Q1 2021 Viavi Solutions Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Viavi solutions first quarter fiscal year 2021 earnings call.

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I would now like to hand, the conference over to your Speaker today, Bill Ong head of Investor Relations. Thank you. Please go ahead Sir.

Thank you Stephanie welcome to Viavi solutions first quarter fiscal year 2021 earnings call. My name is Bill Ong head of Investor Relations. Joining me on today's call Hagen, President CEO and I'm old too CFO.

Please note this call them food.

Forward looking statements about the company's measure performance.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from current expectations estimation. We encourage you to review our most recent annual report and that's if he falling particularly the risk factors described in those filings the forward looking statements, including guidance. We provide during this call about the only yesterday Viavi undertakes no obligation to update these statements.

Please also note that unless we state otherwise all results except revenue on non-GAAP. We reconcile these non-GAAP results of a preliminary GAAP financials and discuss the usefulness and limitation today's earnings we do believe plus a supplemental earnings slide which includes.

It's all commercial pay with all the other ones. The hobbies website. Finally, we have the coin today's call will make the recording available by 430 P.M. Pacific time. This evening on the website I would now like turn the call to almost.

Thank you Bill fiscal first quarter revenue at to 84.7 million declined 5% on a year on year basis, but grew 6.8% sequentially, reflecting both seasonal Louis b. string and stabilization and NSC revenue.

Seven Q offset by a reduction in operating expenses, reflecting disciplined expense management ongoing efficiency programs and lower variable expenses, such as travel and entertainment Evens Commission et cetera, due to the pandemic now turning to SP or spirit, a record quarter with revenue at 101.2 million.

Up 26, 5% from last year, reflecting strong anti counterfeiting and three distancing revenues as well as solid aerospace and defense product demand.

Gross margins at 63% was up to 620 basis points year on year, because of higher volume and better manufacturing absorption.

OSP delivered record operating margins at $46, 7% up 870 basis points compared to last year as a result of higher gross margins and tight expense control.

Now turning to the balance sheet.

Our total cash and short term investments ending balance was 595 5 million, which was an increase of 51.5 million sequentially.

Are operating cash flow for the quarter was a record $63 9 million.

In fiscal two.

21 year to date, we repurchased approximately $13 million of stock at an average cost basis of $12.24 per share.

Overall, we have repurchased approximately 57 5 million of the total of 200 million authorized share buyback announced in September 2019 at an average cost basis of $12.05 per share.

We continue to be opportunistic in a share repurchase.

Now turning to our guidance.

We expect fiscal second quarter of 2021 revenue for via via to be approximately 290 million plus or minus 10 million operating margin at between 19% to 20% and EPS to be in the range of 18 to 20.

We expect NSC revenue to be approximately two O 5 million plus or minus 8 million with operating margins at 11% plus or minus 50 basis points.

We expect OSP revenue to be approximately 85 million plus or minus 2 million with operating margins at 40% plus or minus 100 basis points.

Our tax expenses expected to be approximately 18% to 20%. We expect other income and expense to reflect a net expense of approximately 3 million, we estimate assure count to be approximately 233 million shares.

On October 21, the company announced May resignation as Vib's CFO effective on November 20th.

It was a difficult decision.

It is a privilege to Soviet we argue for more than five years.

It's been a real pleasure supporting and partnering with Alec and the leadership team we are a stronger company today.

I am committed to an orderly transition of my CFO duties. Following my departure and until a successor is identified our current global controller, Pam Evans will so as the interim CFO.

It should be up in the seasonally stronger December quarter.

Overall, we expect Q2 revenue for NFC to be up significantly, reflecting continued demand recovery in field instruments and seasonal strength and 11 production equivalent.

Although macroeconomic uncertainty remains we anticipate fiveg wireless and fiber to lead the recovery in early calendar 2021, and Fiveg field revenue to become more meaningful in the second half of calendar 2021, as the build out of Fiveg network accelerates.

As major carriers prepare to build out their fiveg networks, we have significantly expanded our RF field test instrumentation portfolio to help them automate and streamline the network build out and qualification.

We have also introduced the industry, leading fiveg overran lab and test test suite.

To support open standards, and interrupt and turbo interoperability and network virtualization.

On the fiber side, we are seeing the acceleration of 800 gig adoption by network equipment manufacturers to support the next wave of network and datacenter traffic, we expect our field instruments. All ran an 800 gig to drive NSC growth over the next several years.

Now turning to OSP.

The oilfield business segments. So its first $100 million plus quarter, driven by strong demand across all three of its product groups anti counterfeiting three D sensing and aerospace and defense we.

We expect those piece trends to continue into Q2 with modest seasonal pullback in three D sensing and anti counterfeiting.

Three years ago, our three D. Sensing product consisted of one filter in one device in one application today, our three D. Sensing product line consist of filters and optical diffusers going into multiple customers multiple products and multiple applications.

As a result, we now expect Threed sensing revenue in fiscal 2021 to increase 10% to 20% year on year.

We expect our anti counterfeiting product demand to continue to remain robust for the next several quarters driven by fiscal stimulus spending and banks have to redesign.

Aerospace and defense related product demand is expected to remain strong for the remainder of this fiscal year.

Overall, our long term secular growth drivers and Fiveg wireless fiber in Threed sensing remain intact, and we expect to continue to drive a.

Higher levels of revenue and profitability.

In conclusion, I would like to express my appreciation to the Viavi team for its strong execution. During these challenging times and wish all our employees supply chain partners customers and our shareholders to stay safe and healthy.

I will now turn the call over to Bill.

Thank you elect this quarter, we will be participating at the following investor events.

Virtually in August 2020 annual shareholders meeting on November 11th.

For 2020 Midwest one the one growth Investor Conference on November 12, and MKM partners at the conference on December 15th.

Tiffany let's begin the question answer session cause everyone to limit the cuts the one question and one follow.

At this time, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad.

Your first question comes from the line of John not chatting with Stifel. Your line is open.

Thanks, very much and Amer, let me be the first of what I'm sure we'll be many people to congratulate you on your on your new role that will be sad to see you go.

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Okay. Thanks, John follow up on the on your comments around seeing some improvements in that field business.

I'm curious just to get your take on whether or not it's a scenario where the service providers themselves have started to maybe adapt to the new environment.

Or if their networks are now at the point, where they really need to get out in the field to start doing some of this this upgrade work.

Sure. So I mean listen one the covered head the first tendency for everybody. It was just suspend everything and put everything on hold to figure out what's going on there. We saw during the summer you know people, saying, Hey, Noah things actually can work in this environment than they were adapting their protocols in there.

Procedures parameters holiday work and how they are all the trucks and how would they need to do and to remember.

The amount of maintenance works accumulates it doesn't set things go bad all the time that problems develop fright and.

You can only spend that kind of work for only so much before your network performance status to degrade. So we saw throughout the summer things kind of getting back to normalization you know they don't move they're not the fastest adopting a company those are big companies with big fleets of technicians and trucks.

And then we saw that in the September quarter EPS quarter, one on things Cienas, Hey, we actually have to do work. We have all these programs that we put on hold in.

Things starting to come back and as we entered the December quarter, we're now seeing.

A major service providers in North America to actually moving forward with their network planned upgrades and retrofits and all the maintenance that got.

Got delayed and to be fair to say I mean, Europe, even throughout the whole thing continued to be pretty good. So really the big slowdown was very much a north American phenomena.

Compounded by some weakness in South America, but it's not a big of not a big difference. So now things kind of coming back to life in North America is what's really providing some of that pickup.

Just to add a limited a wheeled she also saw some recovery in Latin America I know, it's actually it's very good point. Thank you Omar.

Clearly Latin America has seen big devaluation.

But actually given that the state of their networks is nowhere near as good as North America with everybody going to our work from home.

It really made the need for upgrades and repairs acute and we actually seeing.

I mean surprisingly South America, getting very aggressive in buying new equipment and upgrading the networks to improve service ability.

Thanks, and then if I just shift gears for a moment here or like into the Threed sensing business or can you help us with some of the seasonality aspects of that there's been obviously a lot of talk about how your largest customer delayed the launch by a little bit and I heard certainly thought that we might see.

Actually growth in the Threed sensing business grew sequentially in the December just given that things seem to be pushed out a little bit and I just wanted to get your sense in terms of seasonality and how this year is maybe a little bit different given some of those push out to maybe what we can expect from that business or you're in the in the March quarter, whether you're expecting sort of in line or or may be slight.

We better seasonality there.

So I'll start and then the RMR will provide more color so.

If you look what's going on you know typically with the this cycle.

It's in the September quarter is the biggest quarter for us okay. Because remember we ship our products literally just in time. So between the time, we ship to ship our filters and they get integrated into get put in a phone is probably at most several weeks. Okay. So in that respect we don't have that lead to.

Lag works.

Or some of the active components suppliers may see so for example, some of them may seem bigger demand in June quarter to get ready for the September quarter, how heavy right. So.

So we actually see in terms of one but really we would probably like vetted representation over real time out.

Plus top last year, but more so brought in the second half of fiscal 21 was the second half of fiscal 20, so to all explain the seasonality remains the same still first half is stronger and in the first half September is quite strong then it'll be slight decline in December or further decline in in the March quarter, and then like.

Pick up in the June quarter, as we get ready for the next one.

It'll year. So this is that's how expanding out but you can see the growth is coming more so in the second half was is the first half when you compare the year on year.

Thanks very much.

Your next question comes from the line, it's Janet charity that J P. Morgan Your line is open.

Hi, Thanks for taking my question.

I just wanted to start with the.

<unk> and Etsy and follow up on the NSC segment on the guidance that you gave I think what you give.

Giving guidance and plays about 12 Boston.

Movement and kind of what I'm trying to get to is as you talked about improvement you're seeing from service providers in terms of their intent to get some activity rolling.

Is it now that we should be expecting as we go through the your we might have a bit better than seasonal kind of fridge acree in in a see through the old for the remaining kind of three quarters is there to kind of catch up activity that might resolve then we should as we go through the yoga.

Seasonal trends in that segment and I have a photo thank you.

Well, so I think clearly you know just there is it's N a C, especially in North America is coming off a a fairly.

Aw point right. So there is you know things are starting to get back to normal are stabilizing now I don't think you're really gonna I don't believe there's gonna be any kind of catch up because remember our customers can only absorb so much at any given time, so if they skipped a quarter there.

Not mean, there's gonna be a significant catch up however, there is some and we see some of it may carry over onto the March quarter, which will be.

Be a little with a fiber buildout that are happening there would you expect several customers he seasonally to see a greater demand fulfilled instrumentation and the March quarter. So I think we're seeing things are returning back to normal and you know every.

Bodies kind of getting back to work in the December quarter, and they're placing orders and some of the orders getting expedited because there is some.

And year end budget flash, but not that much and but we also seeing more importantly is.

Some visibility into some cost major customers that they are now looking at a kind of three to six months, a major upgrade or network buildout.

Put up projects and that May result, in some orders that will soften the seasonally week March quarter yeah.

And just to add some additional color on the seasonality.

If you compare last year's March quarter, which is fiscal 20.

It was seasonally it was actually down close to 20% compared to the December quarter because of the the pandemic and we had a big.

Because of the shutdown in the month of March what we expect going forward typically the when you go from December quarter to the March quarter revenue and N. As he goes down anywhere between 8% to 10% and that's how we are looking at modeling and a C. In the March Cora roughly about 8% to 10% decline going from December quarter to March.

Quota.

Going back to some sort of normal seasonality schimek, although at a lower level and if there is any uptick and if there is any.

Additional spend will definitely go capturing but for modeling purposes, we're assuming normal seasonality going forward, maybe at the lower level and as the year progresses in calendar 2021, we should start seeing the pick up.

I'm on I just wanted to follow up with you on the margin front I think at the investors. When you had issued some long term targets for fiscal two people landscape has changed dramatically since shoot.

Shoot those targets what are you thinking of 19% or for anyone forces operating margin with that level of margin predicated on a higher level of forever, new and you're kind of hitting the high end of that already so if you can kind of.

Do you think about what have you done on the cost side on in terms of improvement in kind of why shouldn't they be thinking that you exceed the high end as revenue start to come back to a more normal level that you should be exceeding the high end because of improvements you've done on the golf site.

Yeah. So I think see when you think about our.

Operating expenses and you compare it on a year on year basis. There are three things that are clearly impacting at one is the operational efficiency programs that we continue to run and this is what we shared with two during the amnesty the funnel that I showed you and we continue to execute on that one of the biggest item on the final was migrating we already too.

New ERP system, which we completed the beginning of this year and we're starting to see benefit of that.

There are other efficiency programs that we are running within in that funnel. So that is once and that is a continuous process and we will continue the sickness, we have definitely clammed on on on expenses.

And there are some discretionary expenses and they're known discretion expenses, we definitely climbed on some home with a discretionary expenses and food is the benefit from variable expenses.

Because things like travel and entertainment and still people are in a lockdown, there's not much of travel happening. We also saw sort of commissions come down because the bookings declined do you own your own business because of the pandemic and we also saw some even expenses coming down because there are no physical evens happening. So those are the.

Variable expenses that we expect to bounce back as the revenue kicks in and.

On the operational efficiency side, we will continue to go drive the operational efficiency and that's part of the Ah long term plan. So schimek I would I'm coming back to saying that the 19% to 21% is the range that we will continue to execute against you've seen a few quarters, we've already got into the to the.

Hi end of the range, but again, that's all there is also a benefit of the variable expenses coming down. So yes. When the revenue comes in you will have a higher operating leverage and the model. So you should see the benefit out of that but you'll also see the variable expenses also go up so I would say, we I would like to stick to 19% to 21% I think that's a good range to work with.

Okay. Thank you.

Thank you very much. Your next question comes from the line of many Cassini with S. I T. Your line is open.

Yes, Thanks for taking my question to follow ups.

To the.

Our cash that is literally deliveries within weeks and by that point a lot of the long lead time items are well known to our customers. So what we actually get for them is something that is very close to what the number of phones. They are going to ship.

So in that in fact, we don't really suffer much from uncertainty we have a very high degree of visibility and certainty in our forecast.

In your forecast so to the extent that.

The OEM can catch open and be able to get more allocation from their manufacturing partner would that drive an upsize.

Your forecast is always conservative and so yes, I mean if.

The time, they give us a forecast they usually worked out all the kinks or have already factored all the shortfalls and they just tell us how many units to ship and there by then the number of number of units is pretty much finalized. So we never really see a lot of the volatility that may happen, one two or three months before.

The delivery date.

Okay very helpful and then Mike.

Second follow up has to do with the mix look.

Looking into Q4, I'm, sorry look into December and the first half of calendar year, Tony One how do you see the mix between Fiveg wireless and fiber evolving.

Well, let's see.

The Fiveg wireless switches.

In the first half, it's mostly 11 production right. So right. When you start a new calendar year, all the major nams get new budgets. So I would say you're going to see quite a few orders I'm.

Happening in the March and June quarter, right, So thats going to be pretty strong and then it's kind of slows down maybe into September and maybe whatever's remains and then December usually at the weaker.

Stuff unless they have budget a leftover now also given that the no amount of build out is going to accelerate the next year, we expect.

There should be more demand from them and we expect the wireless fiveg level production to be particularly strong in the first half now. The other thing is also happening now is the emergence of all around where you now have a lot of demand for interoperability and.

See field verification and that's a whole new product line that we just released and.

As that starts ramping up and demand for those products has going up it will be kind of the icing on the capex. So fiveg is kind of we feel pretty should be pretty strong first half of the year at least from what weve seen fiber as I mentioned earlier, we are seeing.

Quite aggressive build out of fiber taking place in Europe and now also North America. So we expect fiber to be equally pretty strong and our three D. Sensing as I said earlier first half of the calendar year is that.

In a seasonally weaker for us now but to the extend the Android ecosystem starts gearing up more in the three D sensing with world facing cameras, we may see some pick up in that area, but its nowhere near going to be as strong as the.

Our second half of this calendar year when it comes to Threed sensing I'm in the main demand for three D. Sensing will be second half of the calendar year.

Just to just to add I think even during the situation, we solve fiveg wireless lab and the fiber lab in production.

Placing orders for what's been qualified.

We do very well by the remember also people just don't place an order. They also need a lot of support in the field and actually we continue to provide life support in a field supplemented with virtual.

Printing for doing the call with brief locked down and given that if this a lockdown continues in orders as sort of the.

When indices strong wispy is sort of flattish must be strong NSS flattish and so it clearly will conquer balances for the businesses. The key here is the earning potential of the company.

Because of.

The execution discipline and the and the market trends that we are seeing given this to diversified businesses that we have so our.

Moto has been to continuously drive deeper.

The profit Sop, and EPS up and Thats, what youre seeing in the last couple of quarters, even in the current situation, we were able to print a growth in EPS on a year on year basis, and also delivered a very strong cash flow from operations of about 60 close to $64 million.

Got it thank you.

There are no further questions in queue I will now turn the conference back over to Bill.