Q2 2020 Earnings Call
Solutions second quarter 2020 earnings call.
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After the speaker presentation, there will be a question and answer session.
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I would now like to have the conference over to Bill Ong head of Investor Relations. Thank you. Please go ahead.
Thank you Chris welcome to be obviously should the second quarter fiscal year 2020 earnings call. My name is belong head of Investor Relations.
On today's call. It Oh, Oh look I can president CEO and I'm a molecule CFO.
Please note. This call will include forward looking statements about the Companys financial performance.
These statements are subject to risk and uncertainties that could cause actual results may differ materially from couldn't expectations and estimation. We encourage you to with your most recent annual report and that's if he falling particularly the risk factors described in those falling.
The forward looking statements, including guidance, we provided during this call abella only as of today.
Yeah I'll be undertakes no obligation to update these statements.
Please also note that unless we state otherwise all results except revenue on non gap. We reconcile these non-GAAP results to upsell them never got financials and discuss the usefulness and limitations. They are next week.
Police plus a supplemental earnings like what you food.
Historical financial tables are available on the all these website.
Finally, we are quoting todays call and we'll make the recording bailed out by fall into the PM Pacific time. This evening on the web site.
I would now like tend to called the.
Thank you Bill do you ever delivered another quarter of record breaking performance a record revenue in fiscal Twentytwenty second quarter of 313.7 million, we were 2.2% year on year.
And exceeded the revenue guidance range up to 92 million to 312 million.
What is he into a speed delivered strong performance.
Yeah. This record operating margins at 21.6% expanded 80 basis points year over year and exceeded the guidance range of 18% to 20% also recorded record EPS at 53 cents also exceeded the guidance range of 18 cents to 20 cents and reflected in the fixed a 4.5% growth.
From a year ago levels.
Now moving to a reported Q2 results by business segments, starting with NFC.
And I see revenue at 34.2 million grew 4.7% year over year and exceeded the guidance range up to 16 million to to 32 million.
Within NSC any revenue at two or 3 million grew 3.8% from a year ago levels, driven by strong performance in fiber wireless and cable products.
I see revenue at 31.2 million grew 10.6% year over year, driven by strength in our datacenter products from improved market conditions and execution.
Growth assurance products also saw year on year growth, which more than offset the expected revenue runoff in our mature issuance products.
Mature assurance products currently represents less than 10% of as he revenue.
And I see gross margin at 66.4% increase her in 10 basis points year over year, but didnt NSC any gross margins at 66.4% expanded 210 basis points year over year due to higher revenue volume and favorable product mix.
I see gross margins at 66.7% was down 430 basis points from a year ago.
Last year's YSI gross margin at 72% reflected favorable product mix from more software content and the higher margin mature insurance products.
And he's indices operating margins at 16% increase on 30 basis points from a year ago levels, reflecting the gross margin improvement and favorable operating leverage.
This is also a new NSC record and exceeded the guidance range of 12% to 14%.
Now turning to always be wispy revenue at 79.5 million reached the high end of the guidance range of 76 million to 80 million and declined 4.4% year over year.
This decline in revenue is the result of the expected decline the could always be business, partially offset by growth in PT sensing from increased demand.
Well, we speeds gross margins at 54.8% expanded 460 basis points, your efficiencies and higher absorption of manufacturing overhead.
Operating margin at 38.2% exceeded the guidance range and expanded 80 basis points year on year, reflecting the higher gross margin levels, partially offset by increased investments in growth areas.
Now turning to the balance sheet, our total cash and short term investment.
Ending balance was quite and 56.9 million operating cash flow for the quarter was 38 million in Q2 repurchase approximately $9.2 million. So viavi stock at an average cost basis, including commissions of $13, a 93 cents per share.
After 200 million dollar all three share buyback announced during September 2019 analyst day event repurchase to date, approximately $10.7 million Oh Viavi stock, we plan to continue to repurchase Viavi stock Opportunistically to offset earnings dilution from stock based compensation.
Now onto our guidance.
We expect fiscal third quarter 2020 revenue from having to be approximately 278 million plus or minus 10 million operating margins at 15.5% plus or minus 1% and it appears to be the range of 13 cents to 15 cents.
Speaking of see revenue to be approximately 212 million plus or minus 8 million with operating margins at 10.5% plus or minus 1%.
We expect wispy revenue to be approximately 66 million plus or minus 2 million with operating margins at 32% plus or minus 1%.
Our tax expense Street is expected to be approximately 17% to 18%. We expect other income and expenses to reflect a net expense of approximately 2 million share count is approximately 240 million shares.
With that I will turn the call or to alike.
Thank you Omar I'm pleased with our strong performance in Q2, resulting in a record quarter across many key metrics and breaking the prior years record our non-GAAP operating profit of $67.9 million was up 6.3% from the prior years record of 63.9 million.
Business trends came from our three major growth drivers fiveg fiber and three D sensing.
We expect Fiveg laptops demand to remain robust throughout calendar 2020, driven by continued investment by leading Nams in Fiveg R&D.
Did you meant for Fiveg field tests instruments is expected to started ramping in late calendar 2020 or early calendar 2021, we expect fiber demand to remain robust throughout 2020, driven by continued network densification.
In Q2.
We also benefited from year on year growth in cable the increase in cable spend has began began in Q1 and continued into Q2 driven by follow on DOCSIS. Three that's one upgrades at both North American and European cable providers that said, we expect cable spend to moderate for the remainder of fiscal year 2020.
Yes, he revenue came in better than expected at $31.2 million driven by improved demand in enterprise and data center and good acceptance by service providers of our growth assurance products.
You know Spi three D sensing revenue increased significantly year on year, driven by increased penetration and adoption of our three D sensing products.
We expect three D sensing revenue to decline seasonally for the remainder of fiscal year 2020, but be up year on year, reflecting increased customer diversification.
We expect three D sensing to continue its growth momentum driven by continued to continue technology adoption.
Viavi the technology leader in three D sensing optical filters and Diffusers with a strong IP portfolio in January we announced settlement of several IP claims regarding our optical filter patents, including an agreement with LG electronics and algae, you know Chuck as well as a life.
Sensing agreement Oh with Sony optical.
We are pleased with our can force month efforts to date and continue to pursue a pea claims against multiple companies in several countries.
I think counterfeiting revenue came in as expected driven mostly by banknote sort of print demand demand.
We expect this trend to continue for the remainder of fiscal 2020. The bank three design pipeline remains robust. However, there is limited visibility for major currency redesigns launches over the next several quarters.
Lastly in December Viavi went live with our new ERP system, we have been working on upgrading our ERP system for the past two years as part of our continuous operational transformation.
Improving operational effectiveness combined with strong secular growth in Fiveg wireless fiber in three D sensing positions us well to continue growing our topline and expanding profitability.
In conclusion, I would like to thank my Viavi team for another quarter of strong performance and express my appreciation to our customers in our shareholders for their support I'll now turn the call over to that.
Thank you all that.
This quarter, we will be participating in Morgan Stanley's TMT Investor Conference on March four taking place in San Francisco, Chris Let's begin the question answer session, Yes, I want to limit discuss the one question one follow up.
Ladies and gentlemen, as a reminder, in order to ask a question you will need to press star one on your telephone please standby will be compiled accumulate roster.
Your first question is from John Moran with Stifel. Your line is open.
Thanks, very much like I was hoping maybe you could spend a minute and just talk about some of the geographic trends or just looking at the numbers that you reported it seemed like a Europe was actually a pretty strongly on a sequential basis you had passed down almost about the same amount curious if you could just spend a little bit a a time on some of the the different growth categories and how you're.
Seeing that play out a little bit geographically right now.
Yes, So I think I think generally our geographic makes that we're driving is about kinda third the third the third although I'd say you asked North America is being up a stronger like in a high Thirtys last quarter Europe was.
Also in the him a mid to high Thirtys and Asia was down I think it's really driven by the timing of some of the a major orders.
In Asia, we sell a lot less what I would call service provider test instrumentation, most of our Asia sales.
Our on the NSC side on 11 production and their we kinda we go with the cyclicality of procurement by our major NEM customers.
As well as some of the a major on a fiber optic module suppliers.
The other thing is also is.
How are sales get booked on the anti counterfeiting and what are the orders are coming from so I wouldn't read too much into the regional volatility, but I would just say a few big orders coming in a in Europe can sway the European mix and next quarter you may see.
In order in Asia that a little bit reverse the trend.
Aside from that I wouldn't read too much into the regional mix.
And just too okay I tend to add.
So but that just.
Let me quickly here on the issue I know you see 12% growth on a year on year basis.
I'll explain that also includes Trenton, a PD sensing business because typically ship it to.
The Asian supply chain there so that is reflected in that in those numbers.
[music].
Great and then aim or just maybe on the guidance itself. Just curious if theres any expected impact or something built into that guidance from a they see culotta virus stuff, that's going on now in China, and how that maybe.
Impacts either your ability to meet demand or some of the demand that you're seeing out of China right now with the at least with the extra week of of the shutdown for new years. Thanks.
So this is all like I'll start an American continue so in terms of our guidance clearly we're now have good three weeks three four weeks of.
Visibility into all the health issues going on a in Asia. So at this point, our forecast and guidance pretty much includes up to date information on any potential cost impact as well as some of the revenue impacts.
Now in terms of the revenue topline China is not a major customer for us for service provider instrumentation, it's mostly anti counterfeiting as well as the three D sensing and level production in that respect.
The impact on the revenue there at this point is somewhat limited because a lot of the demand can be Matt Oh with the inventories obviously, if Chinese supply chain shutdown gets extended for a longer period that the next one or two weeks we may.
See some potential disruption in the supply chain for various components and obviously, even though we are supply chain is not going to be impacted the customers end demand may get impacted so at this point I am I going to speculate what might happen I'll, just say that everything that we know up to date today is.
Factored into our forecast now on the cost side, we are expecting to see a bit more of a under absorption in our factories in China, given the extended shut down after Chinese new year, but as I said, that's also factored into our gross margin guidance.
For this quarter I'm, Mark I think I think you quoted well so.
A little bit on the revenue side, we have factored into revenue impact.
To the boat, maybe one enough to two percentage points with the total revenue given our exposure in China as Alex mentioned, we cannot sell a lot of.
Field instruments into China, it's mainly on the NFC side, it's mainly lab, so height and highly differentiated products that go into lab in production and then to the extent.
Our business and always be side, when you get impacted on Threed sensing the effect of that into but mainly I think the bigger impact will be on under absorption and that's already baked into the guidance.
Thank you very much.
Your next question is from Alex Henderson with Needham Your line is open.
Yes. So I was hoping you can help us out a little bit with some of the.
Oh S.P. numbers, excluding Friday for a second so was that fairly flat I know you don't want to break out the exact number but trajectory for the trajectory would be very helpful.
Yes, so so Alex up sequentially was slightly up but for the full year of fiscal 20, we still expected to be.
Averaging about $50 million a partner so $200 million the baseline business is still in intact in.
Quarterly Spi business.
On the if I could so do you see in the calendar 20 timeframe do you I mean, that's that's kind of baseline of without any major Prince I'm, assuming so assuming right.
At some point there'll be some prints in the back half of the calendar year.
Yeah. So this is yumes. So the first half of the calendar twentytwenty resuming normal reprint, walliams, which which is the baseline business and for the second half to the extent, we have visibility into the into the funding for the redesign we do expect some redesigns and the second half and I think two should be up.
Anything you guys can be a when we announce to themselves for a for a much quarter. So I think thats, where we are we do expect somebody designs, but at this point then the visibility is not really.
Very clear.
If I if I could just ask one last one really quickly see business just like dumped quite a bit.
Yes, that's seasonal how should we be modeling that I should we thinking about that the next couple of quarters.
Should we assume that that success continues.
But with the seasonal decline and then a seasonal rebound in the seasonally stronger June for any kind of trajectory would be very helpful. Thank you.
Sure I think we did have a record performance in resi business for the first time in.
Since.
I think since Viavi was formed this is the first time this business actually grew.
10.6% year on year.
Two things happened that one is as you recall, we mentioned for a datacenter business in our September quarter, we did see some push out of orders into a into a december quarter market conditions improve our execution was really good and we were able to capture those orders and so it was a very strong quarter for a data.
Central business.
Similarly for growth assurance business.
We also saw.
The business executing quite well and we were able to get some acceptances. So that's how have you saw a sequential growth from a low of $20.9 million to 31 plus million dollars in fiscal Q2 now going forward I think our guidance for SC business is the same we believe that.
This business on an average quarterly basis should be roughly about 25 million dollar per carton placed at least fiscal 20 and this is a fiscal 20 should be considered as a as a as a year of stabilization before we would this business to grow in fiscal 21, so in fiscal Q3, which is a much quarter.
Acted to sequentially go down.
From the $31.2 million that we posted in in the December quarter to roughly about $25 million in the March quarter. So it could be down close to about 20% sequentially.
Perfect. Thank you very much.
Yep.
Your next question comes from Mehdi Hosseini with Susquehanna. Your line is open.
Yes. Thanks for taking my question a couple of follow ups I want to dive in into the.
400 gig upgrade how do you see that market evolving and how do you see that trending into the second half should we expect to.
Material pickup from the first half calendar year into the second half and I have a follow up.
Sure.
We've been selling a lot of our 400 gig gear to the lab at the NIM.
Customers for now several years, we're now starting to see demand being very robust for the year production equipment for both modules as was the equipment. So we do see strong demand from customers.
Emerging and I would imagine the 400 gig is going I continue to gain momentum.
Throughout the calendar year, and we'll see we have a robust pipeline of orders.
For.
Both production as well as the continued lab.
Test and measurement.
Great and as a follow up I imagine the same would be with some of your field test instrument, especially as the installed Fiveg base stations turned on so I imagine the second half you should have as much.
She has seen some growth in unit shipment so in that context, given the fact that maybe there is some under utilization.
Happening the first half should we see operating margin nicely rebounding into the second half and perhaps.
Hitting your targeted.
Ranch.
From the first shoved into the second half.
Well I think generally for us.
The first September and the March quarters are the weaker quarters and the December on June quarters are the stronger quarters. So we always get more operating leverage in the December and June quarters, right now in terms of the five G., we have a pretty good Jim.
And pipeline for Fiveg, a lab equipment and you know as we've been say telling for now quite some time in terms of field deployment, we were more conservative I into our outlook, how the operators will deploy a fiveg infrastructure and I think largely.
Given the latest updates from major carriers, we are there it's very much in line with our expectations. So we do expect just start seeing.
Oh, Gee field instrumentation demand starting to.
Ramp in the second half of the calendar year or towards the end and early next calendar year, because I think that's kind of the timing one I'd say physically at many carriers will be able to do any kind of meaningful infrastructure deployment. So I would say a rule of thumb, we'll get more operating leverage December quarter.
Sure as well as the June quarter, less operating leverage in the March and September corner.
Great. Thank you.
Sure.
Your next question is from Tim Savageaux with Northland Capital. Your line is open.
Pardon me how good afternoon.
Wanted to start focusing on the the growth you're able to show.
Really in any or in the Comcast business in general clearly you're working on a tough comp last year with a pretty significant.
Hi, there catch up or budget flush type and and yet we are able to kind of grow on that even in the any business.
Whatever you could talk about what the what the drivers where there were the unexpected strength might have been did you and in fact see some degree of budget flush in the quarter.
For from a product standpoint.
Whether it's a fiveg here or fiber you just see something more than you expected.
So I would start an outlet Amar continue so I think listen I mean the.
There were some puts and some takes I mean for example, I mean clearly December quarter last calendar year was a very strong quarter.
But also remember the September quarter in the prior was very weak. This time around we had a very strong September quarter, and very strong December quarter. So some of the revenue that we normally would have to may be taken in December might have fallen into a september quarter. So that alone I think overall, if you look at the half on half a D.
Growth is much more meaningful than just purely comparing quarter on quarter also last December quarter, we had a very strong demand for anti counterfeiting would you. This time around was more or less baseline.
But as it but that was a fairly compensated by higher demand for three D. Sensing. So if I look at it what really drove our December quarter. This time around it was really a multifaceted strength across all our major markets. The fiber the three D sensing and Fiveg.
So there was no one I would say bluebird, that's kind of carried away.
And I'd say the other thing I would add is the we did have some uptick on the cable.
There was more of a not a major wave, but I like a secondary wave a where some of the you a north American and European customers came in and placed secondary orders for the upgrade of their DOCSIS 301, So that's kind of helped us a bit to push.
Revenue a bit higher us to any kind of budget flush is I really don't believe this year, we saw anything though what I would qualify as a budget flush pretty much everything that was shipped was in our.
Pipeline I classify budget flush something that we did not expect to be in over the quarter and it appeared during the quarter. Most of the revenue this quarter was pretty much I'm in December quarter was pretty much the revenue that we had in our pipeline.
One thing else I think you I think you coded well so we know be when you look at the beat.
I think Tim that's where it goes when was that expectation at the beginning of the quarter.
We did see a good people to be in this he business and within and see it is also contributed to it.
Datacenter business as I mentioned.
We did see pushout of deals from.
From say fiscal Q1, which is September quarter into December quarter, and we were able to go execute in the market conditions improve and so as he also contributed to that to the two these two to two the beat in addition to any in any we are seeing strength clearly, we're seeing strength 11 production on the optical site as well as on.
The lab wireless side and the as solid mentioned cable products were also strong but again this is probably the second review.
Got it and if I could just follow up quickly on.
Yeah, there's been some concern out there give a report through various components system suppliers about some sort of.
Pause in fiveg spend or deployment.
You know given your results in the quarter and I guess likely your outlook is one of your comments about calendar 20, you don't seem to be seeing that wonder if you might feel they're kind of.
Help us reconcile some of these conflicting data points.
Well I don't think Theres, a conflicting data points I think if you can I recall in all our communication, we were always consistently more conservative us how they fiveg rollout is going to happen and now we've guided accordingly. So as a result, you know it's all comes down to what you expect with where your expectations and what you can.
Indicated so I think we're pretty much inline with what you are saying and is putting much playing out pretty much on the scenario that we have laid out.
In other words within overhead.
Yes.
Understood, Thanks, and congrats and strong quarter I'll pass it off.
Yeah.
Your next question is from Michael Genovese with MKM Partners. Your line is open.
Thanks, very much earlier today a company that's.
In the Threed sensing supply chain talked about world facing as an opportunity for early fiscal 21, and I'm just curious to what extent does that.
To your Tam.
And to your expectations as we get into.
The second half in calendar year.
Well clearly.
Depending what the timing will be I'm, not going to speculate on the timing, but if it does happen earlier it'll be an upside if it gets delayed oh it will it will get delayed so I think you know mice.
I'm not going to speculate on any particular timing.
Because I mean remember.
If you're talking about lasers customers my by laser several quarters in advance of the major ramp we're supplying much more just in time. So we get the orders won the business materializes.
Okay that only get from.
If we were going to go from one threed module per per phone to two does that double your tam or does it add 50% to it.
That customer how should we think of that.
Well I think it it really will come down to.
What the module looks like so the sensors in Oh look world facing are somewhat smaller so it's a smaller area. So the ASP is in that area are smaller so I wouldn't I wouldn't say double but it increases meaningfully.
But also you have to then a running two assumption of home when you models with deployed right I mean, so if it's only one model and it's a high end model than the incremental volume and revenue, they're not going to be that significant if it's across the board the whole palette. The products clearly then it's meaningful.
So you got to look at it the.
SP, which is or the driven by the area of the world facing module, but then also what assumptions you're making on how many model is and what volumes of those models going to be built so I I mean listen I would take if I was a kind of bedding men for the second half of this year I think it's going to be.
An upside but on thing, it's going to be a huge upside.
That's very helpful way to think about it I'm. Thanks, and then just finally finally from me you could since you've mentioned it on previous calls or 800 G.
Just think is a lab test opportunity and in optical fiber.
Justin I think you mentioned, one or two quarters ago is there anything any update on that business or is it is is it well I think thats very very much advanced R&D right. So thats, a really something that people are still playing in a lap. So it's it's far from production, but its you know we start you remember we were shipping 400 gig.
About five years ago. So he just tells you only now a lot of it is becoming reality. So I would say 800 gig would put you somewhere in line for 2016 in terms of the.
Demand.
[noise] right, thanks very much.
Your next question is from semi Chatterjee with Jpmorgan. Your line is open.
Hi, Thanks for taking my question well like I, just wanted to start off with POS King Kong poor part so how you view the opportunity for Viavi around some of the fullest vendors changes in the network. So for example, if all the UK decision on who all we force with some changes in though vendor landscape there.
Do you see it as an opportunity as hold the Fiveg Mendoza sort of Fourg, even those get pretty book.
Well I think the I mean, we work with all companies in various capacities in case of the.
The Fiveg wireless I pretty much everybody if with exception of while way.
It is largely a merchant customer right they buy their test systems.
In many cases companies like I like while way our biggest competition there is internal sourcing and that's in that respect we don't have much exposure to walk away Fiveg.
Spent so to the extent to a there is more restriction rather than less restriction and one of the other customers picks up more business.
I'd say, it's marginally positive for us.
Got it.
I can just follow up on Tom you've already talked about the visibility on Fiveg wireless.
And.
And the timing being late got an acquaintance can you just wanted to see if you're going to give more details as to what do you still destroyed or the seeing white the silvers, Florida, the feeling more confident about timing at this point, which is kind of improving your confidence in that and how you're thinking what would geographies goal for us during that call kind of timing.
Well, you know I listen to listen I've been talking about it for many quarters I mean, let's separate the high versus reality everybody's got their marketing store in Fiveg and then there is a real physical story of deploying Fiveg. As you are saying alone Fiveg is a vastly different technology with a different topology.
So before you go a deployed and spend any money all the operators, they're very financially astute, they're going to take all the vendors and they're going to apply a principle of Shomi basically you Here's your test market go deployed and show me all the benefits that I will be able to get Shomi how my.
Customers are going to benefit and most importantly show me the.
The economics of the solution now on the other handed the all feel they got to show something so there is a going to be an element of being able to put a checkmark they have a fiveg products available.
So then it comes a story and clearly there is a.
Economic wise, and say Oh interesting technology and it could open new revenue streams for many operators, but then comes a point of physical deployment that means you got a half.
Physical people physical trucks physical equipment.
Get provisions in the field to connected in the field installed calibrated sworn and so forth. When you start talking about that whole thing you take into consideration that fiveg ultimately will have five to six times as many locations sites us Fourg you started realizing just how big in an uncertain.
Looking at US and my view is that operators will roll it out to within this with a certain level off cadence that allows them to maintain their current level of operations and not expand their network operations significantly or increase their headcount. So that's why I'm more skeptical at the speed.
And.
Velocity off Fiveg spend by operators and how quickly talk gets deployed.
Thank you thanks for taking my questions Sir.
Our last question is from Meadow Marshall with Morgan Stanley. Your line is open.
Great. Thanks, I, just wanted to kind of get into the the three d. settlements are kind of settlement that you guys had on the filter business during the quarter and just kind of what use cases or are you able to go after those four or just kind of what was the process of settlement.
And then maybe just kind of speaking to you know the success that you guys have had and kind of pulling through additional kind of test.
Measurement sales on kind of.