Q3 2023 Viavi Solutions Inc Earnings Call
Speaker 2: Hello, my name is Jean-Louis. Welcome to the VIAVI solutions F3-Q23 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad.
Speaker 2: If you would like to withdraw your question, again press star 1. I will now turn the conference over to Sagar Habbar, Head of Investor Relations, VIV Solutions. Please go ahead.
Speaker 3: Thank you Jean-Louis.
Speaker 3: Welcome to VRV Solutions third quarter fiscal year 2023 earnings call. My name is Sagar Habbar, Head of Investor Relations for VRV Solutions.
Speaker 3: Joining me on today's call are Oleg Haikin, President and CEO , and Hank Dersin, CFO .
Speaker 3: 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 estimation.
Speaker 3: We encourage you to review our most recent annual report and SEC filings, particularly the risk factors described in those filings.
Speaker 3: The forward-looking statements, including guidance we provide during this call, are valid only as of today.
Speaker 3: VRB undertakes no obligation to update these statements.
Speaker 3: 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 limitation in today's earnings release.
Speaker 3: The release plus our supplemental learning slides which include historical financial tables are available on VRV's website at www.investor.vrvsolutions.com
Speaker 3: Finally, we are recording today's call and will make the recording available by 4.30 pm Pacific time this evening on our website. I would now like to turn the call over to Henk. Thank you Sagar. Fiscal Q3 2023 was a challenging quarter after the pullback in service provider demand earlier in the year.
Speaker 3: And with more muted revenue patterns for OSP, we are now experiencing weaker spending for lab products within our network enablement segment. As a result, fiscal Q3 revenue came in at 247.8 million.
Speaker 3: Down 21.5% year-per-year, albeit at the high end of our recently updated guidance range of $246 to $248 million. PIP's operating profit margin of 11.4% decreased by 4.8%.
Speaker 3: from the prior quarter and 10.1% from the prior year came in at the high end of our updated guidance range of 10.5 to 11.5%.
Speaker 3: EPS at 8 cents was down from 14 cents in the prior quarter and 22 cents from the prior year and came in below the initial guide range for the quarter of 10 to 12 cents.
Speaker 3: The current share count was 225.3 million during the quarter, down from 236.8 million shares in the prior year.
Speaker 3: The tax rate at 24% as well as other income expense of $4.7 million for the quarter arrived at levels consistent with our expectations.
Speaker 3: Cash flow from operations was $17.8 million for the third quarter versus $28.9 million in the Pi Year period as a result of lower revenue levels.
Speaker 3: Year-to-date cash flow from operations was $90.6 million compared to $104.5 million in the prior year.
Speaker 3: On February 1, 2023, the company approved a restructuring and workforce reduction plan to improve operational efficiencies and better align the company's workforce with the current business needs and strategic growth opportunities.
Speaker 3: The company expects approximately 5% of its global workforce to be affected and estimates it will incur charges of between $10 and $50 million in connection with this plan resulting into approximately $25 million in annual savings.
Speaker 3: We anticipate substantial completion of this plan by June of 2023.
Speaker 3: Now moving on to our reported Q3 results by business segment.
Speaker 3: Starting with NSE.
Speaker 3: NSE continues to be impacted by current macroeconomic headwinds with quarterly revenues of $177.3 million, declining 23.2% year over year.
Speaker 3: Any revenue of $149.6 million declined 26.8% year-over-year, driven by the weakness in both service provider and network equipment manufacturing spending.
Speaker 3: SE revenue at $27.7 million increased 4.5% from last year.
Speaker 3: MSE cost profit margin at 63.3% decreased by 110 basis points year-over-year.
Speaker 3: Within NSE, NE gross profit margin at 62% decreased 180 basis points from the prior year primarily due to lower volume. NE gross profit margin at 70.4% increased 130 basis points from last year primarily due to an improved product mix.
Speaker 3: NSE operating profit margin at 1.4% was below our initial guidance range of 7.2% to 8.2%.
Speaker 3: Now turning to OSPE.
Speaker 3: Third quarter revenue at $70.5 million was down 16.8% year over year. Revenue was near the high end of our initial guidance range of $67 million, $71 million. Cost profit margin at 50.6% decreased 490 basis points.
Speaker 3: From prior year, the result of lower volume in combination with startup costs related to a new facility in Chandler. The operating profit margin of 36.6% benefited from a year-to-date reversal of variable incentive compensation and as a result exceeded our initial guidance range.
Speaker 3: of 29.5% to 31.5%.
Speaker 3: Now, turning to the balance sheet. The ending balance of our cash and short of investments was $586.6 million. Up, $96.9 million to point to Lee.
Speaker 3: During the third quarter we were successful in exchanging 57% of our 2024 convertible loads into a new 250 million phase value convertible load during in 2026.
Speaker 3: generating 113.8 million in proceeds net of debt issuance costs.
Speaker 3: The 30 million in repurchase of our common stock, we added net 84 million in cash to the balance sheet, the latter in anticipation of retiring, the remaining upcoming maturity of 68 million in face value of our 2023 convertible notes in the fourth quarter.
Speaker 3: As mentioned earlier, operating cash flow for the quarter was $17.8 million, a decrease of 11.1 million, the over-year, the result of lower revenues. In addition, we invested $10.8 million in capital expenditures during the quarter compared to 18.1 million in the pi-a quarter.
Speaker 3: During fiscal Q3, we repurchased 2.8 million shares of a common stock for 30 million under the Shari Purchase Plan announced in September , leaving a remaining off-line balance of approximately 244.8 million for repurchase.
Speaker 3: As you may recall, in September we announced that the board authorized a new common stock repurchase plan for up to $300 million and ended fiscal Q3 with a planned balance of up to $274.8 million for share repurchases.
Speaker 3: In September , we announced that the board authorized a new common stock repurchased plan for up to $300 million and ended fiscal Q3 with a plan balance of up to 274.8 million for Sherry purchases. Now on to our guidance.
Speaker 3: We expect the fiscal fourth quarter 2020-2023 revenue to be approximately $252 million plus a minus $10 million.
Speaker 3: operating profit margin is expected to be 11.2% plus or minus 120 basis points and EPS to be 7.9%
Speaker 3: We expect an NSE revenue to be approximately 187 million plus or minus 8 million with an operating profit margin of 4.5 percent plus or minus 150 basis points.
Speaker 3: OSP revenue is expected to be approximately $65 million plus or minus 2 million with an operating profit margin of 30.5% plus or minus 50 base points.
Speaker 3: At tax rate, it's expected to be around 25 percent. As a result of the jurisdictional mix, we expect other income expenses to reflect a net expense of approximately 4.5 million dollars. The share count is expected to be around 200 and 22 million shares. With that, I will turn the call over to OLEC. Thank you, Hank.
Speaker 4: Fiscal 3rd quarter 2023 was a challenging quarter for Viavi.
Speaker 4: The rabbit slowdown that we saw in the service provider spend at the end of the fiscal first quarter has spread to our systems and semiconductor customers.
Speaker 4: We have a revenue and non-gap operating margins came in below the lower end of our initial guidance range driven by witness in our NSC segment.
Speaker 4: NSED defined year on year as well as on sequential basis primarily driven by our NE business segment.
Speaker 4: And he was down, double digits percented year on year and sequentially, reflecting weakness in our lab and field products.
Speaker 4: The pullback in R&D's PAN at network equipment manufacturers was much higher than anticipated, leading NSC revenue and non-gave operating profits margins to come in below the lower end of our initial guidance.
Speaker 4: This was partially said by stronger demand for our optical lab products driven by the development of high-speed optical infrastructure, including 800 gigi.
Speaker 4: Our SC Business Sigmund grew 4.5% year on year in line with our expectations.
Speaker 4: Looking ahead, we believe our NSE business bottomed out in the Q3. And we are starting to see some early signs of recovery.
Speaker 4: Specifically, during this quarter we are seeing initial signs of recovery for field instruments and stabilization and gradual recovery for some lab and production business.
Speaker 4: We expect the stabilization recovery momentum to continue into the second half of calendar 2023. One bright spot is our avionics and resilient PNC businesses, which continue to see healthy demand from male-era customers.
Speaker 4: Now turning to OSP. OSP decreased year on year and sequentially consistent with our guidance.
Speaker 4: While Coro was P came in slightly ahead of our expectations, the 3D sensing demand was slightly lower. We expect fiscal year 4th quarter to be slightly down, quarter on quarter, during by lower demand for anti-controfitting products due to post-COVID fiscal tightening.
Speaker 4: The 3D sensing business is also expected to be somewhat weaker than seasonal due to lower demand for smartphones and supply chain transition to new phone model designs.
Speaker 4: That said, we expect stronger second half of calendar year 2023 during the recovery and then the counterfeiting demand and seasonal strength in 3D sensing.
Speaker 4: In conclusion, I would like to thank my VIVI team for managing in this challenging environment and express my appreciation to our employees, customers, and shareholders for their support.
Speaker 4: I will not turn the call over to Sagar.
Speaker 5: Thanks, Eurlie. This quarter will be participating at Rosenblatt's virtual tech summit on June 8th.
Speaker 2: We will now begin the question and answer session. If you have a question, please press star 1 on your telephone keypad.
Speaker 2: Your first question comes from the line of Michael Genovies of Rosenbalt.
Speaker 2: Genevieve of Rosenbolt.
Speaker 6: Please go. All right. Thank you very much. Hey, Oleg, I'm trying to figure out what kind of implication we should draw from this, you know, kind of, you know, suddenly the big flowdown in lab tests. You know, I mean, basically what does it mean for the OEMs? Because...
Speaker 6: As you said, the field test is, you know, seems fairly solid going forward. And you know, I'm just trying to understand, is it more on the semiconductor side that you saw it? Or what do you think that it tells us when they still am spending about their own businesses both for nanose and semiconductor manufacturers?
Speaker 4: Well, you know, if I look at it, so I think of it this way, right? Initially, the service provider kind of slammed on the brakes in September quarter. It took maybe one to two quarters to pre-calate it to the NAMS and then to the semi-players because in September , they still delivered because they had a backlog.
Speaker 4: there's some more of them had backlog in December . By March, they clearly saw big orders decline. I think what often happens, there is a need your reaction to slam on the brakes on spending. We expected the lab equipment
Speaker 4: to be pulled back somewhat because as the lagging effect would get to the NAMs and semi-companies. I think what I was surprised is the size of slowdown. I expected maybe 15% kind of pullback. I mean we saw in some cases 30 to 40%.
Speaker 4: So it's been quite significant. It's not anyone. It's pretty broad-based. It's the wireless NAMS. It's networking NAMS. It's somewhere broad-range, some broad-based semiconductor company, storage processing, communication.
Speaker 4: The only area that was a bright spot is the high performance optical gear and that piece of the business continue to be doing really well. And I think a lot of it is due to a significant backlog of the business that they are still building. And I think probably to some extent...
Speaker 4: sanctioning of Huawei, you know, the US carriers and European care, European and US NAMs are picking up some share and that may be driving some of that demand. But on the broad-based communication ICs, storage ICs, processor ICs, all these companies saw meaningful pullback.
Speaker 4: So I think, you know, the way I look at it, it was a knee jerk reaction to hit the brakes on span. We are seeing, so, well, let's say on field instruments, we saw December quarter was kind of like bottoming out quarter and we start seeing things kind of gradually starting to recover in the March quarter.
Speaker 4: I would say the lab instruments appear to be a very hard drop in the March quarter. And in this quarter we think stabilization with maybe a little bit of the uptake on the lab instruments. So things are starting to kind of come off because I think there was a general shock and now an overreaction.
Speaker 4: which was kind of surprising because we said to everybody in October , hey it's coming, it's just a matter of how quickly it percolates into the supply chain and I think March was a very hard quarter.
Speaker 2: Thank you. Your next question comes from the line of Tim Savagel. Please go ahead.
Speaker 7: Hi, good afternoon. I was a magnification. I'm.
Speaker 7: Speaking of bright spots.
Speaker 7: When you noted the field weakness back toward the end of last year, you noted cable is a bright spot at that point.
Speaker 7: I wonder if you can give this update on what you've seen out of the cable market in the March quarter recently and what your expectations are for the balance of the year.
Speaker 4: So March quarter, I mean we saw cable players have kind of finalized their, you know, CapEx decisions and they started releasing the orders or communicating orders in March and kind of finalized orders early this quarter.
Speaker 4: We already expect to see some revenue this quarter being shipped and in the fiscal Q1. Generally cable players, they pretty much blow through whatever they are going to spend. They spend it in the June and September quarter with maybe a little bit in December . So clearly they are trying to close the gap.
Speaker 4: with a lot of fiber and also counter some of the 5G risk for consumer access. So that's been a positive and it's mostly North American story.
Speaker 7: Okay, and thanks for that. Switching over to the – Okay, and thanks for that.
Speaker 7: March quarter results and to the extent you saw what looks to be about a 30 million dollar sequential decline in any
Speaker 8: And.
Speaker 7: Anyway, to break that down, I guess, between greater than expected lab weakness.
Speaker 7: Or, you know, I'd imagine you normally see some seasonality on the field side, but I'm like you said, you might have seen some sequential growth on the field side. So we look at those couple of moving parts there.
Speaker 7: What were the real drivers between children lab?
Speaker 4: I would say on the field size, what we saw is stabilization and the June quarter is the beginning of recovery. For a damherently, the drop was from lab and production, which is very painful because this is revenue at much higher gross margins than average, so it also put the pressure on the mix.
Speaker 4: So predominantly, I would say a line share of the quarter and quarter drop was drop in 11 production. And we viewed this quarter, it's going to be largely stabilized and maybe even start recovering. So I'd say this quarter is flat to slightly up going before 11 production and beginning of recovery for the instruments.
Speaker 8: Okay, thanks very much.
Speaker 2: Again, if you would like to ask a question, press the number, pardon me, if you'd like to ask a question, press star, then the number one in your telephone keypad. Your next question comes from Metamarshall.
Speaker 2: Again, if you would like to ask a question, press the number, pardon me, if you'd like to ask a question, press star, then the number one in your telephone keypad. Your next question comes from Metamarshall. Please go ahead.
Speaker 9: Great, thanks. Maybe just if we could get a rough mix of any business between lab production and field instrumentation, if there's any kind of rough buckets, just to kind of help us contextualize when we are seeing recovery in one element of the business versus the other, if there's just any directional guidance that we could have there.
Speaker 4: I'll start and I'll turn it over to Hank. We've been working very hard over the last six years or so to reduce our dependency on a service provider or field instruments. One of our very bright stars was really significant growth.
Speaker 4: in love and production. So it actually got to the point where it's a meaningful share of our revenue. That's the sharp pullback during the March quarter was a great impact and I'll turn to hang to provide some general guidance. Like you'll get typically the mix.
Speaker 3: within an E is more than 50% field, 55%, 45% for we call lab products and lab manufacturing closed wireless components. In the Mars cord it was slightly different. It was closer to 60%, 40%.
Speaker 9: So that sort of speaks to the significance of the decline that we saw in that lot of business that's just discussed. Okay, perfect. And then on the 3D somethings I, you guys noted just kind of some headwinds in the School looking for a new phone model design. I just...
Speaker 9: Is there a change in content that we should be mindful of, or it's just you don't know what model it is, so they're not holding as much inventory of any filters.
Speaker 4: Well, there is going to be obviously a new model launch as well as the older models will say, but even in the new and the old models.
Speaker 4: Some of the modules are being redesigned and they're gonna use the newer Even though the same size by more more advanced higher performance filter so all the contract manufacturers and 4 EMs that trying to work down the existing inventory which is not that big
Speaker 4: but also the transitioning to the new model year. So of course everybody wants to consume whatever they have on hand and then do a switch over. And of course, the phone sales are down year on year. So combination of lower demand and consumption of whatever inventory anybody has on hand is what's muting some of the volume.
Speaker 2: Okay, perfect. Thank you. I'll pass it on. There are no further questions at this time. I will turn the call back over to Segar Habar, head of the investor relations.
Speaker 5: Thank you, John Louis. This concludes our earnings call for today. Thank you, everyone. This concludes today's conference.
Speaker 5: Thank you, John Louis. This concludes our earnings call for today. Thank you everyone. This concludes today's conference. You may now disconnect.
Speaker 2: We are now clear. We are back into the host conference.
Speaker 1: And and.