Q2 2023 Viavi Solutions Inc Earnings Call

Hello, and thank you for standing by my name is Regina and I will be your conference operator today at this time I would like to welcome everyone to the VIP solutions fiscal second quarter 2023 earnings conference call. All 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 would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question Press Star One again I would now like to turn the conference over to Sabra Bar head of Investor Relations. Please go ahead.

Thank you Regina.

Welcome to be IV solutions second quarter fiscal year 2023 earnings call.

My name is saga hereby I head up Investor relations for the IV solutions.

Joining me on today's call.

Blake I can president and CEO and Henk Derksen <unk> 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.

Our current expectations and destination.

We encourage you to review our most recent annual report under SEC filings, particularly the risk factors described in those filings.

The forward looking statements, including guidance, we provide during this call are valid only as of today.

<unk>.

We undertake no obligation to update these statements.

Please also note that unless we state the otherwise all results except revenue are non-GAAP .

Really confide these non-GAAP results to our preliminary GAAP financials and discuss that you spend less on limitation in today's earnings release.

The release, plus our supplemental earnings slides, which include historical financial tables.

Available on behalf of these upsides.

That'd be about Scott and thus far we.

We have installations dot com.

Finally, we are recording today's call and we'll make that according available by 430 P. M Pacific time this evening on our website.

I would now like to turn the call, but what do you think.

Thank you Sagar fiscal Q2, 2020 free slightly exceeded our lowered expectations, mainly as a result of anticipated headwinds in service provider spending.

Fiscal Q2 revenue came in at $284 $5 million down nine 6% year over year and above our guidance range of $261 million to $281 million.

So you're obviously operating profit margin of 16, 2% decreased 550 basis points from last quarter, and 710 basis points from prior year, although above our guidance range of 13, 9% to 14, 9%.

P. S. At 14 cents per share was down 41, 7% from the prior year and 39, 1% from the prior quarter results and exceeded the guidance range of 10 to 12 cents per share.

Share count was $227 1 million during the quarter down from $2.

$42 3 million shares in the prior year.

We continue to improve the quality of the balance sheet.

Cash flow from operations was $46 2 million versus $22 2 million in the prior year.

And year to date cash flow from operations continues to be strong at $72 8 million compared to $75 6 million last year during the first half.

Now moving to our reported Q2 results by business segment, starting with NSE.

S E quarterly revenue was impacted by lower service provider spent 207 $1 million and declined 15, 2% year over year slightly ahead of our guidance range of 187% to $203 million.

Although at lower levels compared to prior year and as the quarter progressed demand patents stabilized within NSE.

Any revenue of 179 7 million declined 16, 2% year over year, driven by the weakness in service provider spending.

S revenue at $27 $4 million decreased eight 1% from last year.

And as he goes public watching at 64, 4% decreased 90 basis points year over year.

Within N S E N equals profit margin at 64, 1% decreased 30 basis points from the prior year.

Italy due to declining volume.

<unk> profit margin at 66, 8% decreased 500 basis points from last year, primarily due to product mix.

NSE gross profit margin.

Operating profit margin at eight 9% exceeded our guidance range of five 5% to six 5%, albeit down 980 basis points year over year.

Now turning to OSP.

Second quarter revenue at $77 $4 million was up nine 6% year over year.

Revenue was near the high end of our guidance range of 74 million to $78 million.

Profit margin at 52, 3% decreased 90 basis points from the prior year, mainly a result of startup costs in our New Zealand facility.

Operating profit margin at 35, 5% plus within our guidance range of 35% to 37% down 70 basis points from a year ago.

On February 1st 2023, the company approved a restructuring and workforce reduction plan to improve operational efficiencies and better align the company's workforce.

Business needs strategic opportunities.

The company expects approximately 5% of its global workforce to be affected and estimates it will incur charges of approximately $15 million in connection with this plan.

The company anticipates the plan to be substantially complete by the end of fiscal 2020. Please.

Now turning to the balance sheet.

The ending balance of our total cash and short term investments was $489 7 million down 27 $4 million sequentially as a result of capital deployment towards both acquisitions and stock repurchases.

Mentioned earlier operating cash flow for the quarter was $46 $2 million, an increase of $24 million year over year.

The increase was a result of solid collections.

In addition, we invested $18 1 million.

And capital expenditures during the quarter compared to $14 8 million in the prior quarter, primarily due to complete the build out of our new Arizona production facility.

During fiscal Q2, we repurchased two 2 million shares of our common stock for $25 $2 million under the share repurchase program announced in September .

Leaving a remaining balance of $274 8 million worth of shares authorized for repurchase.

As you May recall in September we announced that the board authorized a new common stock repurchase program for up to $300 million.

In addition, we successfully closed the acquisition of Jackson Labs in fiscal Q2 2023.

The total purchase consideration comprised of approximately $49 9 million in cash and contingent consideration of up to $117 million in cash.

<unk> on the achievement of certain operational and revenue targets to be achieved over a three year period. This transaction provides for Avi our leadership position and a resilient BMT supporting governance, our service providers and protecting their key infrastructure and assets.

The transaction allows us to leverage our existing go to market model utilizes U S Federal Nols.

Now onto our guidance.

We expect the.

Our fiscal third quarter 2022 revenue to be approximately $266 million lots.

Plus or minus $10 million.

Operating profit margin is expected to be 13, 6% plus or minus 60 basis points and EPS to be in the range of 10 to 12 cents per share.

We expect <unk> revenue to be approximately $197 million, plus or minus 8 million with operating profit margin at 7.7% plus or minus 50 basis points OSB.

OSB is expected to be approximately $69 million, plus or minus $2 million with operating profit margins of 35% plus or minus 100 basis points.

Our tax rate is expected to be between 23 and 25%.

A result of jurisdictional mix, we expect other income expenses to reflect a net expense of approximately $4 5 million share count is expected to be around 226 million shares based on current stock price levels, but that I will turn the call over to Alec.

Thank you Henk.

Fiscal second quarter of 2023 came in above our guidance range driven by better than expected NSE performance.

By stabilization in service providers demand and spend.

Our OSP business grew year over year and came in within the guidance range.

Starting with NSE.

NSE declined on a year over year and sequential basis. During the December quarter, we continued to see continuation of general pullback and service providers Opex and Capex spend.

During the last two weeks of September . In addition, we also did not see any meaningful year end budget flush.

Decline in <unk> was primarily driven by weaker demand in our fiber and wireless Lan products by tier one service providers and wireless Nims.

Responding to reduce business outlook.

This was partially offset by stronger demand for our wireless field instruments, driven by the five G. C band infrastructure deployment. In addition, we saw strong traction for the recently acquired Jackson Labs resilient P&C products I am pleased with our market momentum for our resilient TNT technology.

As it increasingly becomes a must have.

By the government and service providers as they adopt resilient TNT technologies to protect their strategic infrastructure and assets.

Looking at the current quarter, we expect the demand softness to persist as many of our customers are continuing to pare back their capex and opex in face of weakening end market conditions.

We are encouraged with the service provider spend stabilization and are starting to see early signs of near term recovery.

We expect field instruments demand to start picking up by mid calendar 2023, our service providers retrench and rebalance their capex and Opex plans and resume their fiber network build outs and five G C band expansion.

This is expected to drive the recovery in demand for our fiber in field RF products.

In addition, we also expect several major cable operators to start upgrading their networks during 2023, which is expected to drive the demand for our cable field instruments.

Our <unk> business segment grew 14, 2% sequentially in line with our expectations. We expect <unk> revenue to remain steady at the current levels for the remainder of fiscal 2023.

Now turning to OSP OSP.

OSP increased nine 6% year over year, driven by growth in both anti counterfeiting as well as three D sensing products and performed in line with our expectations.

Looking ahead, we expect second half of fiscal 2023 to be weaker with quarterly core OSP revenue moderating to about $55 million per share per quarter, driven by weaker anti counterfeiting product demand as some of our major end customers pulled back on fiscal stimulus.

We also expect weaker year on year demand for <unk> sensing products in the second half of fiscal 2023, driven by lower end customer demand.

In view of weaker near term demand environment, we are implementing a limited restructuring plan for our NSE and OSP businesses intended to align our operating expenses with the expected lower near term customer demand and to redeploy investment to strategic growth areas in order to position the Avi.

Accelerating revenue and profitability growth.

End markets recover.

In conclusion I'd like to thank my view RV team for managing in this challenging environment and express my appreciation to our employees customers supply chain.

<unk> partners and shareholders for their support I will now turn the call over to saga.

Thank you.

This quarter, we'll be participating at Morgan Stanley 's TMT conference in San Francisco on March 6th.

We will also be attending the <unk> WC in Barcelona, and OFC in San Diego.

Regina, let's let's begin the Q&A session.

We ask everyone to limit the discussion to one question and one follow up.

As a reminder to ask a question simply press star one on your telephone keypad. Our first question comes from the line of Midi Hussaini with Susquehanna. Please go ahead.

Yes, thanks for taking my question.

Just in terms of what you just described.

Let's see in OSB in the near term should I expect kind of a flat to down quarterly trend into the last quarter of a fiscal year and then.

More meaningful pickup.

Into next fiscal year.

So I would say seasonally.

March quarter is one of our weaker quarters, and I think even though in the last two years because of constrained supply seasonality was not as pronounced I think at this time around we are seeing seasonality returning so.

I would actually expect I think typically our fourth quarter, we start seeing pickup so.

I would expect the fourth quarter to be stronger than the third quarter and.

I'd say as it goes to September it's a little bit too far out outside of our.

Outlook, but I would expect it also to be coming in stronger, especially for OSB.

Okay and then.

Specific to always be.

As we look into the into next couple of quarters.

How do you see the mix evolving.

The NFC benefits from the pickup lower base, especially as the <unk>.

Service providers have become more cautious that could actually be.

Play to your favorite is the compares are easier, but I'm not so sure. It's the compares are relevant.

As I think about OSB into next fiscal year any color would be appreciated.

Well, let me just start to see if I'm addressing your question. So when we think about OSB you got to think of it two ways right.

There is fundamentally two major segments and there is anti counterfeiting and then Theres a three D sensing one the demand for smartphones is very strong.

So effectively if both anti counterfeiting and <unk> sensing are running strong alright strong demand you're in the $90 million quarterly run rate.

In both of them are running weak as what we see like this quarter right. A three D. Sensing demand is lower and the anti counterfeiting as Laura Youre closer to about $70 million.

Quarterly run rate.

When either one of them is strong and the other one is weak you are at about $80 million range. So we think in the.

Over the next two quarters, there is headwinds for both <unk> theres, a lowered outlook demand for the smartphones and we also seeing a number of major economies are pulling back on fiscal stimulus. So it may take them a little bit longer to work through the inventories of products there already.

So we think Thats also going to be on the lower end. So we are clear.

Clearly March quarter, we see.

More clear demand, so we're saying to be in a neighborhood of like high 60 like $70 million I think Q4 if.

Anti counterfeiting comes back although stronger or <unk>.

Smartphone comes in stronger it may be better, but we are for the abundance of caution, saying first half to be in the $70 million.

Range per quarter for OSP.

I'm not sure if I answered your question.

Yes, that's helpful. I'll go back into the queue. Thank you.

Okay. Thank you.

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

Thanks.

So a couple of.

Clarification, so just to be clear the rip is going to be completed by the June quarter, you talked about the size of the cost, but I didn't see any indication of what you think the benefits too.

Results might be what's the.

What your intended use.

Use of the benefit will be whether it'll be investing in something else or whether it'll actually showed through to the bottom line. So could you give us some sense of.

With the cost reduction scale benefits might be and what you plan to do with it.

Sure sure so.

5% of our workforce will be impacted the majority will.

We will be focused.

And our <unk> business, a little bit in the OSB business and we'll be targeting populate expenditures. Most ultimately so but 500 million of opex, 5% of the workforce, so call that a $25 million annualized benefit.

Of which we'll see the impact in the September quarter on a full basis.

Okay and then.

Going back to the OSP business for a second.

So in the December quarter.

We're talking about 24 $25 million worth of Oh.

Three D sensing and I assume when you're talking about.

The March quarter that with.

The $55 million number was just the.

The counterfeiting and could you give us some sense of what you think.

Yes.

That's right it sounds like it's coming down into the $15 million to $18 million range.

Both the June and March quarters is that correct.

That's exactly right, it's about $55 million core or anti counterfeit and then another $14 million to $15 million or so.

<unk> sensing product lines.

If I can just steal one more in Jackson labs can you give us some sense of what it contributed in the December quarter.

<unk> contributed.

The four quarters.

Okay.

Couple of billion dollars in all of those.

Maybe around the two half a penny or penny in EPS.

Thank you.

Mhm.

Your next question comes from the line of Michael Genovese with Rosenblatt Securities. Please go ahead.

Great. Thanks, Pat Thanks, Hi, guys.

Yeah.

I guess, Oh like I'm trying to get the thread on carrier Capex should opex.

Little bit more clearly because clearly it was a little better than you guided to in the quarter.

You talked about the macro but yet it seems like calendar 'twenty three spend so.

Seems like it's going to be okay, and Youre also saying that later in the year.

AT&T is guidance was good I think horizon's was good on the wireline side and maybe not as good on the CDN side. So could you just put all of this together.

What exactly are we saying about that capex and Opex and NSE.

NSE business.

Operating at a higher level because of those things.

Sure sure so I think.

It's almost like.

One we.

At our earnings call in early November we said, okay. It feels like it's a replay of the March quarter of 2021. The Covid hit first there is a panic and I think a lot of them kind of panicked in September and clamped down and then usually they stepped back in the seat.

Well.

Let's think what are we going to do well, let you know.

They they reassess et cetera, well, we got ticked down some capex and by the way, we really could care less about capex, because we don't get impacted by that but that's usually where a big money comes out.

And then they say well, we still have the business turan. So we got to start doing something more on Opex, we've kind of put.

Pulled back too much said, usually that quarter second quarter is when they are lot of realignment happens.

And then in the following quarter, which is where we are right. Now there is now a reassessment and planning okay. So what are we going to do so the capex reductions get communicated to.

<unk> and we've seen number of major in Ams, stating that low and behold, yes, theyre going to get less revenue. This year, even though most of them were in denial or.

<unk> it in October and.

So now so that's kind of the Capex plans, but then the opex plants command because a lot of the equipment is already coming in and it came in and needs to be installed deployed turned on well you need the tools for that and Thats really comes back to us.

We are seeing you know you mentioned AT&T Verizon I mean, there is not okay or the world didn't come to an end guests worth we still need to build out networks, we need to turn on the services and.

Oh, let's start thinking about the deliveries and orders and this is why I am saying we're feeling.

Good that we are starting to see stabilization in the right signals coming out.

With the.

Demand for.

Field equipment and it gets even better I mean, you've seen the AT&T announcements with Blackrock well now they just have a whole part of extra money to go and extend the fiber to the states, where they were not even playing and that brings a whole different element of competitiveness, whereas the cable players now.

We need to respond sooner rather than later and equalize.

Relative performance of cable network versus fiber, so I feel very good that we're going to see.

Recovery and growth in fiber and cable spend this year and by the way last year cable was de minimus. It was kind of a pause here. So I think over the next two years, we're going to see Amit.

I would say mid cycle upgrade of our network before they DOCSIS four <unk> and what they're going to try to do is reallocate spectrum in the cable to have more symmetric.

Bandwidth up and down right.

And of course in about two years, we expect DOCSIS 4.0, which would get you up to maybe up to 10 gigabit.

Speeds.

On the cable network. So that's why I feel.

In fiber and cable or are we going to have some upsides starting in the middle of this year and going on beyond that and of course the <unk>.

<unk> C band deployment is ongoing and now that equipment is there we feel.

The demand for field instruments.

It will be kind of our time to shine.

Well.

I appreciate all that color.

A couple of follow ups and then the <unk>.

Actually the question, so I'm going to pass it on here and again.

Very helpful answer.

Well get back to alright.

Your next question comes from the line of meta Marshall with Morgan Stanley . Please go ahead.

Hi, This is crunch of car on for Morgan Stanley . Thank you for the question for me to Marshall. Thank you for your question I guess just.

Have you seen any changes to behavior from European customers.

And their spend plans since there seems to be some caution around overbuilding or maybe some rationalization over there any sort of geographic trends that you would want to call out.

So I'll start and I'll turn it over to Hank I think.

In the last quarter, there's been a lot of volatility regarding the exchange rates.

The European.

There's been some slowdown in deployment, but the problem is more driven.

Still spend the same budget, but they were getting fewer and less equipment right. So actually.

All things considered we see actually EMEA is doing pretty well.

And.

There is a lot of structural problems I mean, theres a lot of <unk>.

Volatility of.

Foreign exchange, but now we're kind of back to where we were in September in terms of euro and pound.

And actually.

Europe is holding up relatively well I would say for us.

All things considered.

Okay that makes sense and I guess, just a quick follow up just on the.

Strategic activity in this space.

Just given sort of the national instruments announcement, I guess and maybe more industrial players wanted to get into maybe pan am or the broader industry. I guess does that change how you think about M&A opportunities or any update to sort of your thoughts around M&A opportunities.

Well I mean, it's.

I mean.

Even though I mean generally national instruments is in general category. Their business model is very different they are very much focused on lab and some of the industrial deployments and I'm not surprised.

For the longest time test and measurement has been kind of the Rodney Dangerfield for those who are old enough to remember that it wasn't getting respect. So I think these guys are realizing that it's a very attractive.

<unk> business model and but also aggressive I guess is always greener on the other side and when I see electrical industrial electrical power industrial companies picking their nose in our business.

They really don't know where they are in far because it's a very different business model.

It's not a <unk>.

You have to keep spending money and a lot of them are used to.

At relatively low margins and they get enamored by high margins, but they forget that it continues to they need to continually reinvest nonstop in this business. So I think.

I mean, they are doing what they are doing I mean, we're running our business.

Two with the iron our longer term growth and.

Our test and measurement is a bit different from a lot of what they are called industrial our lab based business.

But it's a nice too.

I see that our sector is.

Getting the respect that for the longest time it to us not getting.

Got it okay. Thank you that's helpful I'll pass it onto the next.

Thank you.

Again, Brian a question simply press Star one on your telephone keypad and again, we ask that you limit your questions to one and one follow up our next question will come from the line of Ruben Roy with Stifel. Please go ahead.

Hi, Thank you for taking my question I was like I had a quick follow up on the discussion around Mike Genovese <unk> question.

And the sort of service provider linearity that youre looking at when you went into the downtick late September quarter, you had characterized that as being sort of broad based and I guess the question is is the stabilization you're seeing.

I guess is a little bit of a surprise in the December quarter, given that you thought that this would be a two to three quarter phenomena was that broad based or was that sort of specific to one or a few customers.

Well I mean, if you think our first quarter impact was September quarter, because people just shut down and during the December quarter. There was a lot of rebalancing.

Our customers looking at <unk>.

Head count cuts the Capex cuts like the Opex redistribution, and I would say and.

We are now entering the third quarter of that so it's very much and kind of what I said two to three quarter and what is happening now usually in the first calendar quarter. Many service providers are setting their budgets for the calendar year and theyre, starting to send smoke signals and engage without some conversations and.

<unk>.

The momentum of these conversations I would say, it's a positive one and they've now taken down some of the opex spend reductions they've reduced their capex and now they're getting back to business as usual and one you are spending less money generally you want to get the most of what you already have so you do.

You invest in optimization of your network and since a lot of equipment has been delivered in September December quarter.

Now all that equipment needs to be put into production so to say and you need equipment to install it turned it up and release it into operations, which also requires you to start buying new.

<unk> and software too.

Deploying the network, so that's where I'm, saying that.

This quarter, we are seeing things early stabilized in the discussions are now no longer how much can I push out the orders, but let's discuss the timelines and deliveries.

What I will be requiring during this calendar year. So the tone is very different from what I would say we saw at the end of September and a bit of a panic in the early October .

Okay. Thanks for that detail and I guess, just a quick follow up then when you talked about field instruments picking up mid 20th periods combination of what you just talked about plus.

Sort of the view that the cable guys start to pick up as well so that should help us well.

That's a big deal because you know in the past.

In the past two years cables.

Most of the DOCSIS three that all that was already done.

Three years ago four years ago. So there's been cable was kind of running a de minimis. So the mere fact, there's going to be this and its not one its actually several major cable companies are looking to do an upgrade from where they bring up.

There's still going to give you the one gigabit on the line, but they are trying to make it more symmetric up and down and that requires an upgrade and it looks like.

They are moving forward during this calendar year and the expectations that the taxes for that oil probably will be two years from now because the chipsets have not been developed yet and so.

In many ways. It's a response to the aggressive fiber deployment, that's happening out there so in a way.

Part of the response to the competitive pressure from the fiber operators.

Got it thank you so much.

Sure I will now hand, the conference back over for any closing remarks.

Thank you Regina.

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

Thank you all for joining today's meeting you may now disconnect.

Please wait the conference will begin shortly.

Yes.

[music].

Yes.

[music].

Yes.

Okay.

Yes.

Yes.

[music].

Okay.

Okay.

Yes.

Okay.

[music].

Yes.

Yes.

[music].

Yeah.