Q3 2022 Viavi Solutions Inc Earnings Call
Good afternoon, and thank you for standing by welcome to the V. I V fiscal third quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise should you require any assistance. Please press star zero on your telephone keypad and an operator will assist you.
Now I'll turn the conference over to head of Investor Relations. Mr. Cigar Bar. Please go ahead.
Thank you Sarah.
Welcome to the Abbvie solutions third quarter fiscal year 'twenty earnings call.
My name is saga by head up Investor Relations and corporate SG&A.
Joining me on today's call are Alex hiking, president and CEO and Henk.
Doug Cynthia.
Please note. This call will include forward looking statements about the company's financial performance. These.
These statements are subject to risks and uncertainties that could cause actual results to differ materially.
Cause me pause.
Our current expectations and estimations.
I encourage you to review our most recent annual report and SEC filings, particularly the risk factors described in those filings.
The forward looking statements, including guidance, we provide during this call are valid.
Today.
We undertake no obligation to update these statements.
Please also note that unless we state otherwise all of it does except revenue are non-GAAP .
You can find that 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 include historical financial tables.
On the RV subset.
Finally, we are recording today's call and we'll make that acquiring available by 430 P. M Pacific time. This evening on how that site.
I'd now like to turn the call window Hank.
Thank you Sagar Sabra has been with the Avi for more than six years as head of corporate financial planning and analysis and also the additional role as head of Investor Relations.
Recently left the firm to pursue a new opportunity after having been with via IV, formerly JDSU for more than eight years, and we wish him great success in his future endeavors now onto Villa Avi QC results fiscal Q3 is a record for <unk> March quarter for both Avenue.
Our non-GAAP profitability.
Third quarter revenue came in at $315 $5 million up 4% year over year exceeding our guidance range of the other $1 million to $315 million close.
Primarily driven by continued solid performance in our NSE business segment, and improving sequential performance in our OSP segment, albeit down year over year operating profit margin at 21, 5% came in at the high end of our guidance range of 25 to <unk>.
91, 5%, improving 130 basis points year over year EPS. That's 22 cents increased 22, 2% from 18 cents in the prior year a combination of strong operating performance.
<unk> tax rate and lower share count the share count of $236 8 million shares as lower than expected because of additional redemption of convertible notes.
It still includes the dilutive impact of the remaining convertible notes of approximately four 9 million shares.
Now moving to our reported Q2 results by business segment, starting with NFC.
And this 11, new it's $238 million up nine 3% year over year came in at the low end of our guided range of $229 million to $239 million as a result of COVID-19 related shutdowns and Sunshine in China late in the quarter.
NFC and he revenue increased 7% when we even go to $204 $3 million, reflecting continued strength in our fiber wireless in lab and production products.
S revenue at $26 $5 million increased 35% year over year, driven by strength in our assurance and data center products.
<unk> gross profit margin at 64, 4% increased 20 basis points year over year.
Within NSE and eat gross profit margin at 63, 8% decreased 70 basis points from last year, primarily a result of expedited costs as we proactively secure components to mitigate supply chain constraints.
S E gross profit margin at 69, 1% increased 800 basis points year over year, reflecting both higher revenue and favorable product mix.
And this es operating profit margin at 14, 9% increased 500 basis points year over year, a result of operating leverage on higher revenue and disciplined Opex management.
Now turning to OSP third quarter revenue at $84 $7 million was down eight 1% from a year ago and improved sequentially by 20%.
Revenue exceeded the guidance range of $72 million to $76 million due to better than expected demand for anti counterfeiting products during the quarter.
Gross profit margin at 55, 5% decreased five to 10 basis points year over year due to lower revenue volume and higher raw material costs.
Operating profit margin at 39, 3% was near the high end of our guidance range of 37, 5% to 39, 5%.
You're down 460 basis points year over year, a result of the aforementioned offset by disciplined Opex management.
Now turning to the balance sheet, the ending balance of our total cash and short term investments was $596 million down $82 1 million compared to a year ago.
Italy due to additional retirements of convertible notes as well as investments in organic initiatives, including increased inventory levels, allowing us to meet and exceed customer demand requirements and environment of supply chain challenges.
Operating cash flow for the quarter was $28 $9 million decrease of $19 2 million compared to $48 1 million in the year ago period, the reduction as a result of timing of payroll and inventory related to payables.
<unk>, we invested $19 3 million in capital expenditures during the quarter compared to $8 $2 million in the prior year as we continue to build out the new Arizona production facility.
As you May recall, we had targeted the reduction of our 2023 and 2024 outstanding convertible notes to continuing to improve our capital structure in the first half 2022, we redeemed approximately $321 million of these notes from the original 685.
In principal value.
Leading to a maintained outstanding balance at the end of the first half of 2022 of $364 million or 53% of original principal value and this quarter, we completed transactions to extinguish an additional $50 million of principal value of convertible notes.
At a total acquisition costs of $65 $2 million, bringing the principal value of our combined convertible notes outstanding to $314 4 million at the end of the third quarter or 46% of the original principal value.
During fiscal Q3, we repurchased four 7 million shares of our common stock for $78 $7 million. This includes $4 2 million shares in the amount of $76 million repurchased under the 2021 repurchase plan.
This completes the 2021 bench plan, resulting in a total repurchase of 11 7 million shares for a total amount of $190 million.
The balance of <unk> 5 million shares during the quarter, we repurchased under the 2019 share repurchase plan.
The remaining authorization under this plan is $96 million at the end of the quarter. We plan to continue to improve our capital structure and provide financial flexibility to allow us to execute our growth objectives.
Now onto our guidance, we expect the fiscal fourth quarter 2022 revenue to be approximately $322 million plus or minus 7 million operating profit margin is expected to be 21, 5% plus or minus 50 basis points and EPS to be in the room.
Range of 22.
To <unk> 24 per share.
We expect NSE revenue to be approximately $245 million, plus or minus $5 million with operating profit margin at 16% plus or minus 50 basis points.
<unk> revenue is expected to be approximately $77 million plus or minus $2 million with.
With operating profit margin at 39% plus or minus 50 basis points.
Our tax rate is expected to be between 16 and 17%.
We expect other income and expenses to reflect a net expense of approximately $6 million.
Share count is approximately $234 5 million shares based upon current stock price levels and includes the dilutive impact of approximately $3 5 million of the remaining convertible notes with that I will turn the call over to Alec.
Thank you Henk the second half of fiscal 2022 is off to a good start.
During fiscal Q3, we have achieved the new historical highs in revenue and non-GAAP profitability I am pleased with both NSE and OSP performance and delivering strong results despite supply chain challenges and COVID-19 related shutdowns in China.
The <unk> segment growth was driven by fiber and wireless.
Fiber grew double digit percentages from the same period of last year as North American service providers upgrade and expand their networks with fiber.
Optical lab and production business also saw strong customer demand driven by 400 gig and the initial deployment deployment of 800 gig.
Wireless demand continues to be strong up middle.
Mid single digit percentage from a year ago levels as customer mix shifts from <unk> to Oran deployment.
Demand for cable products moderated cyclically lower.
The FTE business segment had a robust Q3 with revenues growing 30% year on year, we saw strong growth in assurance solutions and data center products, we expect <unk> to benefit from the anticipated strong market demand for <unk> and growth in network traffic.
We continue to execute successfully despite supply chain shortages.
Our ability to secure critical components build inventory and with customer demands has been a great differentiator and enabled us to grow our revenue and market share.
Now turning to OSP.
The OSP business segment delivered better than expected revenue and profitability with revenue exceeding our guidance range.
Although our Q3 anti counterfeiting product revenue decreased year on year, our central banks globally moderated their demand from Covid high stimulus.
Our spending it was up 20% quarter on quarter as three D sensing in anti counterfeiting demand recovered from the December quarter.
Looking ahead, we expect Q4 revenue to be up year on year benefiting from stronger anti counterfeiting and <unk> sensing demand.
Fiscal 2022 is expected to be another record year for revenue and profitability at VF.
Fiscal 'twenty two is also the last year of our three year guidance provided during the analyst day in September 2019.
We are proud to have exceeded our three year targets, despite the global pandemic and challenges in the supply chain.
As we plan the next phase of our growth we will be hosting an analyst day in Boston on September 13th 2022 to outline our strategy and goals for the next three year cycle.
Please save the date and we hope to see you. There we will continue to provide more information.
Regarding the event in the coming months.
In conclusion, I would like to thank by the avid team for another quarter of strong performance and express my appreciation to our supply chain partners customers and our shareholders for their support.
I'll now turn the call over to saga.
Sarah let's begin the question and answer session.
We ask everyone to limit this.
The one question and one follow up.
Please go ahead. Thank you.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad.
One moment please.
Your first question comes from the line of Alex Henderson with Needham. Please go ahead.
Yes.
Great. Thanks.
So first of all congratulations good quarter.
You made a comment a fairly late in the quarter.
Awesome pressures on supply chains out of China.
And it seems pretty clear that China has gotten worse in April .
Is there.
Additional pressures are evidenced in <unk> and can you quantify.
The magnitude of the impacts for the two quarters.
And while we're on the subject did the change in conditions in.
Europe as a result of the war in Russia have any impact on demand in EMEA and do you have any operational exposure to Russia Ukraine.
Sure.
Thank you Alex.
So in China.
I would say, it's kind of was one of a one time impact that kind of.
Permanently shifted some supply because what they've done is they increase the amount of days in quarantine your incoming products and youre outgrowing products have to be.
Once you've done that adjustment and it roughly cost us I'd say, probably about $8 million in revenue shipment, which all kind of Oh, it's coming in the June quarter. That's part of the reason the June quarter is going to be extremely strong.
And I think once that's factored in it's now that new lagging lead time is built and so now the product is flowing accordingly, and it was really just the way.
Just put additional requirements for incoming components to set some few days in inventory.
Quarantine in an outgoing components has to go in quarantine. So that's now all fully factored in our guidance.
For the June quarter Us too.
The situation in Europe .
We are we overall I think we have about maybe $8 million to $10 million of revenue in that region.
And that's all now been factored in and we have some.
Salespeople.
And.
In the region that we have been working to.
Either too.
To move ore.
Let go so that's where we are.
So just to be clear $8 million to $10 million annually or quarterly or annually annual annual held annually right right and so that's been backed out of the forecast for the euro.
<unk> at this point in orders received it might've been laid it out.
No no receivable exposure.
And the last question that was in that.
Opening salvo was has there been a change in demand in.
In EMEA as a result of the war, causing.
Either cancellations longer close time I did notice your European business was a little bit weaker than we had expected.
Any change in demand conditions.
No I think.
There is no impact I mean.
In the quarter, it's a few hundred thousand dollars. So it didn't really move the needle one way or the other.
But in generally in Western Europe .
Okay. Thank you.
Sure. Thanks, Alex.
Yeah.
Thank you. Your next question comes from the line of Tim <unk> with Northland Capital markets. Please go ahead.
Okay.
Hi, good afternoon, and congrats on the good results.
I wanted to follow up on a comment you made earlier about double digit growth in our fiber in the quarter, which was pretty strong in.
And kind of lever off some commentary from very large fiber suppliers, such as Corning talking about expectations, even at their scale for double digit growth for.
Many years, maybe it would be enhanced by some of these.
Infrastructure stimulus projects.
I mean, do you think that type of double digit growth in fiber is sustainable over a period of time or is there anything in particular driving that this quarter and I have a follow up well I mean.
I don't think anything sustainable at 20%.
Both I think you got to look at the.
March quarter, a year ago.
That's where a lot of things were just starting to recover. So you have obviously easier compare although our march quarter was already quite good for us.
Last year as well.
So.
I would say what's been driving it is several major players are aggressively ramping up their fiber.
Fiber.
<unk> deployed it had been deploying fiber for many years now they're turning it on and they are turning on new customers and that requires significant spend.
On field instrumentation.
And outfitting, our that tax with all the equipment and.
We have pretty much one significant chunk of that business and.
Also in some ways, thanks to our amazing job of our supply chain.
Our organization, we're able to deliver the product where none of our competitors can't even I can't even source the components. So.
That's why I said in my comments the prowess of our supply chain management has really been instrumental in not only benefiting from this increased spend in fiber, but also capturing share.
For the remaining business because a lot of.
A major players that would give you let's say 70, 80% then they would have a second source for 20, 30%.
And if second source cannot deliver then you take the entire 100% so that clearly has been an additional.
Icing on the cake.
Got it and I wouldn't hold you to 20 I was just trying to get you to 10, there but.
Fair enough well I think.
Higher single digit growth is obviously for the foreseeable future.
It's something we can definitely strive for.
Okay, I'll take that and the follow up is on the wireless side, where you mentioned mid single digit growth.
I wonder if.
If you've seen a material contribution on the wireless field instrumentation side.
And to the extent, you really haven't yet and Thats more second half cannot take wireless growth to the same rate.
As fiber or maybe even greater for a while at least.
Well I think the I don't think wireless will ever be as biggest fiber because I mean fiber is just fundamentally a much bigger market.
And if you look at think about number of fiber tax ultimately will they need in this country, it's in tens of thousands whereas the wireless.
Industries, obviously much.
More compact theory have bought maybe several thousand right.
<unk>.
We feel very good about our position in the wireless field and we've upgraded our <unk>.
Gulf War entering this market now to be more like a third of the market instead of a quarter and we are already seeing orders coming in and.
Starting to ramp and I do believe second half will be a much stronger.
In terms of deployment.
So.
So when I talk about the wireless it's traditional.
<unk> is taking their deliveries, but we're also now seeing.
More and more orders coming in from a new entries as well as service providers as they deploying Oran and we feel particularly good about our position in the Oran and it's.
Kind of in ways.
If you think about Oran is in between the Nam equipment and the field equipment, we actually having strong position in both it really makes us by far the best choice for Oran deployment in the industry and we feel.
Us.
Things really pick up pace Oran could become a major growth driver for the wireless business, where traditionally it was more driven by <unk> demand and with the <unk>.
Unbundling, our kind of opening up too.
Architecture to $5 <unk> to other players.
It's increasing the number of customers for us it is increasing the number of test points that need to be tested and it also increases number of applications not only being a service provider, but also increasingly private networks. So in that respect I think the market expansion for the infrastructure test.
With the emergence of the open around network is is actually expanding our addressable market significantly on the infrastructure side and of course as that gets bigger it actually creates even more flywheel effect on our field instruments for the wireless instruments.
Okay.
Got it thanks very much I appreciate it.
Okay.
Your next question comes from the line of stomach Chatterji of J P. Morgan. Please go ahead.
Hi, Thanks for taking my questions.
Yes.
One if I can take you back to your comments about the Douglas issued 2019 analyst day.
And when I look back I think at that point, you had issued a growth target of two to five bush geek or revenue <unk>.
Obviously, you feel good.
Through the three yields didn't plan probably track as you expected because we started with the tough fewer initially off for that I missed it but for the last two years, you've been Oh last.
Last fiscal year and this year you're on.
Correct at the high end or be higher.
High end of your range that you had guided to and so I'm curious like how to think how you're thinking about sustainability of the growth beyond sort of the Dubai ports into high high above the high end of that range that you've issued in the past.
Do you are you thinking about it the current growth rates being higher primarily in account of pent up demand or do you see some of the drivers. That's helping you delivered this growth being more sustainable as you sort of think about the next two to three years and then have a follow up please.
So well.
I think about it.
Clearly, we did not foresee the.
The global pandemic, we thought there may be a recession or so and we figured we'll handedly blow away through our AR.
Gross so we have plenty of buffer built in and obviously it proved to be a heck of a lot tougher, but we still exceeded it on the top line and significantly exceeded on the bottom line through the operating leverage right. So.
And.
In terms of.
What we're seeing is the market is actually has improved and the dynamics before it was very much driven by DSL and cable on the field instruments.
And today, we fundamentally have a much more diverse and more dynamic I would say higher growth environment.
Our fiber is becoming a major play in the field instrumentation and wireless with our new wireless stores, it's opening up new markets and.
Some of the new segments like Oran, and with a five <unk> and our revamped FC business, we actually think we're going to be in the higher growth segments than we were while we were restructuring the business kind of from the Jds unit phase days two of the modern reality, so we actually.
I don't want to.
Don't want anybody still my Thunder for the analyst day, but we do feel that the next three years, we are much more optimistic about the next three years than we were about the last three years because the first three years was really stabilize the patient.
Three of the last three years was get the patient into fighting shape and start.
Kicking back in the market and I think going forward. It's all about full speed ahead. So we feel that the dynamics of our end markets. Our diversity of our end markets and the new applications that we're playing in are actually going to be a more dynamic environment in the coming three years than what we've seen in the last three years.
Got it got it.
For my follow up.
On the three D sensing piece of the business you mentioned, you've seen sort of demand pick up from the low point in December which is.
Contrary to the seasonality on the unit front from your primary customer there and if I remember correctly you have a lead time of about two to three weeks, which is you generally have been pretty closely aligned to unit demand that the customer sees.
It does suggest that.
The cost of what might be changing sort of their buying five doing in terms of building a bit more inventory just curious to get any more color on that front and does that sort of impact and the timing of the benefit that you see at the ramp that you see into the next product cycle.
Sure.
Remember December was a very unusual quarter in that respect and our customer actually talked at length about it. The reality is they werent able to get all the chipset. So their demand was artificially constrained and since we have elite short lead time, when they knew they could not get all the product.
They needed they reduced their number of builds and it adversely impacted us within the quarter.
The actual demand.
Our situation improved in the March quarter, they've built more units.
Obviously placed more orders with us and I do see some level of Alere linearization.
In the March and June quarter, the builds are a little bit higher because I think.
Traditionally there was billed a lot in the second half of the calendar year and pair back in the first half and kind of do the June quarter as the transition to the next.
Product here, I think given the shortages and supply constraints.
In the December and September quarters.
They are now making up some of the volume in the first half of the calendar year, So, it's giving us a bit of a stronger demand and I think.
I don't I don't claim to know if it changes their pattern or not but the reality is we can respond to the diamond.
In that respect I think we are the least of their worry in terms of supply chain.
Okay no. Thank you thanks for the color I'll cede the floor. Thank you.
Sure.
Thank you. Your next question comes from the line of meta Marshall with Morgan Stanley . Please go ahead.
Hey, this is <unk> on for me to thank you for the question.
Two quick questions. One are you seeing any disruption in demand from supply chain complications elsewhere in the insulation chain for example, inability to find labor or availability of equipment are you seeing those sort of things on different demand.
So well I think the I wouldnt say by the inability to find labor I think the there's two types of supply chain challenges. One is especially if you are exposed to China production.
As you probably are well aware it with a zero COVID-19 policy.
They have implemented a number of additional controls that increases the quarantine on incoming components and outgoing products. So as a result, you now have to factor in a longer lead time of getting parts into China getting product manufactured and shipped out of China, So, but thats the kind of one time.
And it happened really late and I'd say in the third quarter and now in our March quarter.
The second challenge is really the steel components and it's a very narrow set of components I'd say by and large we don't have an issue anymore with the semiconductor devices are passive components, but the high performance analog mixed signal an FPGA.
Continue to be.
Still under tight supply, but we do think we're going to see a situation improving by summer.
Got it okay. Thank you and then just one quick follow up you sort of mentioned this earlier in the call that Youre seeing.
Share gains and I. Just was wondering are there any particular end markets that you're seeing share gains right now given sort of the supply chain challenges and maybe you being able to mitigate them a little bit better.
Got you.
Well I'd say.
In the NFC across the board.
We are seeing.
Share gains some of them are very tactical like for example in our field instruments, where you have multiple sources a lot of our competitors just can't deliver the product that cannot get the parts they need to build their product and.
The ability of your supply chain to execute versus your competitor.
Basically customers give you a 100% of the business, which is a big deal because once you have 100% you got it for the next whole product cycle with replacement parts with the <unk>.
Support so on and so forth. So that's where you pick up I would say tactically market share in.
In the field and then on the advanced technology space like our wireless business.
Our 800 gig in Salon.
Having our product and that they are bleeding.
Bleeding edge of our performance with the latest standards and far outpacing the competition, we are winning market share by basically.
Standing hourly technological leadership over our competitors.
Got it thank you helpful.
There are no further questions at this time, Mr. <unk> I'll turn the call back over to you.
Thank you Sarah.
This concludes our earnings call for today, Thank you everyone.
Thank you you may now disconnect your lines.
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