of the Prior year, so our exit velocity would be equal to the entry velocity of the prior fiscal year, But now we are doing it with a much lower operating cost structure and a smaller outstanding share count. So you then overlay the operating and financial leverage onto it, right? And that shows you, okay, even at like roughly flattish up top line, you're going to see a nice growth at the EPS level.

Speaker 3

So that's how we operationally thinking about upcoming fiscal 2024.

Speaker 5

Great. Thank you very much. Helpful.

Operator

Next, we'll go to Alex Henderson with Needham. Your line is open.

Speaker 6

Great. A couple of just simple operational stuff. Has the benefit of the improved production out of Chandler, Arizona now You've been fully feathered into the margins on OSP?

Speaker 3

Yes, sure. So Chandler is now running in production. So all the start up costs are behind it, the start up yields and optimization, it's all behind it. And now as the volume increases, All the unabsorbed expenses are being absorbed. So it's clearly whatever the Gross margin drag we were getting ahead of time is now behind us.

Speaker 6

So June to September in OSP In that production facility is fairly stable on the margin side?

Speaker 3

It's already steady state, yes.

Speaker 6

Perfect. 2nd, the cost cutting moves that you've done, those are fully in the June quarter?

Speaker 1

They are partly in the June quarter. They will be fully in the September quarter. So the full quarter impact you will see in the September quarter. So we're planning with OpEx levels of call it $118,000,000 $120,000,000 per quarter for the September quarter.

Speaker 6

And that's the run rate going forward, obviously, with some seasonality to it?

Speaker 1

Absolutely. With some seasonality to it and as revenue recovers, Some variable costs, but you should think of that as the run

Speaker 6

rate. And on the OSP side, can you characterize whether we're On the counterfeiting products at a point where We're at baseline or are we below baseline or how do we Characterize that. Historically, you've talked about a baseline and then you'd have these spikes above it. You're talking about it being down from last year because of absorption, but isn't it wasn't it above normal and therefore We're kind of back to baseline here?

Speaker 3

Well, I think the baseline has gone up over the years, right? So in terms of the when you're talking baseline, you're talking about Revenue, not the cost, right? Yes. So I'm talking about revenue. So I think this year, we believe it's Running below the baseline, because of the it's a two for effect.

Speaker 3

On one hand, the fiscal stimulus has ended, a lot of countries are pulling back, but it's further reinforced that they are not only pulling back, They also have taken all the delivery of a lot of products in the past several years. So now they have to burn down all that inventory. So On one hand, they are printing less. On the other hand, it's taking they have inventory that's taking them some time to consume. And we think We probably should be back in equilibrium by the end of this calendar year.

Speaker 3

And the second half, we should see Beginning of recovery in the anti counterfeiting demand, which obviously will drive significant operating leverage What is the

Speaker 6

quarterly baseline in the counterfeiting businesses?

Speaker 3

I think the base business today, we are seeing running around $50,000,000 closer to $50,000,000 from the normal about $55,000,000 and kind of higher end about $60,000,000 So we said $55,000,000 was the base. At the higher end, we get up to $60,000,000 Right now, I'd say this is kind of the lowest demand I've seen in a long time.

Speaker 6

Okay. So baseline is around $55,000,000 is

Speaker 3

the number that you should

Speaker 6

get back to once we get through this Correction in that business.

Speaker 3

Yes. And as you can imagine, this is pretty much almost everything with exception of materials drops to the bottom line It's a pure fixed cost business.

Speaker 6

And at that level, it's what type of operating margin at 55?

Speaker 3

Well, when we you got to take combination of the baseline business and the anti counter bidding. So as I say, when both of them are filing or hiring firing on all cylinders, we get into the mid-40s. When both of them are in the worst possible shape, you get into the low 30s.

Speaker 6

Right. So the baseline on the Counterfeiting excluding the 3 d sensing is higher it's about higher end of that range, right? Yes,

Speaker 3

we don't break it out, but I would say when you're kind of running steady state, you should be in the high 30s Okay. And then For the full business unit.

Speaker 6

One more question. So it sounds like the strength in the June quarter came as a result of The seasonal uptake of cable, which is pretty clearly a very seasonal pattern around the summer, they spend And deploy over the summer and they tend to pull back into the colder weather. As we Go into the Q4, I would think that most telcos are under enormous pressure to deliver significantly improved cash flow. I mean, certainly AT and T has promised that they're going to see deliver much improved cash flow in the back half. So are we at risk that we're Getting a little bit of improvement here over the course of the summer, driven primarily by cable, but at risk of a 4th quarter disappointment as a result of them pulling back into that seasonally critical Q4 for them on their cash flow?

Speaker 3

Well, I actually don't believe that. I mean, you're right about the cash flow and what they want to do. But remember, The £800 gorilla in their cash flow is the CapEx that they spend on equipment and construction. If they're going to do it, that's they're pulling and remember they couldn't do it a year ago because they had 6 months of NC and R contracts, non cancelable, non refundable. So they had to go so they initially shut down all the OpEx expenses and that's what got us here.

Speaker 3

Right now, if you think about the what they spend on network maintenance, it's a pimple on the elephants behind relatively speaking, but it's Giving them significant operational effectiveness, just by keeping the network running. So I think, the money pool from which We are drawing even though they're not it's not burning coal in their pocket, they are spending the money not at the same rate as it was a year ago, But this is one area that they are looking to do to spend to get more out of what they already have installed rather than adding to the capacity. So I think you're right on them buying new equipment and doing new construction. But where I do see them spending money is trying to get more from more bang for the buck they already spent. And that's what we benefit primarily from.

Speaker 6

Okay. That makes good sense. I appreciate that differentiation. Just one last question, if I could. When I look out into the back half of the year and the Potential recovery in the first half of next year.

Speaker 6

The Street sitting at 2.5% kind of revenue growth, 0% to 5% if you want To abandon $0.61 and I know you don't want to guide, but do you feel like those are reasonably attainable? Or do you think that they're a little Challenging or do you think that they're easily beatable? What can you just give us some tone around it?

Speaker 3

I mean, it really depends on the first Half of calendar next calendar year, right? I mean, we don't have much visibility, but we do know that we think our 11 production Part of the business is going to continue to recover. I mean, we are seeing R and D at semi and NAMS kind of getting back. I mean, there is a Strong competitive angle to it. I mean, they cannot forever reduce their engineering spend.

Speaker 3

We do think the anti counterfeiting business is going to continue to recover, especially in the second half of the year. And I'd say the and we know Milaero is actually pretty strong as well. So the only thing that I is that We have to wait and see as to how aggressive the service providers will do in the second half of the calendar year. So If they are conservative, then we are thinking you've got to be roughly flattish. If they decide to start getting back and spending a bit more money, then You could have then the growth projection could be a reason.

Speaker 3

Great. Thank you.

Speaker 1

All right. Thank you.

Operator

Thanks, Alex. Next we'll go to Meta Marshall with Morgan Stanley.

Speaker 7

Great. Thanks. Maybe just wanted to spend a second on the SD business. You guys have had a number of products that kind of can help drive revenue for your customers. And just wondering, in this environment, are they less likely to adopt those?

Speaker 7

Or are you kind of seeing traction with those products that can Kind of help with more revenue upside for customers. And then maybe just a second question. Obviously, M and A in Space has been a little bit tough in the past, which is kind of more elevated valuation expectations. I would assume with The more challenged customer set right now that maybe people's expectations are a little bit more reasonable. So does it change how you kind of view the M and A landscape?

Speaker 7

Thanks.

Speaker 3

Sure. So we're actually feeling pretty good about our SC business these days. It's been a, I'd say 5, 6 years of restructuring. We've reduced spend significantly. And within the existing R and D, We had to retool the product architecture and more importantly focus where we are going to invest going forward.

Speaker 3

And the area where we have a very strong product offering today is around the AI ops, which is the kind of your Automation, Natus Network Operation Center Automation, the artificial intelligence, Helping you with the preventive maintenance and things around that landscape. We are seeing a pretty good traction and we are winning Some pretty, again, some very heavy hitters in the market, which gives me confidence that this is not a one off type opportunities. So we see we do feel that SC has every opportunity to become gaining momentum through This year, which is finally, this is the year it's going to finally start contributing to the overall. And by now, we have pretty much flushed all the late declining legacy business, which was roughly around $50,000,000 to $60,000,000 6, 7 years ago, pretty much all of it has gone away and we've been replacing it. And from this point on, it's all kind of firing and pulling in the same direction.

Speaker 3

So In that respect, we feel our SC business on both on the enterprise and service providers side has some Very exciting story to tell and we think that they could achieve pretty good success in the coming years. On the M and A environment, it's quite interesting. I mean, clearly, there's only a handful of big transformational M and A opportunities, and we all know what those are. I mean, I think they're still fairly in auctionable. But what we are seeing very interesting is the lack of liquidity and all of a sudden a lot of Sizable software, mainly on the software side, companies that are complementary to our SC business, All of a sudden, we've seen the company where I just give you one example that we saw a year ago And we gave them a very respectable offer and they walked away laughing at us.

Speaker 3

They just got sold for 1 fourth of our offer a year ago at liquidation because they couldn't repay the debt They were carrying. So there is actually now a lot of very interesting technologies that you can pick up at the bargain basement Our stock ins, so it's purely becoming a make versus buy and all of a sudden you can pick up modules for your software offering Below the cost of make and this is what we are seeing right now and we are obviously aggressively looking at these opportunities.

Speaker 7

Perfect. Thanks so much.

Speaker 5

Sure. Next,

Operator

we'll go to Ruben Roy with Stifel. Your line is open. Thank you. I just had a couple. Like on the topic of improving conversations, how would you characterize that?

Operator

Is that Sort of broad based across your customer base or is it relegated to sort of your larger customers? And also geographically, are you seeing that Again, broad based geographically or is it sort of centered in any specific areas?

Speaker 3

Yes. I mean, I'd say, customer conversation is actually fairly broad based. It's not one off. I mean, clearly, there's more intense Conversations with the companies like cable. Amazingly also the conversations are with the Tier 2 telecom providers, mainly Many of them are private equity funded like fiber deployers and things like that.

Speaker 3

I mean, they were the first ones to kind of pull back, but they also are now coming back and looking what they're going to be doing. And on the lab and production with the engineering organizations, I think after about 2 quarters of pulling back, they are back because they need to deliver their roadmap Products to their customers, so we're seeing that coming back. So I'd say between the engineering CapEx customers and the, I'll say cable and fiber service providers, the talk is much more intensive. The wireless, I think, is kind of quiet still. I think they're still digesting what they already got.

Speaker 3

But we do think the wireless is going to be coming back probably in the second half of the year.

Speaker 1

Got it. Thank you for that detail.

Operator

And just a quick follow-up, just a clarification on the lab spend. It sounded like You're starting to see a little bit of discussion or improvement in maybe even orders from semiconductor companies and some of the equipment companies. But then we are still lagging behind the field stuff. So I guess are you expecting lab to be down again and then Stabilized in the current quarter or has it already stabilized and

Speaker 3

No, I think the bottom quarter for lab was the March Quarter and it had some recovery in June and I expect it to continue to recover throughout the year.

Operator

That concludes today's question and answer session and today's call. We thank you for your participation. You may now

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Earnings Conference Call
Viavi Solutions Q4 2023
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