Q1 2023 Viavi Solutions Inc Earnings Call
Good afternoon, and welcome to the V. Avi solutions first fiscal quarter of 2023 earnings Conference call.
Lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this session. Please press star one on your telephone keypad.
To withdraw your question Christa I want again, thank you I will now turn the call over to cigar bar.
<unk> of Investor Relations. Please go ahead.
Thank you Julie.
Come to the IV solutions first quarter fiscal year 2023 earnings call. It.
My name is out there by head up Investor Relations.
Joining me on today's call are oil linked hiking, president and CEO and Henk Derksen <unk> CFO .
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 estimation.
We encourage you to review our most recent annual report under SEC filings, particularly the risk factors described in those filings.
Forward looking statements, including guidance, we provide during this call are valid only as of today, we undertake no obligation to update these statements.
Please 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 that usefulness and limitations in today's earnings release.
The release, plus our supplemental earnings slides, which include historical financial tables are available on Yahoo, 's website, www dot investor, but we have installations dot com. Finally, we are recording today's call and we'd make that according available by 430 P. M. Pacific time. This evening on our website I would now.
Like to turn the call over to Hank Thank you Sagar Fiske.
Fiscal Q1, 2023 was a challenging quarter for P. IV after record results in 2022, we saw an anticipated deceleration in demand in the last three weeks of the quarter concentrated among service providers.
Fiscal Q1 revenue came in at $310 2 million down five 1% year over year and below our guidance range of 317.
And third do you want a million dollars.
<unk> operating profit margin at 21, 7% improved 40 basis points from last quarter.
Although down 100 basis points of last year and came in within our guidance range of 27 to 22, 1%.
EPS at <unk> 23 cents was down four 2% from both prior year and prior quarter results, but within our guidance range of 22 to 24.
The current share count of 230.
4 million shares includes the dilutive impact of the remaining convertible notes of approximately one 4 million shares.
Now moving to our reported Q1 results by business segment, starting with N. S. E N S E quarterly revenue.
At $218 9 billion declined three 9% year over year and was below our guided range of $231 million to $241 million.
As discussed earlier I missed the revenue guidance.
Adult a weakness and severance provide a segment late in the quarter.
Within N S E N E revenue of $194 $9 million decreased four 9%, while a year ago.
Incidents was down 9% year over year lab instruments across both wireless and optical combined was roughly flat S. E revenue at $24 million increased four 3% year over year.
NSE gross profit margin at 64, 7% was flat year over year within NSE and <unk> gross profit margin at 64, 4% decreased 40 basis points from last year, primarily due to declines in volume S.
7.7% year over year coming off by a year record levels.
Exceeded our guidance range of $86 million to $90 million cost profit margin at 56.7%.
<unk> hundred basis points, you have a year and includes the impact of startup costs.
<unk> Ah Resona facility.
Operating profit margin of 42.3 per cent exceeded the high end of a guide range of 39% to 41%, but there was a decrease of 180 basis points for me I go.
Now turning to the balance sheet.
Ending balance of a total cash.
And short term investments was $517.1 million.
Down 47.8 million sequentially, primarily due to acquisitions excursion translations and share repurchases to offset the dilution of our amply equity plan.
Operating cash flow for the quarter was $26.6 million, a decrease of $26.8 million compared to $53.4 million and Diego periods. The reduction was the result of timing of pale and non recurring income tax related payments. In addition.
<unk>, we invest at $14.8 million in capital expenditures during the quarter compared to $15.7 million. The prior year, primarily to build out a new Arizona production facility.
During fiscal Q1, we repurchased 1.3 million shares of common stock for $18.7 million, thereby completing transactions under the 2019 the purchase plan that expired at the end of the quarter as.
As you may recall.
<unk>, we announced that the board authorized a new common stock repurchase program for up to $300 million worth of shares.
This new plan allows us to be opportunistic as we think of our capital deployment strategy.
Now onto our guidance.
<unk> of the sudden and unexpected production and demand at the end of fiscal Q1 and continuing into October we are reducing our outlook.
We expect the fiscal second quarter of 2022 revenue to be approximately $271 million plus or minus $10 million operating <unk>.
<unk> is expected to be 14.4%, plus or minus 50 basis points and EPS to be in the range of 10 cents to 12 cents.
We expect <unk> Avenue to be approximately $195 million, plus or minus $8 million with operating profit margin of 6% plus or minus 50 basis points or.
Speed Avenue is expected to be approximately $76 million plus or minus $2 million was operating profit margin at 36% plus or minus on the basis points are tax rate is expected to be between 24% to 26% as it was.
Of jurisdictional mix, we expect our income expenses to reflect a net expense of approximately $6 million.
Account is approximately 230.4 million shares based upon current stock price levels and includes that a lot of impact of approximately 1.4 million shares of the remaining convertible notes with that.
I will turn to go over to <unk>.
Thank you hang the September quarter was a disappointing quarter per vre unexpectedly coming in below guidance, we exited physical 2022 with strong order momentum and demand visibility for the most part Q1 appear to be on track with strong backlog and how could you mind across all segments. However in the last three weeks of.
September we noticed a significant deceleration in our books shipped conversion across many major service providers in North America and Europe .
The service provider business dynamics are characterized by a heavy percentage of bookshop orders coming in and the third month of the corner.
Thus a rapid slowdown in order conversion significantly impacted our field instruments revenue.
Service provider segment aside other V I V and market segments delivered as expected.
The end of quarter bookshop dynamics that we observed is a reflection of general pullback and spent my major service providers in North America and Europe during the month of September which.
The slower spending environment to persist over the next several quarters Ah service providers work to reduce their opex in capex slowing down fiber and wireless deployment.
Looking at the quarter and a greater detail helps understand the underlying dynamics.
The revenue came in at $310 million, which is about 7 million below the lower end of our revenue guidance ranch. Despite.
Despite the lower revenue our EPS came in line with our guidance of 23 cents.
The revenue Miss was entirely driven by the lower revenue in our NFC business units.
Your spirit when you came in above our guidance, but was insufficient to offset the shortfall in N a C.
The NSC Miss was driven solely by field instruments product line or 11 production products, which includes five G wireless and 400 Giga fibre delivered as expected.
S E business unit, so moderate growth of about 4% year on year, driven by continued improvement in demand for our insurance products.
In early October via we acquired the Jackson labs, leading provider of resilient PNC technology.
<unk>, which stands for positioning navigation and timing is a rapidly growing requirement and critical infrastructure and applications, including <unk> telecom and data com and energy and transportation networks.
Acquisition is part of our strategy to continue reducing the average dependence on volatile telecom service provider spend budgets and to accelerate to be obvious growth by investing in high growth high value applications.
As we look ahead at the December quarter, we expect NSC demand environment continued to be challenging specifically.
Field instrument segment is expected to continue to see weaker demand service providers reduce and realign there spend budgets and priorities.
Furthermore, is also highly unlikely that we will see any traditional year and budget flash this time around.
The level of production segment is expected to be slightly down some of our semiconductor in Nam customers are also showing increased conservatism in capex plan.
The business is expected to continue to perform in line with our expectations.
Now turning to OSP.
<unk> business segment results were better than expected with both revenue and profitability exceeding our expectations.
The revenue were driven by stronger than expected demand for both the anti counterfeiting of <unk> products.
Looking ahead of December quarter, we expect revenue to be seasonally down primarily due to lower enter an anti counterfeiting demand as our customers work to adjust their ear and inventories. We also seeing slightly softer than expected <unk> demand.
We <unk>, we expect the macro economic headwinds and the end market demand volatility to persist into the near future.
<unk>, the longterm via IV growth to drivers and investment pieces remain intact.
Strong liquidity position combined with strong upgrading operational execution execution and financial discipline physicians as well to manage through the near term macroeconomic uncertainty and come out stronger as markets recover we remain positive on our long term growth drivers.
Such as five G wireless fibre three G sensing and with the recent acquisition.
<unk> acquisition, an entry the resilient PNT.
In conclusion, I would like to thank my view Ivy team for managing in this challenging environment and express my appreciation to our customers and shareholders for their support I will now turn the call over to soccer.
Thank you <unk>.
Quarter, <unk> will be participating at the annual Needham security networking and Communications conference.
November 15th.
Julie let us begin the question and answer session.
We ask everyone to limit discussion one question and one follow up.
10-Q at this time I would like to remind everyone in order to ask a question <unk> on your telephone keypad to try your question past, Taiwan again, yeah.
Your first question comes submitted Sidney S. I G. Please go ahead.
Hi, This is Logan anger on behalf of <unk>.
I guess for my first question I wanted to touch on your.
Second quarter guide for N S C.
Operating margin of 5% plus or minus 50 basis points I guess can you give a little bit more color on what's driving the significant downshifts. There. It seems like that is expected to be you know your lowest operating margin for that segment and.
Several years of you to supervise what color there that'd be that'd be great.
Absolutely. It's <unk>, it's a revenue story for N S E N.
Anticipated deceleration in Vermont.
Allows us to guide 195 million at the mid point and at the moment, the NSC business drops below 200 million in revenues per quarter.
See significant.
That gradation in the operating poor for performance margin. The close profit margins are typically intact.
Deleverage that hit us on the bottom line.
So volume all volume button.
Got it and then.
I guess sticking to N S. C can you.
Talk a little bit more about what you were expecting next quarter, especially from the service providers you mentioned that.
Slowing demand do you see any risk that the slowing field.
Field instrument demand could lead into slower.
Lapin production at some point in the future if.
Especially after macro headwinds surrogate worse.
So when we saw the sudden deceleration of books ship conversion at the end of.
September our initial thought was you know the thing is the customers have not cancelled.
The discussion was all about pushing it out and spreading it off several of course, so our initial photos like well, let's see how the October shaped shop. If thing it was really more of the end of quote a cash management or whatever well. The October clearly show that many major service providers are slowing down there are plans.
And spreading the revenue over multiple quarters, so with the weaker demand we felt it's prudent to lower the expectations clearly if the market bounces back and you know some of them decide to accelerate it will be an upside, but we decided to take a conservative position and reset.
Our internal planning as well as the expectations on the field instruments in particular with service providers.
When we talk about 11 production demand continues to be strong, but you know I think it's only prudent thing to do because many of the service provider names and including semiconductor companies are seeing their and market demand swung down <unk>.
Looking at the history in the past when that happens you know you're also seeing a bit more conservatism on R&D capex not as much as not as volatile as the service providers, but it's probably prudent to say that there's gonna be some pull back in a bit slower and burn rate and that's more concern.
Which expand environment. So that's why you know, we're not really taking our 11 production down that much but I think it's prudent to take it down in the mid single digits as the outlook.
Your next question comes from Alex Henderson, some need <unk>. Please go ahead.
Thanks.
So obviously.
Giving some pretty.
<unk>.
Mmm, Yeah, I guess the question is.
I think you've implied it's gonna persist for a couple of quarters beyond that so.
As we look out into the back half of your fiscal year should we be assuming that the fourth quarters.
Good Netflix to to be thinking about it as a guide to how will you be looking at three two in poetry as well.
Sure. So I'll ask I mean, clearly you know nobody has a crystal ball, but the one thing I as you well know me me and Hank our view is we don't want to be catching.
Catching the falling knife and you know do a little decrease and then more decrease and so on and so forth I think we decided looking in the past history and I'm proud of actually looking at the first COVID-19 quarter is a good indicator will literally saw the spanned freeze after the what was the 14th of March of 2020.
And then the next quarter was down and then another and then it's after takes about two three quarters for service providers to find their new footing and then they start spending I mean in the end. It takes it's really driven more like how long it takes.
The service provider players to.
Reach the new equilibrium because reality is they still need all these instruments they still need all this deployment.
But my experience has been it's never a quarter I mean, it's like they move like an aircraft carrier, taking long time to pivot and find the new thing. The first thing that you know from what we've seen at the end of September the froze all the travel and they really hit on any whatever the P O as in Opex, we're seeing.
[noise] out there. Unfortunately, a lot of our revenue is treated as an <unk> maintenance opex. So we got hit in the second quarter. It's usually comes to realignment of their capex and bigger span and then they announced the lay offs and what have you in the third quarter. They know reassess where they are and start.
Releasing funds and we usually Bennett are the beneficiary on the opposite side of the we are the early beneficiary when the app expand becomes a bit looser. So we think effectively taking a three quarter conservative you kind of this as being the kind of first quarter uhm stabilizing and the March quarter.
<unk> and.
Looking stable too may be slightly a recovery in the June quarter. So that's kind of our scenario under which we are operating but we're seeing next year is gonna be a slower year with a lot of lay offs that service providers as they tried to lower their cost exposure and in a way we expected it next year.
To be slower Unfortunately, the slowdown came in about 14 weeks sooner when we talk to our analysts day, we guided flattish because we expected. The first half continued to be strong in the second half to be weaker than net net thing will be similar to the prior I think literally right after the analysts Dave.
We so you know the very quick.
Mm mm degeneration of.
Demand profile and the slowdown came in about 14 weeks sooner than we thought.
So based on the December quarter normally being seasonally as strong as one of your strongest quarters of the year.
And.
The guide of 10 to 12 cents that sounds like you're talking about something in the 60 65 cent range for 23, and just kind of the the ballpark, but if you looked out beyond that to 24. It sounds like you you think of recovery will happen, but probably in the calendar 24 not in the back.
Calendar 23 is that right.
Process.
Well, so that really depends how deep you think the recession will be and the <unk>. The next year brings I mean, clearly if you think it's gonna be a quicker recovery then clearly the bounce back will be justice.
Much quicker if we think next year is really gonna be a malaise or kind of dad's calendar year, then it's going to be more towards the lower end, but you know we view it as an opportunity for us to actually further improve the structural.
Structural positioning of the Ivy so when the recovery desk come in the operating leverage will be that much cheaper and will recover much stronger.
Your next question <unk> capital markets. Please go ahead.
Hi, good afternoon.
A couple of questions on the nature of the slowdown you're seeing with the carriers I guess first would be.
Are you seeing similar trends across fiber and wireless on the one hand.
And then can you comment on what you're seeing out of the cable operators.
A phone.
So you know.
So it's interesting wise the cable operators, we did not expect much in the second half, but we do see actually more dynamic.
On the positive side behavior, among cable operators and they're pretty much taking everything they plan to take and I think cable we find cable operators to be a.
A bit less neurotic in terms of their quarter to quarter span. They have their plan and they just executed I think the when it comes to the telecom service provider, it's largely today, it's wireless and fiber we don't do much DSL anymore, and it's really just how fast they're they're not canceling the programs.
They are moving forward, but they're slowing down the pace because in some cases, we actually doing field deployment. So we are physically going into they are infrastructure.
Uhm facilities, and installing racks of equipment and would they come back as like Hey, we want to slow down the pace and we still need all the equipment, but could you spread over multiple quarters and can you also increase my payment terms. So it's clearly.
I think it the way it is if you're you're not changing your plans by what you're doing is you're spreading it over more quarters, thereby reducing your quarterly cashback. So that's what we are seeing I mean, I'm a remarkably we haven't seen any order cancellations, it's really been all around.
Pushing it out spreading it over multiple quarters and discussing the payment terms. So that's why.
And nobody's really canceling their programs at this time that we can see.
Got cable on the <unk>.
<unk>, so far it's been much more stable.
Okay, great and and I guess since you're focused on on field instruments for the weakness.
Giving you a relatively recent entry on the wireless side I assume that's more on the fiber side.
And you can comment on that in the context, maybe with this next question which is about.
You know how broad based.
That sounds like a pretty broad based in terms of what you are seeing you know a T and T as decline in queue for and kind.
Kind of finishing their whole C being billed I mean, that's pretty well established anything that's what's been driving a lot of this stuff it sounds like you're.
You are seeing more than that but how important is a T and T. In this whole equation for Ya.
Well I don't want.
Changes, but clearly when I say major North American and European you can pretty much assume who who we're talking about right, but it's not just AT&T sexually broader including them as well as the others and Uhm Uhm and it's you know in reality is when they finished building out this time comes into turn up.
The services and that's usually when a lot of our equipment comes in and what we are seeing is the they're slowing down some of that as well. So you know.
I think once they realign who knows they may come back and accelerate equipment purchases, but generally whenever a CFO task you know reduce the opex at one of the easiest things to do in any companies shut down the travel and entertainment and any kind of any <unk>.
Expenses that are in your Opex and unfortunately field instruments for the purposes of service providers are in their opex budget not in their capex budget. So the first thing they whack is any kind of.
Opex related purchases and then then they go and adjust their capital Ah spent but actually the good news is when they reduce their capex.
Usually they are opex spans on instruments goes up because you do more with what you've got rather than buying new equipment. So.
So it's a bit counter cyclical in that respect.
And we saw the same thing happened during COVID-19 and that in prior cycles.
Your next question comes from Angela <unk> J P. Morgan. Please go ahead.
Hi, good afternoon Angela.
Just wanted to dig enterprising here I know probably a few quarters ago. You mentioned that you have taken pricing up sort of a head of all these costs N. Now that somebody's input costs are coming down and you are seeing demand slow down are you seeing any pressure on price thing, especially from start up your large tier one providers and then I have a follow up.
So the good news is there is no pressure on pricing, it's really ultimately demand.
On the positive side, we no longer doing any expedite the I think pretty much the components are becoming readily available in the situation continues to improve as we speak and nothing this quarter I think we're not really seeing we're not really chasing Annie.
Components in.
In any case, if anything we are seeing some of the semiconductor device pricing is starting to come down. So in that respect if you notice on a much lower revenue are gross margin is holding really well and that actually is more positive than that because what's in the gross margin is the whole operating costs.
They are operations overhead is built in there so on the lower volume if your gross margin is holding up pretty well on the lower volume. It actually tells you. The when you get back to the higher volume your margins are going to expand so in that respect I think our pricing is holding very well and it's really comes down.
One two the velocity at which customers who want to take up equipment. I don't think they are really looking for it's not really I would say a competitive price environment.
Got it so I guess just to follow up quickly on that personal planners, no components that you're saying or even like FPGA or any other certain alright special.
Special components are you, saying pressure.
I think even fpga's are saying that we are now at balance I think it said equilibrium with them in the lead times are coming down very rapidly and in some cases, you know what used to be like three or four months ago. I was given to you as an 18 month lead time, you know have spot.
Market availability, Sir and some components, it's been a very dramatic turnaround.
I mean, there's I mean pjs are still with with now it's just a reasonable Ah.
Standard lead time, I wouldn't say they are available on a stop spot market as easily but that's kind of the lost I think element that's gonna fall.
<unk> in place, but there's been a rapid.
Uhm improvement in lead times and availability.
Your next question comes some <unk> some rosenblatt Securities. Please go ahead.
Oh, great. Thanks.
Touched on some of this before but I just I just want to ask maybe another way which is.
It sounds like you're saying that you're early in early economics.
We are here and that you know.
So so so do you think then that the.
That the.
<unk> you know the lab tests customers will slow down further in the future because you're kind of an early indicated or is that is that a right way to look at it.
Well, you know I'd say the field instruments because it is so easily you know, it's it's an opex and that's that's usually where we see the first thing now when it comes to R&D companies do not sacrifice their orange D as readily as.
Service providers sacrifice deliveries to their field technicians.
So generally R&D span stays more resilient, but I don't think it but I do think you know the you.
You may see like 5% pullback or something like that or maybe they will push out the orders by a quarter. So I I think the the nice thing about lab equipment, it's not as volatile as feel instruments, but it also does not bounce back as quickly as field instrument. So filled instruments you get whacked.
To really hard and really fast and it just as quickly you'll see the reversal of fortune.
The lab instruments I think it's more resilient it comes down last but it also probably may take a couple of quarters longer to recover.
Okay sure.
Okay. So so so so as you mentioned, all like and and Heck you guys did the analyst day and give it a three year outlook and then then.
Then things started to change so obviously the beginning of this three or out with is is different. So so is the three R outlook the same or do we have to reevaluate.
That.
So we will continue to be committed to the three your outlook we early in the cycle.
And we have to better understand how demand plays out here over the next couple of quarters, but especially in terms of profitability and casual generation. Yeah. We're committed to the plan and we forgot about it and markets. It's just that we have to work flu.
The current softness so so give us one or two quarters see where we are before we give you an update them and you know as we talked about it we said we kind of got it. The first this was the first year of a three year plan and we said, it's gonna be a roughly flat because we figured there is gonna be recession.
We we figured hey first hassle.
Meeting in Boston the profile looked really good in outlook for the second quarter was quite good and but we figured there'll be a second half will be weaker and I think it really got pulled in by about 14 weeks. So I would say this fiscal year will be probably a bit down from the prior.
<unk>, but you know when you talk about three years.
<unk> assumed by then you'll have a recovery and the market fundamentals and the you know the trends are still the same uhm as the worst so I think us economy recovers or demand recovers I think when we think about three years out.
It's too early to start downgrading right.
He can if you'd like to ask a question <unk> on your telephone keypad.
Your next question comes Senator Marshalls from Morgan Stanley . Please go ahead.
Hi, This is Mary Linux on for a minute Marshall.
I had a question on where you're seeing the weakness in the O S. P segment and your guidance, what's their pull forward of the three decent thing or our currency volumes coming down in your assumptions.
Well I think they're generally will be C Z in the December quarter anti counterfeiting slows down so that's really kind of the biggest cyclical downturn I'd say.
<unk> sensing September quarter was pretty strong Ah last year are major customer pulled in a lot more and then they realize that the rest of the industry can deliver so we had a much weaker December quarter. This time around I think the September demand roughly was in line with the market.
Demand and I think December I demand to us.
We have a rolling forecast, we did see some slight reduction in the forecast Ah, saying listening to Qualcomm and some of the others. It kind of makes sense given the potentially more conservative outlook for a number of foreign sales, but it's nothing like it was last year. So it's still pretty good maybe.
A little bit weaker than we thought but it's I think December quarters, <unk> pullback is primarily driven more by traditional cyclical anti counterfeiting adjustments.
Julia that's the last question.
And we have one more question coming again <unk> Securitas. Please go ahead.
Alright, Yeah, just sir thanks, just a couple of questions on the numbers on the model I want to I'm trying to get it split out more between Gore O S. T and three <unk>. So I guess I'll ask was core O S. P.
In the mid sixties or or high sixties, where does that come in.
Mid mid sixties in the first quarter.
Okay, Great and and then finally with this increase in the tax rate. We're looking at I assume that's just cause there's some sort of fixed taxes or international taxes N N. The tax retire now because the earnings are lower so is that the case and then how long do you think will have this you know 25.
Versus say 17 that we're looking at before.
Yeah, I think a specific to the score does exactly how you described it is geographical jurisdiction will makes in.
<unk>, where we are paying tax with generating in queue to expect to generate higher income and we think that will will normalize.
During the rest of the year.
And there are no further question at this time I will tend to call back or 40 cigar for closing remarks.
Thank you Julie.
This concludes our earnings call for today, Thank you everyone.
Please wait the conference will begin shortly [music].