Viavi Solutions Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 10 speakers on the call.

Operator

Hello, everyone. My name is Emma. Welcome to the VIAVI Solutions 4th Quarter and Full Year 2024 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 will now turn the conference over to Vibhuti Nair, VIAVI Solutions' Head of Investor Relations. Please go ahead.

Speaker 1

Thank you, Emma. Good afternoon, everyone, and welcome to VIAVI Solutions' 4th quarter and full year 2024 earnings call. My name is Vibhuti Nayyar, Head of Investor Relations for VIAVI Solutions. And with me on today's call is Oleg Haykin, our President and CEO and Elan Daskal, our 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 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 the guidance that 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 discussed on this call, except revenue, are non GAAP.

Speaker 1

We reconcile these non GAAP results to our preliminary GAAP financials and discuss their usefulness and limitations in today's earnings release. The release, as well as our supplemental earnings slides, which include historical financial tables, are available on VIAVI's website at www.investor. Viavisolutions.com. Finally, we are recording today's call, and we will make the recording available on our website by 4:30 pm Pacific Time this evening. Now I would like to turn the call over to Ilham.

Speaker 2

Thank you, Viburi. Good afternoon, everyone. And now I would like to review the results of Q4 of fiscal year 2024. Net revenue for the quarter was $252,000,000 which was at the midpoint of our guidance range of $246,000,000 to $258,000,000 Revenue was up sequentially by 2.4% and on a year over year basis was down 4.4%. Operating margin for the 4th quarter was 10.9%, which was above the midpoint of our guidance range of 9.5% to 11.8%.

Speaker 2

Operating margin increased 160 basis points from the prior quarter and on a year over year basis was down 80 basis points. EPS at $0.08 at the high end of our guidance range of $0.06 to 0 point 0 $8 and was up $0.02 sequentially. On a year over year basis, EPS was down $0.02 For the full fiscal year, revenue was $1,000,000,000 down 9.6% on a year over year basis, primarily due to conservative spend by service providers and NAMS. Operating margin for the full year was 11.5 percent, down 4 10 basis points from fiscal year 2023, and full year EPS was $0.33 down $0.22 from the prior year, primarily due to lower year over year revenue. Moving on to our 4th fiscal quarter results by business segment.

Speaker 2

NSE revenue for the quarter came in at $182,200,000 which is at the lower end of our guidance range of $179,000,000 to $189,000,000 And on a year over year basis, NSE revenue was down 7.9% for the quarter. NE revenue for the 4th quarter was $158,500,000 which is a 9.7 percent year over year decline as a result of continued conservative spend by service providers and NAMS. SE revenue was $23,700,000 and up 5.8% from the same period last year, partially supported by revenue that was pushed out from Q3. NSE gross margin for the quarter was 62.1 which is

Speaker 1

a

Speaker 2

decline of 40 basis points as which is a decline of 40 basis points as compared to the same period last year. SE gross margin was 67.5%, which is an increase of 190 basis points from the same period last year and was driven by product mix. NSE's operating margin for the 4th quarter was 1.8%, which is an improvement of 360 basis points sequentially and 400 basis points lower than the same period last year. NSE's operating margin was at the low end of our guidance range of 1.4% to 3.6% due to lower revenue. OSP revenue for the quarter came in at $69,800,000 which was above the high end of our guidance range of $67,000,000 to $69,000,000 and was up 6.2% on a year over year basis as a result of strength across all products.

Speaker 2

OSP gross margin was 53%, which is an increase of 6.40 basis points from the same period last year and was primarily driven by higher revenue, favorable product mix and production ramp at our new manufacturing facility in Chandler. OSP's operating margin was 34.8%, which is up 50 basis points sequentially and 5.30 basis points increase on a year over year basis as a result of the higher gross margin fall through. OSP's operating margin exceeded the high end of our guidance range of 31% to 34%. Moving on to the balance sheet and cash flow. Total cash and short term investments at the end of Q4 was $496,200,000 compared to $486,100,000 at the end of the 3rd fiscal quarter of 2024.

Speaker 2

Cash flow from operating activities for the 4th quarter was $26,200,000 versus $23,500,000 in the same period last year. During the quarter, we purchased 1,300,000 shares of our stock for about $10,000,000 For the full year, we purchased 2,300,000 shares for about $20,000,000 We have approximately $215,000,000 remaining under our current authorized share repurchase program. The fully diluted share count for the quarter was 224,200,000 shares, down from 224,600,000 shares in the prior quarter and versus 225,500,000 shares in our guidance for the 4th quarter. CapEx for the quarter was $3,800,000 compared to $7,400,000 in the same period last year when we were completing the construction of our new facility in Chandler. In June a restructuring and workforce reduction plan to improve operational efficiencies and better align with the current business needs.

Speaker 2

We expect approximately 6% of our global workforce to be impacted and estimate to incur approximately $15,000,000 of restructuring charges in connection with this plan. As a result of this initiative, we anticipate to achieve by the end of fiscal 2025 an annualized cost savings run rate of approximately $25,000,000 which will mainly benefit our operating expenses. Moving on to our guidance. We expect that the first half of fiscal twenty twenty five will continue to experience a conservative spend environment by service providers and NEMS. That said, we believe that we are nearing the bottom of the down cycle and we expect a gradual recovery in demand in the second half of this fiscal year.

Speaker 2

Given the lingering softness, we are guiding for the 1st fiscal quarter of 2025 revenue in the range of $235,000,000 $245,000,000 Operating margin is expected to be 10.8 percent plus or minus 90 basis points and EPS to be between $0.05 $0.07 We expect NSE revenue to be approximately $164,000,000 plus or minus $4,000,000 with a breakeven operating margin plus or minus 100 basis points. OSP revenue is expected to be approximately $76,000,000 plus or minus $1,000,000 with an operating margin of 34%, plus or minus 100 basis points. Our tax expenses for the 1st fiscal quarter are expected to be about $8,000,000 plus or minus $500,000 as a result of jurisdictional mix. We expect other income and expenses to reflect a net expense of approximately $3,500,000 and the share count is expected to be about 224,200,000 shares. With that, I will turn the call over to Oleg.

Speaker 2

Oleg?

Speaker 3

Thank you, Ilan. The IV end market spend environment continues to be conservative, particularly the North American service providers. Despite these headwinds, our revenue came in at the midpoint of our guidance with stronger OSP revenue partially offsetting weaker NSE demand. Our EPS was at the higher end of our guidance range. Starting with NSE.

Speaker 3

The fiscal 4th quarter NSE revenue came in at the lower end of our guidance range. NSE revenue declined 8% on year over year basis, driven by the softer demand from service providers and wireless NAMS. We believe that decline in NSE demand is bottoming out and we should start to see a recovery in the second half of the fiscal year. A bit more color on that. The first is field instruments demand remained largely at the maintenance levels due to the absence of major network build outs and upgrades by Tier 1 service providers, particularly in North America.

Speaker 3

That said, the investment in data center fiber internetworking by Tier 2 operators together with recent comments by major service providers regarding their fiber plans leads us to expect a pickup in field instruments demand in the second half of fiscal twenty twenty five. Our wireless demand continues to be impacted by sharply reduced R and D and production CapEx spend by major wireless NAMs, who have reduced investments in response to significant cutbacks in 5 gs deployment by wireless operators. One positive recent trend we are seeing is the emergence of many new customers pursuing O RAN development. However, their cumulative spend is still relatively small. Other parts of NSE are faring much better.

Speaker 3

Fiber Lab and production demand was slightly up. We expect the upcoming transition to 1.6 Terabits and ramp of PCI Express 6.0 to drive recovery and growth during the fiscal 2025 for Fiber 11 production. Mill Aero business continues to be a bright spot seeing year over year growth in revenue driven by strong customer demand for communication, avionics and positioning navigation and timing products. We expect this business segment to enjoy strong demand throughout fiscal 2025. SE segment grew year on year, helped by enterprise orders that were pushed out from Q3.

Speaker 3

We are seeing a lot of interest in our AI ops products and expect it to be a growth driver for fiscal 2025 and beyond. As we look at Q1 fiscal 2025, we expect a seasonally weaker demand driven by similar dynamics as in Q4. Continued demand weakness from the service providers in wireless and wireless NEMs leading to overall weaker NE and seasonally weaker SE revenue, offset by continued strength in Fiber 11 production and mail aero business. Looking ahead at fiscal 2025 for NSE, we expect the conservative spend environment to persist for the remainder of calendar 2024 and a gradual demand recovery in the first half of calendar twenty twenty five. Now turning to OSP.

Speaker 3

The fiscal Q4 OSP grew on a year over year basis, mainly driven by higher demand for anti counterfeiting and 3 d sensing products. Overall OSP results exceeded the higher end of our guidance range. Looking ahead, we expect OSP to be sequentially up in the September quarter, mostly driven by seasonally stronger demand for 3 d sensing products. Overall, we expect fiscal 2025 OSP demand to be similar to fiscal 2024. To summarize, the fiscal 2024 was a challenging year for VIAVI and the industry.

Speaker 3

While we expect the soft market environment to persist for the remainder of calendar 2024, We anticipate the start of gradual recovery in first half of calendar twenty twenty five. I would like to thank my VIAVI team for managing through this challenging environment and express my appreciation to our employees, customers and shareholders for their support. With that, I'll turn it over to Vibhuti.

Speaker 1

We're ready for the Q and A. Emma?

Operator

Thank you. We ask today that you limit yourself to one question and one follow-up. Thank you. Your first question comes from the line of Reuben Roy with Stifel. Your line is open.

Speaker 4

Thank you. Hi, everybody. Oleg, thanks for the detail around how you're thinking about sort of the near term environment and then the sort of first half of next calendar year. I guess, can you drill in a little bit on sort of how you're thinking about inventory levels at your customers, I guess, by field instruments and then also lab instruments? And then I had just one or two quick follow ups.

Speaker 4

Thank you.

Speaker 3

Sure. I mean there's really no inventory to speak of. I mean all of our deliveries for field instruments to our customers are just in time and it's mainly coincides with whenever they are doing any kind of major expansion project or technology upgrade or things like that. There's also obviously when I say we see our revenue at the maintenance level, there is this constant churn that big chunk of our quarterly revenue is just churns. And it's just basically low of large numbers, big installed base, the batteries die, equipment gets damaged and they periodically replace whatever needs to be replaced.

Speaker 3

And it's been a fairly consistent number for the past several quarters, which makes me feel a bit better because it just shows you that the first thing customers come back to is they start replacing what's been damaged. And as they start looking at the major new projects and we've heard obviously from AT and T, but also we are seeing Tier 2 players like there was Lumin recently had a call and there's others. There is a lot of interest for developing fiber Internet working between all those hyperscale data centers and these are the players that are actually running projects today and they are placing orders. And clearly so from that perspective, I don't know to what extent they have equipment inventories for networking gear, but I imagine that is also winding down. And clearly as they start talking about the resuming their expansion and technology upgrade, that is what we view as a positive news for us.

Speaker 3

On the 11 production, that is also pretty for new equipment and it usually comes in when they are developing next generation product. They start placing orders in the fiber area and the high speed compute area. High speed compute is driving PCI Express 6.0 and the upcoming 1.6 terabits. I mean the budgets are open and the CapEx is flowing and we are seeing purely as soon as the equipment is available they want it. So in that respect, we feel pretty good.

Speaker 3

But there is also probably further away in the second half of the fiscal year or first half of the calendar 25, the 1.6 terabits is flowing into the module manufacturing and we are seeing a lot of interest from the major AI players to drive upgrades in their contract manufacturing factories to be able to deploy 1.6 Terabit modules and products. And for the first time, it's really the data centers that are driving the transition to the higher speeds rather than service providers. When we saw 400 gig, 800 gig, they were driven by equipment vendors to service providers. This time it's very much the data centers that are driving the transition to the higher speed speeds of the products. And that's why we're feeling much more bullish on our fiber lab and production equipment.

Speaker 3

So that's kind of more color on those two areas.

Speaker 4

Yes, very helpful. All again, and you hit my follow-up on the 1.6 tariff side. So thanks for that. I guess then I'll shift over to just a quick follow-up for Elon on the restructuring. Elon, you talked about the OpEx savings through the fiscal year.

Speaker 4

Maybe you can put a finer point on sort of how you're thinking about that between R and D and projects versus sales and marketing and how we should kind of think about modeling that through the year in terms of the savings as it hits the model? Thank you.

Speaker 2

Sure. So thanks for the question. And obviously, as I mentioned earlier in the prepared remarks, most of it would be a reduction of the overall operating expenses. We don't see any of our major R and D project being impacted or delayed due to this initiative. So these are across the board of the operating expenses, but none of the initiatives that we drive in terms of development will be impacted.

Speaker 2

And also, as I mentioned earlier, the full realization would be by the end of the year. So it's more of a 2026 kind of net spend there.

Speaker 5

Got it. Thank you. Thank you.

Operator

Your next question comes from the line of Ryan Coats with Needham. Your line is open.

Speaker 5

Great. Thanks for the question. Certainly appreciate your comments about 5 gs. That doesn't sound like it's coming back around anytime soon. Wanted to double click a little bit on your comment around data center interconnect for the fiber players.

Speaker 5

Are you seeing demand there from the data center operators who are leasing dark fiber or are they leasing actual connectivity and bandwidth from the service providers on a wholesale basis?

Speaker 3

So I mean it varies across different data centers operators. But I mean for the biggest ones, they basically build data centers and then they pick a vendor who lays fiber and they lease those fibers from them. And what's a little difference is, when a service provider lays a fiber, there's a lot of dark fiber. And they generally don't connect the dark fiber until they need it maybe years later. What we're seeing with data center, they're laying fiber And they also initially started doing the same thing, just lay the fiber, connect a few strands and I'm going to lease them and then when I need it, you turn it on.

Speaker 3

What they are finding is that they need to turn on additional fibers and additional bandwidth comes a lot faster than everybody thought. And more importantly, it becomes also much more sensitive the quality of performance of that fiber, right, in terms of the latency, the speeds and things like that. So they're actually putting pretty strict service level agreements as to what performance that fiber needs to deliver. And that actually plays very much to our strength because what they are realizing is traditional build fiber is fairly unreliable and you cannot turn it on as you need it, right? So we are now working with the data center operators and with the people who provision fiber to bridge this gap to make sure as the fiber gets deployed, you actually characterize it and you know exactly what you're getting for.

Speaker 3

And then you can monitor it throughout the life. And when you need to turn on the next wavelength, it happens very quickly, which usually means you actually connect everything and you only by just turning on it becomes a software switch rather than rolling a truck and starting to connect the fibers and then finding out that things may not work or things like that. So we're seeing the level of evolution and forethought in deploying fiber network truly changing the traditional paradigm that the service provider has been doing. And I guess it's the Tier 2 players who are responding more center operators and they are the ones who are winning the business. And I think they view it as their new business model going

Speaker 5

forward. Thank you for that, Oleg. And just following up on another big segment, within the broadband sector, I know that's been pretty depressed. You've talked about previously some push outs in cable. Are you seeing any signs of life in cable?

Speaker 5

And obviously, we're seeing I assume you're seeing some push outs in fiber and bead and these sort of things that would be driving the fiber access industry? Any comments around broadband?

Speaker 3

Sure. On cable, so the cable upgrade is underway. But unlike in the previous things where they would just buy everything in 1 quarter and just kind of roll it out, they're doing it over multiple quarters, which leads you to a smaller bump up in demand within the quarter. But on the other hand, it provides for smoother shipment over the multiple quarters. And I think part of it is because since the fiber to the home players have slowed down or stopped their deployment, I think the pressure is a bit less.

Speaker 3

However, I saw comments and AT and T does appear to be serious about resuming their aggressive push fiber to the home next calendar year. I expect the competitive pressure on cable to accelerate and we will probably see more aggressive spend by them as well. And the other area that Cable was concerned about is the fixed wireless. And so far it has been been has not been a factor in terms of competitive pressure on them to do anything. And as you pointed out earlier, I mean, as I said as well, 5 gs deployment, I think, will be the last piece that's going to start recovering.

Speaker 3

And I think the earliest will be the end of our fiscal year or kind of middle of next year, because I'm not seeing any kind of meaningful movement there. And in fact, all the major NAMs have really kind of gone into hibernation mode where they are continuing to do kind of advanced research, but not much in terms of the accelerating new products to market.

Speaker 5

That makes a lot of sense. Thank you. And just one last quick comment on the operations side. It looks like your inventory on your balance sheet was down quite a bit. Any comments around that?

Speaker 5

Are you able to kind of sell what you forecasted? And what will be driving the step down in inventory in house?

Speaker 3

Well, I think the as we all know, during the supply chain shortage, you had to agree to a lot of product like kind of NCR, non cancelable, non refundable. And of course, a lot of semi companies have kind of shoved it all down our throats. So we built up some components inventory. We have been pretty much working diligently all that inventory down. But also our anti counterfeiting manufacturing, we are holding quite a bit of raw materials.

Speaker 3

And now as the anti counterfeiting demand is starting to come back, we've been consuming the raw material as well as the semi finished goods. And we've been bringing inventory more in line with our kind of current run rate demand. Perfect. We haven't been buying machine stock. Let's put it that way.

Speaker 3

Yes.

Speaker 2

It's more to categorize it as a more normalized level now. I mean, and it will now fluctuate relative more to revenue as opposed to kind of the prior cycle.

Speaker 6

Yes. That's right.

Speaker 5

Yes. Great stuff. Thank you. That's all I've got.

Speaker 7

Thank you.

Operator

Your next question comes from the line of Mehdi Hosseini with SIG. Your line is open.

Speaker 8

Yes. Thanks for taking my question. The first one has to do, Oleg. Can you tell us how the quarter progressed, especially in terms of booking? Was there significant erosion throughout different business units, service providers, CSPs and so forth?

Speaker 8

Or did it start a week and just carry through? And I have a follow-up.

Speaker 3

Well, actually I'd say as a difference from the prior quarters and I mean what we are seeing is the forecast that we kind of assume early in the quarter largely holds. So we've been seeing fewer decommits or cancellations. The only big cancellation we had in and it was not really cancellation, our major customer reduced their order by a third, which was on the wireless NAMS. Had that order came through, actually we would have beaten the high end of our guidance on NSE and it was really a major wireless NAM decided to take a less product because of slowness in the market. We don't generally track kind of reliant book to ship ratios because the way our market works, demand works, the June quarter December quarter are usually stronger and we get a lot of bookings within the quarter.

Speaker 3

And the September March are generally weaker and we get a lot less bookings within those quarters. So I look more like the way I gauge the relative health of the funnel is that what kind of bookings will enter the quarter and expectations and how well do they hold up or there is a left to go. We forecast the bookings and then we track how many of the bookings show up as they're supposed to show up. And the way it makes me feel a little better is they actually showing up. Okay.

Speaker 3

Whereas before they would get pushed out or get canceled. So I think the booking environment, while the revenue may be lower, the booking environment is now more predictable and more robust. So we can plan better our quarter.

Speaker 2

Great.

Speaker 8

And then if I just double click on OSB, should I assume that image sensor, what is being reflected in the guide for the September quarter, would that show any year over year growth?

Speaker 3

You're talking which segment, the 3 d sensing or anti counterfeiting?

Speaker 8

3 d sensing.

Speaker 3

3 d sensing. Well, it's actually lower in revenue year on year because we have now going to the new ASP schedule. So there is pricing roadmap. So the ASP is lower. The volumes are slightly the same, maybe a little higher.

Speaker 3

But the problem is the volume growth is not enough to offset the ASP erosion that they just want in the factory for the next year. So but one and of course it's still very much driven by a single customer which we have a very high level of penetration of products. So it's very much driven by their demand and volumes. One thing we are also noticing there that is positive, the demand is now being a little bit better linearized throughout the year. And I think it's mainly driven by contract manufacturers who don't want to be heavily overstressed in the September, December quarter and then having a lot less demand in the March June, but still I think September, December quarters is a much higher volume.

Speaker 3

And one other development I think we are now seeing kind of if we call them signs of life or interesting new trends, mainly the China Android players are toying with the 3 d sensing. It's still very small volumes, just a handful of platforms. But if this becomes a major trend and adoption, this will be actually a big positive for us in 3 d sensing. And there's also rumors that Samsung maybe trying to make another go at it, but after having so many years of full start, I will hold off on that one as the outlook.

Speaker 2

Sure. And maybe I will let you know, it's about 2.5 sorry, maybe I just said it's about $2,500,000 year over year for the Q1. So, roughly, it could be another that Oleg mentioned, but also we'll have to monitor the supply chain that Oleg just discussed and maybe it's kind of more linearized and over the course of 2, 3 quarters, it will kind of offset itself.

Speaker 8

Sure. Just for proof of modeling, the implied midpoint of your guide implies about a 9% sequential growth in OSP. Is that driven by both 3 d sensing and counterfeit?

Speaker 3

Well, I think the anti counterfeiting business is starting to rebound. I mean, a lot of the inventories have been consumed. So we have a I mean, there's an uptick in there, but also 3 d sensing has a higher numbers. But you have to discount it for some of the ASP erosion. So you probably would be in closer to an 80,000,000 dollars range between the 2 of them.

Speaker 3

But of course, it's both segments are doing better demand wise, volume wise than in the prior year.

Speaker 7

Okay. Thank you.

Speaker 3

And when the anti for us it's very important for anti counterfeiting to start recovering because that's where a lot of big iron is sitting in terms of the manufacturing assets. So clearly driving a better absorption on a stronger anti counterfeiting demand has a bigger impact on the operating margin of the OSP business unit.

Speaker 7

Got it. Thank you.

Operator

Your next question comes from the line of Michael Genovese with Rosenblatt. Your line is open.

Speaker 6

Great. Thanks. I just have one question, which is, Oleg, you've spoken a lot about how AI and data center investment can improve or help field test over time. I just wanted to kind of more directly connect the dot on how it could help field test. And so is the Lumin announcement about their investment in AI, is that key to the second half recovery or other things like that?

Speaker 6

Do we expect other service providers to announce something similar? I guess there's a few questions in there, but if you could kind of run with those thoughts, I would appreciate it.

Speaker 3

Well, sure. I think all of that is goodness actually. Those are all positive things. I mean to be fair, I mean Lumen, to give them credit even when they were really beaten down in the last 12 months, they've actually been when I talk about the Tier 2s being more aggressive, I think Lumin has been one of the more proactive and more innovative companies in that space in terms of how what technology they deploy and how they roll out their value proposition. And I mean, we like Lumin because they actually listen to a lot of good innovative ideas in there.

Speaker 3

And they're one of the more innovative players in terms of implementing things that truly differentiate them from the run of the mill fiber operator. So I'm not going to say any more than that, but Lumen, they didn't just start it. They've been doing it for the past year and year and a half, even when they were beaten down into the pulp. They continued with the innovation.

Speaker 6

I guess if any more maybe I guess you did touch on this a bit earlier, but any more color or comment or prediction on this AI investment creating more, whether it's optical or fiber, whether it's optical kind of core or fiber access demand. So that's why I zeroed in on Lumin there because it seems like their AI investments will

Speaker 3

So yes, because so when I was talking about is the and particularly if you look at 1.6 terabits, I mean, traditionally driving from 10 gig to 100 gig, 100 gig to 400 gig, 400 gig maybe to 800 gig, Traditionally, the drive to adoption of the higher speeds was driven by NAMS supplying into service providers. 800 gig was kind of like mix between service providers and data centers. 1.6 terabits is being driven all by data centers. And what we are seeing, the rate of fiber bandwidth consumption, whereas let's say, service provider will lay a fiber and then maybe every couple of years they would turn on another fiber strength and they generally only connect 1 and then they roll the trucks to connect the others as they need it. What we are seeing with data centers is, A, more strands being enabled from get go.

Speaker 3

They just may be sitting dark, but they actually pay for connecting all the strands. So then as they needed, they turn them up quicker. And the reason they're doing it is the time between lighting up fiber and lighting up the next fiber, the time is much, much shorter. And they see their traffic grow much faster than the service provider. So in that respect, I see them looking at the fiber interconnecting between their data centers are completely different than the service provider who would look for their metro and core network.

Speaker 3

And I view it as a positive for us because that basically means much more frequent changes and need for a much faster responsiveness.

Speaker 6

Thanks. Appreciate the color.

Operator

Your next question comes from the line of Meta Marshall with Morgan Stanley. Your line is open.

Speaker 9

Hi. This is Karanjuvakar on for Meta. So first question just on the NSE side. I know you're sort of expecting a conservative spend environment throughout the calendar year. I guess as you look into the first half of next year, where you expect some uptake, I guess, are you expecting sort of a step function recovery in revenues or a more gradual recovery?

Speaker 9

And I guess just parsing out between Europe, European and U. S. Carriers, just any trends to be mindful in terms of how you're thinking about a recovery? I know North America is the most challenged today. And How you expect the recovery there to play out?

Speaker 3

What you said, service what function? Do you mean like an NE and a C or? No, no. Just

Speaker 9

like the recovery being a step function or sort of more gradual?

Speaker 3

Step function. Got it. I think it's so look at it, there is the basic things like field instruments. I think that's being a I would say not a big step, but like lots of little step because those are driven by projects. So I think it's a gradual recovery.

Speaker 3

And I would say, amazingly Europe has not been that bad. Yes, they slowed down, but nowhere near as bad as North America. North America has been cricket basically for last 2 years. So I think in terms of a step function, clearly, if AT and T will continue to proceed with their plans to accelerate and resume their fiber to the home, In a way, it will be a bit of a step function for the fiber instruments. And usually, if somebody as big as AT and T restarts a deployment, it sends a shock through the industry, which means the cable guys are going to have to accelerate, the wireless may have to do something more because then it creates a nice competitive whirlwind that everybody needs to start responding.

Speaker 3

So it generally, just as when they stop spending, everybody else stops spending. When they start spending, others are going to follow usually. So but I don't want to create expectation of a step function. I'd rather go with a gradual recovery in the base demand. Where I see a greater acceleration is really the Fiber 11 production and we do think 1.6 terabits will be a big driver in the first half of next calendar year, okay?

Speaker 3

And in terms of the clearly as North America starts to recover, I mean Europe follows pretty quickly. But the good news is Europe never really did not really get down as much as North America. So I expect the recovery in Europe to be a bit more mild. But what's also really interesting is we're seeing a lot more aggressive plans in Latin America, which is you think always will be the last ones, but they are actually in many ways been playing catch up and we're seeing some of the more interesting opportunity especially for our AI ops and some of the other products coming out of Central and South America as well. And Asia has been pretty solid all alone.

Speaker 9

Okay. That's very helpful. And then I know you mentioned earlier that sort of on the OSP side inventories are depleted. But I just wanted to get a little bit more color on trends you're seeing there. What drove the upside?

Speaker 9

Is it around inventory builds or new prints? And just expectations on that moving forward? That would be helpful. Thank you.

Speaker 3

You're talking about our internal inventories, right? Not the inventories of service providers, which inventories are you talking about?

Speaker 9

Like the OSP side inventory, so yes, you're on.

Speaker 3

OSP, yes. So as I mentioned earlier, the we are seeing some recovery in the anti counterfeiting demand and it's really driven, I mean, a lot of the inventory that was built up in the channel during COVID because they also order a lot of material and products to keep on hand. Finally, a lot of it has been wound down and consumed. So the orders that are coming back is really more in line with the demand and consumption and less of the restocking or anything like that.

Speaker 9

Okay. That's helpful. Thank you.

Speaker 7

Sure. Thank you.

Operator

Your next question comes from the line of Tim Savageaux with Northland Capital. Your line is open.

Speaker 7

Hey, good afternoon. Couple of questions. First on the guide, I think if I heard you right, because you would expect to see kind of a double digit million sort of sequential increase in OSP. And I guess you're saying you would have seen something closer to that were it not for the ASPs and that comment about $80,000,000 or initially looking at it, you think maybe something so there's some negatives in the currency business, but it sounds like maybe not. Did I get that right?

Speaker 3

No, there's no negatives in the currency business. I think the people are just talking about 3 d sensing demand. I mean, we have a new pricing in place and clearly with the ASP erosion, they've taken down some of the revenue because the volumes are not that much more than they were a year ago. So that was what I was talking about.

Speaker 7

Yes. I get that relative yes, I get that relative to last year. I was just talking sequential, but I think we're talking about the same thing. And a similar question on NSE coming down sequentially, it looks like that could be some seasonality that you see typically there. But is there any particular product or end markets driving that sequential decline in NSE for Q1 'twenty 25?

Speaker 3

I think it's really more seasonality. I mean, just weaker demand, but I mean, clearly, we normally would have gotten some orders more. I think I'd say wireless NAMs is probably one area where the demand is lower. And I would say just general the service provider field instrumentation just demand is weaker.

Speaker 7

Okay, thanks. And then back on the kind of AI data center side, and I don't know if you break it out or look at it this way, but I think it'd be interesting to get a sense for within the NE segment, what sort of revenue level can you attach to data center overall or fiber driven data center, whether that's 800 gig test going to 1.6 in lab and production, You can assume a good bit of that's probably data center driven. And you've mentioned the potential for more field instrumentation driven by that. But if you had to take a swing at it, would you say data center is has a prospects of getting up toward 10% of your NE business over time? Or is it there now or some sort of order of magnitude?

Speaker 3

I'm not going to get into this thing because I mean any number I give you will ultimately be a BS number anyhow. So I mean there is I don't think there is really any good research or understanding because I mean one thing I can tell you is the 1.6 terabits is next year will be driven all by data center, right. Whereas when we went from 400 to 800, it was primarily driven by carriers and NAM supplying carriers. So I think I don't really try to supply data center or carry node. I mean fundamentally it's all driven by technology.

Speaker 3

But I would just say that 1.6 terabits will be driven by data center demand. I mean, if you want to ascribe that revenue to that, I mean, maybe eventually we as things stabilize, we can start doing segmentation on the end market use. But usually the same line just like for 800 gig, the line that was built originally for service providers ended up supplying data centers when the service providers start spinning, you can't really because it's a multi use technology. So we think of it more as to who will be the lead customer driving it. And for the first time, I think data centers will drive the next technology node.

Speaker 3

And in terms of the build out of the networks, it is still the service providers fiber, but it's a Tier 2 service providers who are providing those fiber interconnect between all the data centers rather than the big players like say AT and T or Verizon. So I mean whether it's data center today or they take some of that fiber and give it to in the future for 5 gs towers, I mean it's a multi use. So we don't really sweat trying to figure out what's the end market demand.

Speaker 7

Okay. I understand. Let me take one last desperate attempt at that question and say, Art, if you were to replace 800 gig and with replace data center in my question or AI data center with 800 gig, it might be a little bit easier to give us a sense of the size of your 800 gig business relative to your overall test business in network in any?

Speaker 3

I have the numbers, but now you're asking me to go into the segment reporting that we don't report. Because I mean, there is a at any given time, we have a 400 gig, 800 gig and now later this calendar year, we're going to have 1.6 terabits. I mean those things are it's just like sediment chart that keeps one goes down and the other one goes back up and there is a substitution. So I don't think I'm going to go into that level of detail.

Speaker 7

Fair enough. Thanks.

Operator

Your next question comes from the line of Mehdi Hosseini with SIG. Your line is open.

Speaker 8

Yes, thank you. A couple of housekeeping items. Given the fact that the $25,000,000 of annualized cost savings is going to materialize second half of fiscal year 'twenty five, should I keep the OpEx kind of flattish from here? And the implied OpEx for the September is $120,000,000 So I'm just wondering how should I model that for the rest of the fiscal year?

Speaker 2

Generally, yes. There are several puts and takes. Obviously, some of it has to do with net increase in variable employee costs, but generally, yes, you're right.

Speaker 8

Okay. And what about the fiscal year tax rate?

Speaker 2

So we guided for about $8,000,000 Then for the remainder of the year, it will depend on the jurisdictional kind of mix. Obviously, as long as the North American kind of region will recover, then obviously it lowers our effective tax rate. You can see that in the Q1, it's still at $8,000,000 which is a higher than normal effective tax rate, but that's kind of the thinking.

Speaker 3

Yes. I think you should look at the absolute dollar amount of taxes because they are really driven by statutory kind of things. And ironically, the more money we make, the lower percentage in Texas we pay. Because in North America, we have NOLs and a lot of other offsets that will effectively lower our tax rate.

Speaker 7

Okay, got it. Thank you, guys. Thank you.

Operator

This concludes our Q and A portion of the call. I turn it back to Vibhuti for final comments.

Speaker 1

Thank you, Emma. This concludes our earnings call for today.

Operator

Thank you for joining everyone.

Speaker 1

Have a good afternoon.

Operator

You may now disconnect.

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Key Takeaways

  • In Q4 VIAVI reported $252M in net revenue (midpoint of guidance), operating margin of 10.9% (above midpoint), and non-GAAP EPS of $0.08 (high end of guidance), with full-year revenue at $1.0B (–9.6% YoY) and EPS of $0.33 (–$0.22).
  • The NSE segment saw a 7.9% YoY revenue decline (NE down 9.7%) due to conservative service-provider and NEM spend, whereas SE revenue grew 5.8%, and the OSP segment outperformed with 6.2% YoY growth and a 34.8% operating margin boosted by product mix and a new manufacturing ramp.
  • VIAVI ended Q4 with $496M in cash and short-term investments, generated $26.2M in operating cash flow, repurchased 1.3M shares for $10M, and has $215M remaining under its share repurchase authorization.
  • A June restructuring plan will reduce ~6% of global workforce, incur ~$15M in charges, and is expected to deliver ~$25M in annualized operating-expense savings by the end of FY 2025.
  • For Q1 FY 2025, the company guides to $235–245M in revenue, ~10.8% operating margin, and $0.05–0.07 EPS, anticipating continued conservative spend through H1 with a gradual demand recovery in H2 driven by fiber build-outs, data-center upgrades and AI-related test needs.
AI Generated. May Contain Errors.
Earnings Conference Call
Viavi Solutions Q4 2024
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