Q3 2021 Viavi Solutions Inc Earnings Call

Good day, Thank you for standing by and welcome to the <unk> via these solutions third quarter fiscal year 2021 earnings conference call. At this time, all participants are in a listen only mode. After the.

Speakers presentation there'll be a question and answer session to ask a question during the session you'll need to press star one on your telephone.

Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero and I would now like to hand, the conference over to your speaker today belong head of Investor Relations. Thank you. Please go ahead.

Thank you Kristina welcome to V. Avi solutions third quarter fiscal year, 2021 and earnings call. My name is belong head of Investor Relations. Joining me on today's call older hiking, President and CEO and Henk Derksen and CFO. Please note. This call will include forward looking statements about the company's financial performance.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations and estimations. We encourage you to review our most recent annual report and in our SEC filings, particularly the risk factors described and those filings the forward looking statements, including guidance. We provide during this call are valid only as of today.

The Abbvie undertakes no obligation to update these statements. Please also note that unless we state otherwise all results except revenue are non-GAAP. We reconcile these non-GAAP results to our preliminary GAAP financials and discuss their usefulness and limitations in today's earnings release, the release plus our supplemental earnings slides, which includes historical financial tables are available on V. Obviously website.

Finally, we already call on today's call and will make the recording available by 430 P. M. Pacific time. This evening on our website and now I'd like to turn the call over to Hank Thank.

Thank you Bill and welcome everyone and thank you for joining today's call. My name is <unk> and I'm extremely pleased to have joined the Avi I joined from Belden, why I spent more than 20 years and various finance and operating roles and served as the CFO during the last 10 years prior to coming here.

I'm very excited to have the opportunity to work with <unk> and the rest of D. D. I B team I look forward to speaking and meeting with many of you and the coming months now onto the obvious results fiscal QC 2021 reflects a strong quarter with D Avi wherever they could.

Revenue and non-GAAP profitability as well as cash flow for a given march quarter, which is typically a seasonally weaker quarter.

Third quarter revenue came in at $303 $4 million, which exceeded our guidance range of $280 million to $300 million.

Revenue grew 18, 4% from a year ago level exceeding pre pandemic levels and setting an all time, the Avi QC record day year over year performance reflects the robust recovery from last year's pandemic impact continued strength and wireless and fiber.

As well as very strong continued anti counterfeiting demand and OSP.

<unk> operating profit margin at 22% expanded 540 basis points year over year and exceeded the guidance range of 17, five to 18, 5% EPS at 18 and reach.

Reached the high end of the 16 to 18 guidance range and increased four cents.

From a year ago.

Longer than expected volume and the Asia Pacific region resulted in a shift and the jurisdictional mix of income contributing to a higher effective tax rate, 26% for instance are 18% to 20% guidance.

Going forward for the fourth quarter, we expect the tax rate to normalize within the range of 19% to 21% and be approximately 20% for the full year.

Now moving to our reported Q3 results by business segment, starting with NSE.

<unk> revenue at $211 2 million.

Increased 12, 9% year over year and grew two 2% sequentially exceeding our guided range of one and was $89 million to $205 million within NSE and <unk> revenue at $199 million.

Increased 16, 5% from a year ago and increased five 5% sequentially, reflecting the recovery from last year's adverse pandemic impact with N thesis and fiber cable and wireless products.

<unk> revenue decreased 12, 1% year over year and decreased 21, 3% sequentially, reflecting weak demand for our assurance and data center products. We expect the S E business segment to start recovering and the coming quarters.

And S E close for profit margin at 64, 2% was in line with last year's performance and down 10 basis points year over year.

And S E T and E cost profit margins at 64, 5% increased 90 basis points from last year.

Italy, due to higher revenue volumes and favorable product mix.

S E gross profit margins at 61, 1% decreased 820 basis points year over year due to lower revenue.

And the six operating profit margin at nine 9% increased 250 basis points year over year exceeding the high end of our guidance range of 6% to 7% primarily as a result of operating leverage on higher revenue.

Now turning to OSP.

OSB had a strong quarter with revenue at 92 $2 million.

Up 33, 2% year over year, driven by very robust demand for our anti counterfeiting as well as three D sensing products.

Third quarter revenue at $92 2 million was within our guidance range of $91 million to $95 million.

Gross profit margin at 66%.

Increased 800 basis points year over year, driven by higher volume favorable product mix and high utilization.

<unk>.

Operating profit margin of 43, 9% at the high end of our guided range of 42% to 44% increased 890 basis points from last year's levels as a result of the aforementioned.

Now turning to the balance sheet.

The ending balance of our total cash and short term investments was $678 1 million and increase of $29 3 million sequentially.

Our operating cash flow for the quarter was $48 $1 million.

And third quarter for me, Avi and an increase of $9 million compared.

Compared to $39 $1 million and a year ago periods we.

We invested $8 $2 million and capital expenditures during the quarter compared to $10 3 million and the prior year.

In Q3, we repurchased $7 $9 billion of Yahoo stock at an average cost of $15 and 93 per share including commissions.

In total.

As of the end of the third quarter, we repurchased $76 $2 million out of the 200 million authorized under the share buyback plan announced in September 2019 at an average price of $12.57 per share we will continue.

And to be optimistic and I share repurchase.

Now onto our guidance.

We expect the fiscal fourth quarter revenue to be approximately $300 million plus.

Plus or minus $10 million.

Operating profit margin is expected to be between $19 five and 25%.

And EPS and the range of 18 to.

And for 'twenty.

We expect NSE revenue to be approximately $227 million bill.

Plus or minus 8 million with operating profit margin at 14% plus or minus 50 basis points.

OSP revenue is expected to be approximately $73 million, plus or minus $2 million with operating profit margin at 39% plus or minus 100 basis points.

Our tax expense rate is expected to be approximately 19% to 21%. We expect other income and expenses to reflect a net expense of approximately $3 $5 million.

Estimated fully diluted share count used in our calculation is 243 million shares. This includes an increase of approximately 11 million shares to reflect estimated dilution impact from the 2023 and 2024.

For convertible notes.

The share count without the convert dilution is approximately 232 million shares.

With that I will turn the call over to <unk>.

Thank you Henk and welcome to your first official earnings call out to the Avi.

I am pleased with the average performance in fiscal Q3, and we have surpassed the pre COVID-19.

Levels of business and achieved a new historical highs in revenue and non-GAAP profitability for fiscal Q3, driven by both of our business segments. The anti segment benefited from continued business recovery led by increased demand for fiber and cable field instruments as Msos and telcos service.

Providers resume their maintenance and network upgrade activities the.

And the recovery was particularly strong in the Americas and Europe are 11 production equipment continued to see strong demand driven by 400, geek and wireless infrastructure customers.

The S E business segment as expected came in weaker than Q3, driven by a confluence of two trends the reduced spending by service providers and existing network says they gear up for five G and the delays in new projects by enterprise customers and two more staff is able to return to work that sad.

We expect <unk> revenues and bookings to start rebounding and fiscal Q4.

We expect the demand to continue to improve throughout the calendar 2021, returning to and exceeding pre COVID-19 levels.

Additionally, we expect five G field instruments demand to start materializing in the second half of calendar 2021, as five day service providers start ramping up there and network build outs.

Longer term, we expect several major industry and political trends to setup NFC for a multiyear super cycle.

The carriers recently made sizable investments and spectrum and and our aggressively working on five D wireless field deployment plans.

The five day market presents the Avi with new wireless and fiber growth opportunities.

Our wireless products are already off to a strong start with solid bookings and business visibility. We're also seeing attractive growth opportunities in Europe as governments. They are pushed to help fund the deployment of fiber to the home to replace their legacy copper and networks and lastly, the U S plans for multiyear investments and broke.

By and outside major cities is expected to present and V Avi with new markets and opportunities for fiber cable and wireless.

Now turning onto OSP deal.

S. P. A business segment delivered a record revenue and profitability for March quarter led by strong demand for both anti counterfeiting and three D. Sensing products anti counterfeiting demand is being driven by a combination of global Central bank fiscal stimulus inventory replenishment and bank's total redesigns.

Fiscal Q3, so above seasonal demand by major customers and we expect stronger than normalized demand for anti counterfeiting products to persist in the foreseeable future.

Three D sensing demand from mobile devices remained strong and is up double digit percentage from a year ago levels, reflecting the increased adoption and penetration we expect three D sensing revenue and fiscal year 2021 to be up 16% year on year. This is a slight decrease from our prior.

And quarter expectations of being up 20% year on year, driven by industry semiconductor supply chain constraints.

To summarize calendar 2021 and is off to a strong start with both NSE business segment experiencing a rapid recovery and expecting year on year revenue growth throughout the rest of the calendar year. The OSP business segment is expecting to see continued robust demand for the anti counterfeiting products driven by.

Global fiscal stimulus programs and currency currency Redesigns and three D. Sensing is expected to continue to see further adoption and penetration opportunities overall, we expect our principal growth drivers <unk> fiber and three D. Sensing to continue driving growth for V Avi and calendar 2021.

Yes.

In conclusion, I would like to express my appreciation to the V. RV team for its continued strong execution and delivering another record quarter and wish all our employees and supply chain partners customers and our shareholders to remain safe and healthy as we returned to a business normalcy I will now.

Turn the call over to Bill.

Thank you all like this quarter, we will be participating at the Needham TMT Investor Conference May 20th and the Stifel Cross sector Investor Conference on June 8th Christina Let's begin the question and answer session. We ask everyone to limit discussion for one question and one follow up.

As a reminder to ask a question you will need to press Star then the number one on your telephone towards and draw. Your question press the pound key please.

Please standby and we will compile the Q&A roster.

And your first question comes from the line of Mike <unk> with J P. Morgan.

Yeah.

Hi, Yes. This is for Cardoso on for Selman Chatterji.

My first question is actually your and our supply constraints that you mentioned for <unk>.

And seeing business and actually I'm kind of surprised here just given the commentary that we parents through earnings season, thus far that you're not necessarily.

Feeling any of those implications on the NSE business I'm, just curious and is that correct and then B. You know what are you guys seeing and NSE business not in terms of supply constraints and whether you're factoring any into your forward guidance and then I have a follow up thank you.

Sure.

Great question. So I mean, we don't have an issue with our supply.

Three D sensing product D.

He is more on the customer side, if they cannot get all their chips. So to say are they necessary they have to reduce their forecast. So that's really where we've seen some reduction and forecast because they just simply cannot meet any.

And.

And all of their requirements for I'd say, it's one thing regarding the NFC I mean sure. There is a lead times are getting longer and there are shortages of supply, but fundamentally you know we're not a very big player relatively speaking and you know are we know how to manage our supply chain frankly speaking.

And we saw a shortages looming on the horizon as far back as October and November and we took some cash and put a lot of products on shelf and.

And in anticipation of these shorter.

Shortages materializing and while you know there were shortages of supply and we obviously chased it and you're just basically put more money on the table and you get the necessary products you need we were able to meet all our customer demands and not.

Miss any of our deliveries and in fact, we think our ability to really manage supply chain, Oh, Wow will present us with opportunities to pick up some share.

While many of our competitors who are cash poor.

And don't have a good visibility or.

Our ability to Hum.

Execute on the product requirements, we think will have an opportunity to pick up some share and grab market share from any of our competitors.

I appreciate the color and then my second question's on the three D sensing business, specifically around the Android opportunities. There I think last quarter, you highlighted incremental excitement around it.

And the Android customer base adopting at least for world a world facing three D sensing applications and at least going into the second half of this year.

Maybe moving into next year I guess, you know and has there been any progress there you know versus 90 days ago is there anything there to be incrementally more excited about and then on the side of that it seems that three D sensing applications being adopted for automotive seems to be.

Getting a little bit more exciting at least from new stories that you you're hearing and the and the price I guess.

What's the opportunity around there and and what's your expectations around it materializing. Thank you.

Well I mean, there's so I think I would say a three months can make a bit of and we got more information. So I would say today I'm less enthusiastic about Android.

Moving sooner rather than later.

I think I'm not going to go into the details, but needless to say, it's a very complex technology and people are finding the three D. Sensing is not a slam dunk you cannot just it's not easy to be a fast follower. So for various reasons I think Android may take a bit longer and it would probably be into next calendar year before we see Android.

It may.

And making any kind of major adoption. So I think for now it's very much going to be a more of our traditional customer base.

You know our automotive continues to progress and we are getting very good traction.

Traction there, but you know volumetric Lee speaking automotive is not a very big market I mean, you're selling today, it's a lot of it in cabin coverage, but you know even if you win 100% of it and you are talking about millions of units, whereas in our mobile phones youre talking about tens of millions of units, so and weekly basis. So I mean, it's a.

It's a.

For motive is an interesting market, but it's still in very early stages of adoption, it's mainly limited to the high and.

Packages and various cars and of course you know.

And automotive has their own problem and they are facing also semiconductor shortages from them.

But it's not really an issue for us because when you have semiconductor parts shortage I generally automotive customers prioritize their high end models.

With the all the bells and whistles like three D sensing and so in that respect, we're not seeing any degradation and demand there, but it still remains a.

Several orders of magnitude smaller market and unit basis.

Versus the mobile handsets.

Thank you I appreciate the color and congrats on the results.

Sure. Thanks for thank you.

Your next question comes from the line of Alex Henderson with Needham.

Thanks and.

Welcome to the Abbvie call.

As the new CFO and congratulations.

Thank you.

Building and wasn't a great place to work too.

I wanted to ask.

Question on the three D sensing and commentary.

16% growth.

And my math would suggest.

Pretty significant decline and the June quarter yet.

As we look listen to.

The commentary of the prime customer.

Their results over the March quarter were well ahead of anybody's expectations on.

And phone sales and I would think that the inventories would be pretty lean as a result of that and and hence.

Hence some building so are you, saying that basically despite depleted inventories theyre unable to get components and therefore.

And what's creating some softness from the June quarter.

Or and my own.

Estimating the March quarter can you give us a little bit of a sense as the March and June quarter, basically half out of the March quarter.

Well first of all I'm not going to comment on.

And or explain the delta between our major customers right. So I remember whatever it was sold and the March quarter, probably was built and the September quarter or even early December quarter. So there is some timing and I think maybe the day.

The differences here and is more a explained by what we thought our expectations were.

Given the traditional seasonality versus the actual forecast so I think.

I wouldn't say it's necessarily.

And you shouldn't read into it that we had a significant declines in orders from our customers. They just think we might have been a bit more optimistic in terms of the forecast that we are expecting to see in the I would say even the March quarter March quarter was a bit weaker than we thought it would be and of course June quarter is weaker as well. So I think we would just.

For once we had a higher expectations on the mobile handset industry and then the handset industry has actually given us.

So if I were to strip out three D sensing from the OSP business and just looked at D. OSP.

Anti counterfeiting piece it looks like that was pretty close to $70 million is that kind of the range that we should be anticipating it to stay and that's well above the historical and.

And I think what you said in the past was.

Five or six quarters of that sustained.

Higher level is that the level that we should be thinking or is that too aggressive and.

For normalized.

Yeah, I think 70 is too aggressive because you remember we said, it's kind of and we said instead of thinking of kind of base business are around 50 think of it as a high <unk> I think that's probably still for abundance of caution I would take us a number because yeah, and we don't believe either a quarter, where a customer wants a big shipment early so you can.

Get north of 60, and there may be quarters, where they digestion fall below 60, but I'd say on average over say a four quarter run rate.

Expect to see about.

Uh huh.

Hey, Hi fifties.

Average versus the.

Fifth our high Forty's and about 50 average and so.

I would just leave it at that but.

But we do expect low 70.

And the March quarter is that correct.

I don't yes, it says slightly below 70, so I mean, it was a very strong quarter and I mean it was.

It also led to some.

A typical cyclical tax rates because of which jurisdiction you accrue the profit I mean generally we get a lot of these orders in the second half of the year for middle of the year. So as a result, we have shown a higher tax.

Tax rate and the March quarter, because of where the profits accrued so I mean, there so but we do expect to see continue to see a significantly stronger anti counterfeiting demand in the foreseeable future and remember there are still many countries where print works are still shut down because of COVID-19 and.

And Ah theres going to be significant pent up demand and those are big cash countries and then the second though and like I say remember as everybody's printing more and more cash.

Stimulate their economies and remember that cash quantity is going to be out there that means there are price replacement volume.

If you kind of stretch it out a couple of years out is not going to be at a higher level as well, so and that's and added leads to a bigger market for our products even down the road as that initial kind of.

Medium term higher demand for printing declines.

Okay I'll get back from Q. Thanks.

Thanks.

Your next question comes from the line of many Hussaini with Susquehanna.

Yes, Thanks for taking my question, perhaps I'll, let if I were to replace the prior question to what extent your success and three D. Sensing is from share gains.

Well I mean.

We are pretty much have majority share and this so and.

And most of the growth there has to come from a market growth rate or the <unk>.

Greater adoption and.

So I think.

We were expecting Android to be kind of the day next adopter of the technology starting from the end of this year into next year and it looks like these plans are going to be pushed out of it.

And theres been a lot of it for I'm not going to go into it but theres been plenty of write ups about.

World facing three D sensing for Android phones.

From the press, which all those rumors are true.

Sure. So the content increase and a given high end smartphone made by North America base OEM is that behind us or are you going to continue to have increased content.

Well I think the.

As you get more the only I'd say most of the near term content increase we will have to come from more world facing cameras penetrating into broader product range.

Okay. So that's one but I think also.

A few years couple of years out as you get new generation, we also hoping to win some share and the diffusers space as well, so theres still plenty of opportunities to win more content perform for.

For us.

Especially as you consider and Diffusers.

Yes, I actually David.

And that's what when I was trying to give us yes, and thanks for but that's not a next 12 month horizon, that's more of a further out.

Okay.

You made an interesting reference to and I see.

And you characterize it as.

Facing a super cycle as you look.

Forward and this actually makes sense over the past two fiscal years and as fee revenues have been kind of flattish in fiscal year 19, and as she was up 28%. When you say super cycle does that imply we're getting into a look at two consecutive year of double.

Digit growth is it 'twenty fiscal year 18 and 19.

Reflective of a super cycle.

I don't know about that well I mean, clearly they remember this year is the easy compare in the prior so yeah, you can have a double digit I think and maybe.

And maybe say more of a like a high single digit growth and but the point is you have to periodically as big dips and cyclicality I think we're going to see more even the sustainable strength.

And the mere fact that the reason I'm, saying it is the customers that were really poor spenders or like really been neglecting are now coming back and are looking at significant multiyear spend profiles to upgrade the performance of their network and expand their networks and.

And also.

Do you remember I mean, two really five G by itself cannot happen without significant upgrade to the fiber so and the way we are seeing more and more almost day.

Our synergistic pull through on a lot of fiber opportunities.

Customers gearing up to five G and it's much stronger than we were even estimating as far back as two quarters ago.

And so as a result, and the seat I mean in Europe, it's very big because they have a predominantly twisted pair and DSL and as you can imagine DSL is really really and capable now to deliver the type of content and bandwidth debt even cable can deliver so in that respect to get consumer broadband.

And you really need fiber and but also fiber is the essential element prerequisite for you to deploy five G down the road. So we're seeing that strong over there and in the U S.

Now we do expect that.

Rural broadband to result, and significant investment in fiber and cable and wireless and a lot of these tier two and tier three cities and the broader community and remember there it's the mileage that drives the.

Purchases rather than the density.

Great. Thanks for all the detail. Thank you sure.

And once again in order to ask any questions that is star one and your.

Our next question comes from the line of Tim sub Michelle with Northland capital markets.

Yeah.

Hi, good afternoon.

And I wanted to follow up on the Super cycle and myself.

And.

And first a clarification on what you just said.

With regard to things looking much stronger than even two quarters ago was that a reference to fiber.

And <unk> or both.

That was really at this point and time.

Predominantly fiber and cable actually.

Fiber and cable and and you mentioned and you do have some easy compares so it looks like you know.

Very strong double digit growth as of Tomorrow March quarter, Yeah, So I mean and near term, it's double digit single digits down the road.

And when I say Super cycle, I mean, let's put it this way whenever you have a technology node transition. It's usually has a two to three quarter bump when.

And when we talk about Supersarko Youre looking really more like force to six to eight quarters.

A higher level of demand more evenly spaced maybe lumpy here and there, but it's fundamentally higher level of spend and you've seen before.

Understood and.

Would you.

And just sort of characterize that as a market growth rate and I ask because you're obviously layering and you're kind of new entry into the wireless.

Field test.

<unk>.

Theoretically that might enable.

Avi to deliver above market growth.

So from that.

Yes.

So wireless to me would be and icing on the cake and I'm talking about the mainstream NSE business, it's like fiber cable.

Things like that and that's.

The kind of base driver.

The wireless to us as a higher beta business, because we are a new camera and the market. So if we succeed it will be a much.

And incremental growth and top of it.

Got it and last question for me I mean, if you could comment on kind of what you saw with the carriers.

And the March quarter, it looks like now.

And these budgets increasing what they may have gotten an earlier start and.

In terms of order activity than.

And the normal have you seen that and have you seen that kind of continue.

Here through the calendar second quarter.

Well you know I don't know if it's normal I mean, it was for this way and throw out of the shutdown and a lot and remember what they did a hard shut down in March last year, and everybody kind of set.

Staring at their naval and the June quarter, then in the September quarter and are they started looking oh, maybe we shouldn't be doing something let's start planning the more of it was taking place and December quarter and now this year I think a lot of them have fully baked well for.

And it plans for clearly understanding what needs to be down to the network. I mean, one thing. This a work from home and shutdowns have demonstrated is the really poor quality of the consumer broadband and tried to and I.

I think we're going to continue to see quite a bit of different mix of traffic going forward, there's going to be more working from home I do believe people will come back to work, but the mix will not be the same as prior to it. So I think there is a lot of good understanding of the.

And network upgrades and REIT rebalancing that needs to take place and if you overlay on top of it the five G. It's all goes hand in hand, because you cannot have five G without robust broadband.

Broadband and fiber network and.

And you cannot really keep your customers satisfied and try to up sell them New services. If you don't have a very strong.

And offering and with the convergence of five G. I mean with things like cable and other and consumer broadband you now have potential new entries and competitors coming into the wireless space, namely cable companies and others.

So I mean, there is the increased competition is driving some of the more conservative traditional service providers to really take a deeper look at their network and provide spend some real money and maybe get out of some of those media acquisitions that we've heard about and many years.

Thanks very much.

And your last question comes from the line of meta Marshall with Morgan Stanley.

Hi, This is Eric on for me to and Thanks for taking our question maybe just a quick one on and regional development are you expecting any impact from potentially weaker India on and kind of the OSP or NSE side.

Well I mean, it's probably too early to tell them and we do indeed is a is not a very big market for us, but it is a growing market for us.

And.

I think there may be some delays, but if anything I think India will continue to the programs that we are doing and India over longer term and fiber and some of the other applications.

And our.

At this point still looking pretty good.

And obviously at can change and next month or so but at this point and time, India, It's more strategic in nature for them to implement these infrastructure upgrades and so far we see things proceeding as planned.

Got it that's helpful. And then maybe if we could just double click on some of the comments and meat around the world broadband opportunities.

And trying to understand does that do to those opportunities for you differ based on you know potentially those funds being allocated to newer alternative providers do you kind of view it as neutral regardless of where funds go or do you have a better positioning.

And maybe some of the more traditional providers.

Sorry, you're talking about the China or.

Within the U S. The rural broadband within the U S is well I mean, clearly the traditional the big ones are very much into it but also I'd say tier two tier three are getting I mean.

And people with whom we've done and the relatively limited business.

With this whole a rural broadband they're now looking at significantly upgrading their offering and in many cases many of them are looking to upgrade their fiber networks in the hope of leasing the airlines to various wireless service providers. So we are seeing.

A renewed level of investment and demand from what I would call it tier two and tier three service providers.

Got it that's helpful. Thank you.

Mhm.

And there are no further questions at this time now I'll turn it back over to belong.

Thank you Christina This concludes our earnings call for today. Thank you everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.

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Okay.

Okay.

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