Q2 2024 Viavi Solutions Inc Earnings Call
Hello, everyone. My name is Rob welcome to the Avi solutions second quarter fiscal year 2024 earnings call. All lines have been placed on mute to prevent any background noise.
The speakers remarks, there will be a question and answer session I'll now turn the conference over to Ilan desk L. P. IV solutions CFO. Please go ahead.
Thank you operator, good afternoon, everyone and welcome to <unk> solutions second quarter fiscal year 2024 earnings call.
My name is Ilan Daskal, the IV solutions CFO and with me on today's call is all the Titan President and CEO.
Please note. This call will include forward looking statements about the company's financial performance.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations and estimations.
We encourage you to review our most recent annual report and SEC filings, particularly the risk factors described in those filings.
The forward looking statements, including guidance that we provided during this call are valid only as of today.
Yeah. The undertakes no obligation to update these statements.
Please also note that unless we state otherwise all results discussed on this call except revenue are non-GAAP.
We reconcile these non-GAAP results to our preliminary GAAP financials and discuss their usefulness and limitations in today's earnings release.
The release as well as our supplemental earnings slides, which include historical financial tables are.
Available on <unk> website at Www Dot Investor does the IV solutions Dot com.
Finally, we are recording today's call and will make the recording available on our website by 430 P. M Pacific time this evening.
Now I would like to review the results of the second quarter of fiscal year 2024.
Net revenue for the quarter was $254 5 million.
It was above the midpoint of our guidance range of $240 million to $268 million.
Revenue was up sequentially by two 7%.
Gives me and on a year over year basis was down 10, 5%.
Operating margin for the second fiscal quarter was 13, 2% and exceeded the high end of our guidance range of nine 6% to 12, 8%.
Operating margin increased 80 basis points from the prior quarter and on a year over year basis was down 300 basis points.
E. P. S 11 cents exceeded the high end of our guidance range of six to 10 cents and was up <unk> <unk> sequentially and on a year over year basis was down three.
Moving on to our Q2 results by business segment.
NSE revenue for the second fiscal quarter came in at $179 6 million, which.
Which is above the midpoint of our guidance range of $169 million to $185 million.
On a year over year basis revenue was down 13, 3%, primarily due to lower capex spend by names and weaker spend by service providers.
Any revenue for the quarter was $155 $5 million, which is at 15 points, 2% year over year decline.
<unk> revenue was $24 $1 million and grew one 3% from the same period last year.
NSC gross margin for the quarter was 63, 4%, which is 100 basis points lower on a year over year basis.
<unk> gross margin was 62, 5%, which is a decrease of 190 basis points from the same period last year and was primarily due to a combination of product mix and lower volume.
S E. Gross margin was 68, 9%, which is an increase of 460 basis points from the same period last year and benefited from higher margin product mix.
Nse's operating margin was three 6%, which is an increase of 270 basis points sequentially.
The decrease of 530 basis points on a year over year basis.
NSC operating margin was above the midpoint of our guidance range of zero to 4%.
OSP revenue for the second fiscal quarter came in at $74 9 million.
Which was at the high end of our guidance range of 71% to $75 million and was down three 2% on a year over year basis.
OSP gross margin was 52, 1%, which is a decrease of 20 basis points from the same period last year and was primarily due to lower volume and unfavorable product mix.
OSP operating margin was 36, 4%, which is 140 basis points lower sequentially and increased 90 basis points on a year over year basis.
OSP operating margin exceeded the high end of our guidance range of 32, 5% to 34, 5%.
Moving onto the balance sheet and cash flow.
Total cash and short term investments at the end of Q2 was $571 $8 million.
<unk> two $489 7 million in the same period last year.
Cash flow from operating activities for the quarter was $20 4 million.
Versus $46 2 million in the same period last year.
We have not purchased any shares of our stock in the second quarter as we plan to retire the outstanding balance of our March 2024 convertible notes in the amount of $96 4 million.
The fully diluted share count for the quarter was $223 5 million shares.
One from $227 1 million shares in the prior quarter and was two <unk> versus 222 million shares in our guidance for the second quarter.
Capex for the quarter was $5 $8 million, which is $12 $3 million lower versus the same period last year. When we were completing the construction of our new facility in Chandler.
Moving on to our guidance.
For the third fiscal quarter of 2024, we expect revenue in the range of 245 and $253 million.
Operating margin is expected to be 10, 4% plus or minus 160 basis points and EPS to be between five <unk>.
And <unk>.
We expect NSC revenue to be approximately $176 million plus or.
$3 million with an operating margin of one 5% plus or minus 150 basis points.
OSP revenue is expected to be approximately $73 million.
Plus or minus $1 million.
With an operating margin of 31, 8% plus or minus 200 basis points.
Our tax expenses for the third quarter are expected to be around $8 million as a result of jurisdictional mix.
We expect other income and expenses to reflect a net expense of approximately $3 million.
And the share count is expected to be around $224 7 million shares.
With that I will turn the call over to all outlet. Thank you Elon and welcome to your first earnings call with VIP.
The fiscal second quarter 2024 came in stronger than expected revenue was slightly above the midpoint of our guidance helped by stronger demand for 400 gig and 800 gig fiber.
Arrow NFC products.
<unk> came in above the high end of our guidance driven by a richer margin revenue mix and lower opex.
In the near term, we expect stronger demand in the above product areas to help offset continued weakness in the service provider spend.
Starting with NFC, the second fiscal quarter NFC revenue came in above the midpoint of our guidance range. Although the NSC revenue declined on year over year basis, driven by a slowdown in <unk> and fiber build hours by major service providers. There was a number of bright spots.
Fiber lab and production has continued to recover driven by stronger 800 gig demand offsetting weakness in computing and storage aerospace.
Aerospace and defense products saw robust growth driven by strong demand for avionics, and PMT or positioning navigation and timing products and the new <unk> products continued to perform well, resulting in a slight year over year growth. Despite the decline in service provider spend.
Looking ahead, we expect continued demand recovery and growth in our fiber 11 production aerospace and defense NFC products compensating for the continued near term weakness in the service provider spend.
Now turning to OSP.
OSP declines on a year over year basis, primarily driven by lower demand for anti counterfeiting products.
This decline was partially offset by strong <unk> demand.
OSP results came in at the higher end of our guidance range.
In the March quarter, we expect OSP to be slightly down from the December quarter with a stronger demand for anti counterfeiting products offsetting the seasonal decline in <unk> sensing.
Looking ahead to calendar 'twenty four we expect telecom service provider spend to continue to be soft with the notable exception of the North American cable operators we.
We expect the cable spend to ramp in the middle or second half of calendar year 2024.
That said our strategy in the past six years to diversify outside the service providers into a level of production and aerospace and defense. It makes it easier to ride out the telecom cycle downturn.
11 production spend is seeing a faster recovery versus service providers driven by the demand for the new technologies, such as 800 gig and open ran.
Recently, the Abbvie was awarded a $21 $7 million grant by NTIA to create an advanced test lab to empower and accelerate the development of open ran technologies and components. These awards reflect the August technology leadership in <unk> upcoming Sig G and aura.
Our aerospace and defense products are seeing strong demand and growth driven by the nextgen avionics and they need to protect critical infrastructure and assets against jamming and spoofing and cyber warfare.
Conclusion, I'd like to thank my view Abbvie team for managing in this challenging environment and express my appreciation to our employees customers and shareholders for their support.
With that I will now turn back to the <unk>.
Operator in Q&A.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
And your first question comes from the line of Michael Genovese from Rosenblatt. Your line is open.
Alright, great. Thanks, a lot first question is just on the service provider market just to understand make sure I heard the comments right.
It sounds like Youre, saying all of 'twenty four calendar expected to be weak there with cable getting better at the end of the year first of all did I hear that right and secondly.
Did that did your expectations changed in the last three months ago has that the carrier south in telecoms have gotten more pushed out or was that consistent with three months ago.
Well so let me just say look the reality is I don't know what the second half is going to look like from service providers. We know the demand will be somewhat stronger in the June quarter.
With stronger.
Beyond that I, just think I mean clear.
Clearly it's.
It's not getting any worse, it's getting a little better, but I would still prefer to think of it as a flat to slightly recovering.
As the kind of more sporadic because I think they are still pretty weak, but the point is we are seeing its coming in but it's not as dramatic as I would've liked to see now the area that is stronger is the cable in fact, we were expecting cable to start spending and coming in in the first half of calendar year, but.
As you probably know there were some delays driven by technology readiness.
Pulling the DAA architecture by some of the vendors and aside to the the ramp is being pushed by.
One or two quarters so.
We know it's coming we're already seeing some orders, but despite that we were expecting in the March quarter.
Got pushed out that's why we are guiding March quarter flat to slightly down it was going to be slightly up in the absence of that slow down.
Let's put this way I feel a lot better about the environment in which we are operating then we were even a quarter or two quarters ago.
Don't want to get ahead of our skis on <unk>.
Service provider of recovery, because when I see it I'll believe it I mean, so I think we still got a lot of it.
Alan sheet issues, they need to address it before they really start spending significantly.
Okay great.
Great job.
The abundance of caution I mean, do you feel better about what's going on the answer is yes, it might seeing big dollars.
Coming in the answer is no not one thing what we did see interesting is we're seeing pretty good traction on our service enablement products with the new architecture, AI ops, which drive our opex reduction in things like capital avoidance. So that there we are seeing a pretty good.
<unk> bite on the instrumentation, particularly with fiber deployment I think there is a pause that.
May at least last six months, maybe towards the second half of the year things will get better but at this point I think it's my Crystal ball is telling me I'm not seeing anything dramatic changing.
Speaker Change: Understand understand great next next question. This is.
Speaker Change: It's 800 gig fiber lab and production sounds very.
Speaker Change: Very interesting.
You've probably had either two or three quarters of sort.
Sort of measurable.
Our revenues there so I assume that that is increasing and then any color you can give us on that and we are not sure whether you had answered this question, but sort of.
How much of.
That represents either now or what it could be in the future would be would be very helpful.
Well, so I mean, there are 11 production business.
I would say on any.
Let's see if I think about the <unk>.
Network enablement.
Speaker Change: And the FC So network came on was about 87%.
Our lab and production is.
No.
I think it is but it also includes wireless is about 40% so and of that I'd say fiber lab.
Speaker Change: <unk>.
Speaker Change: Kind of compute high performance computing is roughly half of that right. So maybe.
20%.
And.
Now with the storage billing a slowdown that we saw the computing and storage was weaker I mean, all of that business is it really kind of bottomed out around the June quarter, but what's really been driving the recovery of that business is.
Fiber production and the fiber lab demand than it is driven by 408 hundred gig products right. So I think so what I would say it's now it's out.
Ah recovered first of all its recovery and continue to grow.
Thank.
The same players who are building telecom modules and now more recently.
AI.
And.
Data center modules are buying the equipment.
I've been trying to ascertain like for so many million ports, how much equipment is being bought.
I think we're probably not there in terms of truly understanding.
Speaker Change: How the Capex spend is linked to that because it's still early in the game, but exactly same equipment that they use on the coherent telecom module line. They are using it also on building the.
The data center.
<unk> for the AI applications.
Perfect Great, yes, it sounds like.
Going forward that would be interesting.
To figure that out.
That relationship I can't wait to get an update on that Okay. Last question for me sorry to take so much time, but I'd like to ask them.
And then a question.
Which is can you just help me understand because the revenues were pretty good for the quarter. The earnings were good. The revenue guidance is good I'm just still not seeing the reason why the EPS guidance is lower so could you explain that to me.
Sure. Thanks for the question so.
As you know third fiscal quarter.
Susan that from a seasonality perspective is usually kind of slower.
Speaker Change: Then the second quarter. So if you think about it on a consecutive basis. Then also when you hit kind of the beginning of the calendar year. There is some incremental cost.
Associated with employee related.
And that kind of drives cutoff in terms of the opex, but again thats all Ive mentioned earlier the traditional seasonality when you think about it.
<unk> is kind of.
It's kind of building up really nicely.
When you think about the rest of the year, including the fourth quarter.
So theres a lot of statutory cost accruals that happens in the first quarter of the calendar year and.
On the OSP.
Notice there is a lower margin because.
I'd say cyclicality of three D sensing the second half of our fiscal year is a much lower utilization. So there is more under absorption in that respect now that said the anti counterfeiting is coming back so it's offset some of it but not all of it.
Last quarter, the <unk> sensing was quite strong.
Okay, great. Thanks, so much for all the answers for the question Chris Thanks Pam.
Speaker Change: Your next question comes from the line of Tim <unk> from Northland Capital. Your line is open.
Tim Your line is open.
Okay.
Figured it out good afternoon.
Tim: Can you remind us of your lead times in service provider fiber test.
Generally if we get an order.
I'd say within two months, we can turn it around so.
So it's all within the quarter.
Now except for some things like if it's a.
Some.
<unk> are very quick like for example, fiber scope and things like that other product like where you're buying a whole bench well you have a mems switches and things like that if we have them in inventory we can.
Turning it around within I'd say two to three months.
Okay.
Where would you assess your service provider customer inventories to be with your product.
Zero.
It's all just in time.
Right.
The reason I ask it is is that.
Tim: Throughout the early part of reports here from both some of your bigger peers Corning, Nokia as well as some of the bigger service providers.
Tim: We have seen some early indications of project based.
Kind of.
Increases in plans for 'twenty four.
And I'm, just trying to reconcile what's been a pretty consistent drumbeat here.
With with what we're hearing from you.
And I think there could be you typically you lead these things but.
I don't know might you lag at this point because of the lead times I Wonder.
I don't think are you seeing some of the same things.
Speaker Change: I don't think that go ahead.
Once they decide.
Speaker Change: And when they tell these guys are going to do a project. They may tell it to them before they tell us because once they are ready to start building.
They just placed an order and within <unk>.
Two months they get their equipment.
It was pretty quick.
Makes sense I'll pass it along.
Our next question comes from the line of Alex Henderson from Needham <unk> Company. Your line is open.
Thanks.
Could you give us a little bit more granularity on the <unk>.
Size of the three D sensing in the quarter.
Expectations for the three D sensing in the March quarter.
So generally Alex <unk> sensing half of the annual demand comes in in the September and December quarter, sorry, two thirds comes in in the September and December quarter, and one third comes in March and.
And the June quarter so.
I will say, we ran right around 20 $25 million in the quarter.
And so.
Okay.
You are looking at what 10 $10 million or so.
Speaker Change: This quarter.
March quarter, maybe a little more than 10, but.
I mean the fee.
Thanks.
Yes.
Okay.
Yeah, it's about it's around.
It's 10, plus minus a $1 5 million.
All right.
Can you give us an update on the planet in Phoenix, It's now fully operational although the benefits of the cost improvement or in the mechanics of the kind.
Counterfeiting business at this point.
Speaker Change: Is that correct.
Yes, so what we're seeing now so that's when you know where people are running out of inventory.
So you start seeing a lidar and forecasted spot orders popping up like hurry up and ship as soon as you can so.
Speaker Change: We're starting to see more and more of these type of things.
Popping up theyre, not big orders, but it is telling us.
The inventory starting to deplete itself in the channel so.
In the March.
Speaker Change: March quarter will be expecting a little bit stronger demand from what we were thinking maybe even three months ago. So that's actually helping us to.
Offset some of the three D sensing declined quarter on quarter.
It is fully operational and we still have you know.
More.
Speaker Change: Capacity for additional growth there so it's not.
Yes in terms of Utilizations Nokia theatre in terms of the.
The availability that we can get.
Fully operational but not fully.
Right of course.
Speaker Change: Alex Let me give you a correction actually three D sensing is going to be closer to about <unk>.
Speaker Change: $16 million in this quarter, one <unk> perfect. Thanks.
I was thinking about.
End of year.
So going back to this.
Speaker Change: Split on.
800 gig products just to be clear so the.
Ratio of ports to equipment is quite low right I mean, we're talking about.
Double digit port per.
Speaker Change: Okay.
Speaker Change: Kind of ratio there I assume that this is predominantly going into the.
Production side of it it's not going into the field deployment and.
You are talking about how many.
Products can go through a test and measurement.
Process.
In any given period, but that's the sampling process so the ratio.
It was very very high relative to the total number of ports to go across that equipment right.
Well I mean.
It varies right. So when you start production you tend to do a lot more test. So you have a lower number of ports for lets say a million dollars of equipment as you would get with experience curve you start and you feel comfortable you start.
Speaker Change: <unk>.
D Contenting the test.
Spend less time on a tester. So yes equipment predominantly goes into the production lines. I mean, you have all these factories in China and other places that are building. These modules. So when they start they generally use more intensive testing and then as they get more comfortable they start reducing and doing more of.
Sample testing or.
Less extensive testing per module so.
Speaker Change: That's why it's continuously moving.
Targets.
Speaker Change: And in one case.
One project and we have gauged.
It came out to about 40 cents per module.
Of.
Capex for module capacity, so if you're doing a port you need about 40 investment per port on the capacity reliance <unk> build a let's say.
Million and a half.
Units.
A week.
Align so you've probably I mean, I think it works out to about 40, some about $300000.
Or that capacity that you got to invest but it's only one data point than other people do it differently. So they spend more I mean, so it's still very early to tell.
So.
<unk> already seen very significant ramp in productions of both.
The link and Infiniband products going into the AI.
AI clusters.
Two from what I can tell you really haven't seen any meaningful contribution from that at this point.
Should we then think that as we move into the second and third phase of production ramping that.
The sampling rates actually.
Go up and therefore, we shouldnt be looking at the rate of growth and AI is the primary driver of the overall demand.
Curve as opposed to the sampling percentage well I wouldn't go I wouldn't go that far because remember what was the first thing. They did is they are redeployed the same lines that were building telecom coherent.
Business that dropped quite significantly.
Redeployed those assets to the AI data centers and.
And then just when you also think about it if you're just doing them.
Alignment or like I say infiniband youre, putting.
Speaker Change: Photonic integrated circuit is aligning with the.
Processor that is really more semiconductor packaging when you're actually building the actual.
Module with laser is and everything else, that's where you tend to use more of our optical test equipment.
I see okay.
Just going back to the telecom piece for a second.
Yeah.
There is obviously, a very large inventory glut out there of telecom equipment.
That has to be absorbed it has there been any build in inventory in your product areas or is that just simply that didn't happen because they werent constrained as much on that those type of products.
Speaker Change: So we have no inventory in the channel I mean, putting much the orders kind of get turned off.
December quarter of.
Calendar 2022, so if anything a lot of the inventory in the field is getting long in tooth and we know that there is a a lot of wear and tear and there needs to be a replacement coming up so we actually already seeing signs that people say, hey, I will need to replace I mean, what would be the terms what would be the lead times, so and that risk.
Pat.
People will kind of sweat the assets they will swap the assets. They will cannibalize and then they'll have to do a wholesale replacement.
Speaker Change: So.
Speaker Change: When I say.
Kind of flattish 2024 or likely I just think.
I, just don't think I know they need to do it I just don't know if they can afford a massive replacement, but hey.
Hey, there.
Speaker Change: It could be a good chance that in the second half.
See more and more of these type of things popping up but I don't have that kind of visibility beyond six months.
Alright, thank you.
Speaker Change: Sure. Thanks.
Your next question comes from the line of meta Marshall from Morgan Stanley. Your line is open.
Great. Thanks.
Oleg you mentioned kind of you were more encouraged about cable spending kind of earlier in the year just wanted to get a sense is that DOCSIS. Four <unk> is that just their networks are running hotter just given some of the comments you just had to Alex just kind of what is the trigger to that investment and then.
On the flip side since you kind of think about wireless may take a little bit longer just what do you think should be kind of early.
Speaker Change: <unk> of wireless versus I mean, thanks.
So if I look at so cable rights first I think the we know it's going to be happening.
It was actually we are expecting some of the orders start popping up in the March quarter, and then accelerating into June.
Speaker Change: From what we've heard and I'm not going to.
Name any names, but theres been a delay in some of the core technology development by leading infrastructure providers.
So I think that is being pushed.
Speaker Change: But one to two quarters.
Speaker Change: In terms of getting the software ready and everything has to be working so I think thats, where we are with cable, but I do.
See actually cable happening this year.
Speaker Change: On the.
What was your second part of your question.
Just on the wireless side.
Oh, the wireless yes, so the wireless.
Well, we all know you've seen the Ericsson Nokia Samsung and all the deployments with T mobile Verizon AT&T, so that has slowed down.
So the area, where we are seeing less is on kind of the field equipment and a lot of the.
Our sales are related to deployment, while we continue to see a capex being spent is on product development.
We have not seen significant decline in the R&D capex for.
<unk> <unk> and now we are seeing some of the elements of Sig <unk> popping up.
Speaker Change: Is it just.
Generally I think the wireless infrastructure is a bit more muted in terms of.
Aggressiveness I'd say in Europe, and North America, now that said, India is doing pretty well.
It's obviously I wish the margins were better in India, but I think clearly the demand is right now India is one of the few bright spots for infrastructure deployment.
Great. Thank you.
Sure.
Your next question comes from the line of Ruben Roy from Stifel. Your line is open.
Yes. Thank you I'll like I just had a couple of quick questions really follow ups I think you've talked about a little bit of this.
Ruben Roy: And in answer to the prior questions, but just in terms of service provider. It sounded to me like you're saying that you are having conversations right. So last quarter I think you've talked about not seeing any P commenced I would imagine that that's still the case.
But also.
Some of the service provider is still figuring out their budgets for this year is that giving you a little bit of.
Ruben Roy: I wouldn't call it hope, but sort of visibility I guess into thinking that you can still turn out to what you should be sort of a normal seasonal year, meaning June up and then September a little bit down like usual is that driving that or any other detail on those conversations.
So I think this year I mean, I don't want to jump too far ahead, but actually September may actually be stronger this year than normal because of the cable is maybe happening in September as it gets pushed right. So but generally I would say what do we see it from service providers. There is a very healthy churns business if things go.
Bad then just replacements and things like that.
What.
Generally drive.
Another like I'd say, 20% more which makes a big difference is whenever they're doing build outs or upgrades to their networks.
The ongoing business is going pretty well people maintaining their network, they just keeping things running.
I am not seeing yet is the people doing.
Big step functions in expanding capacity or upgrading their network or extending their network.
Some of these projects are a little bit more I mean, we know they are being planned and there's plans for that I, just don't know when they're going to decide to pull.
The ripcord on launch it and I, just kind of looking at the general environment and the <unk>.
Telecom sector I think.
They prefer.
Every quarter they don't do it they just can't.
Bank more cash and retire more debt so I think.
Ruben Roy: One one.
We're kind of just looking at the from competitive.
Ruben Roy: Approach as cable guys start up.
Grading their networks I think some of the service providers will see need.
Need to.
Get back to extending their networks, so I think.
Ruben Roy: I just don't.
I don't want to be a killjoy, but I just don't see.
Cash burning hole in our service providers pocket, but they need to go and start digging in laying new fiber or.
Aggressively starting deployment the area, where we do see a fairly.
Fairly good momentum, but it's on a much smaller or like an order of magnitude smaller scale are these tier two tier three primarily private equity funded fiber operators, who are laying fiber in anticipation of data centers coming to the area or service providers, extending <unk> networks to the area or they finally.
Meeting our fiber to extend their network into some of these rural communities. So that is one piece that is ongoing but.
<unk> and order of magnitude smaller amount of volume than somebody like AT&T, Verizon British telecom or Deutsche Telekom, what span that on an annualized basis.
Alright, great. Thanks, Thanks for all that detail.
Ruben Roy: And then just a quick follow up for Ilan I might have missed this on the balance sheet discussion.
Are you where you need to be then on leverage and do you expect to come back into the markets to repurchase in the near term I might have missed that.
Yeah, so probably for the next quarter or two.
We'll be focused more obviously on the retiring of the convert and.
Ruben Roy: It continues the overall by the continues to be part of our capital allocation model right. I mean, we're not deviating from the overall strategy.
Probably on the buyback for the next one to two quarters will be more muted devoted disc.
Decided to bank some cash so we can retire the whole converts in a way, it's a synthetic share buyback because you're avoiding.
Dilution down the road.
Right right got it okay, well, thank you very much.
Speaker Change: Thank you thanks.
There are no further questions at this time I will now turn the call back over to Ilan desktop for some final closing remarks.
Ilan: Great. Thank you operator. This concludes our earnings call for today and thank you everyone for joining today's call.
Speaker Change: This concludes today's conference call. Thank you for your participation you may now disconnect.
Please wait the conference will begin shortly.
Sure.
Speaker Change: [music].
Speaker Change: Okay.
Okay.
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Yes.
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Yes.
Speaker Change: Yes.
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