Q3 2024 Viavi Solutions Inc Earnings Call

Operator: Water FY24 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. I'll now turn the conference over to Ilan Daskal, Viavi Solutions CFO. Please, go ahead.

Carl.

Ilan Daskal: All lines have been placed on mute to prevent any background noise.

Ilan Daskal: The Speakers' remarks, there will be a question and answer session.

Ilan Daskal: I'll now turn the comp base okay.

Ilan Daskal: Desktop the IV solutions CFO.

Ilan Daskal: Go ahead.

Ilan Daskal: Thank you, Jericho. Good afternoon, everyone, and welcome to Viavi Solutions' third quarter fiscal year 2024 earnings call. My name is Ilan Daskal, Viavi Solutions' CFO, and with me on today's call is Oleg Khaykin, our President and CEO. Please note that 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 filing, 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, and Viavi Tech undertakes no obligation to update these statements.

Ilan Daskal: Thank you Jerry good afternoon, everyone and welcome to the IV solutions third quarter fiscal year 2024 earnings call.

Ilan Daskal: Please also note that, unless we state otherwise, all results discussed on this call except revenue are non-GAAP. We will compare these non-GEP 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 Viavi's website at www.investor.viavisolutions.com. Finally, we are recording today's call and will make the recording available on our website by 4.30 p.m. Pacific time this year.

Ilan Daskal: My name is Ilan desktop via IV solutions, CFO and with me on today's call is OLED hiking, our president and CEO.

Ilan Daskal: Now I would like to review the results of the third quarter of fiscal year 2024. Net revenue for the quarter was $246 million, which was above the low end of our guidance range of $245 to $253 million. Revenue was down sequentially by 3.3%, and on a year-over-year basis, it was down 0.7%. Operating margin for the third fiscal quarter was 9.3%, which is slightly above the low end of our guidance range of 8.8% to 12%.

Ilan Daskal: Please note. This call will include forward looking statements about the company's financial performance.

Ilan Daskal: These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations and estimations.

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

Ilan Daskal: The forward looking statements, including guidance that we provided during this call are valid only as of today.

Ilan Daskal: Yeah. He takes.

Ilan Daskal: <unk> takes no obligation to update these statements.

Ilan Daskal: Please also note that unless we state otherwise all results discussed on this call except revenue are non-GAAP.

Ilan Daskal: We reconcile these non-GAAP results to our preliminary GAAP financials and discuss their usefulness and limitations in today's earnings release.

Ilan Daskal: The release as well as our supplemental earnings slides, which include historical financial tables are available on <unk> website at <unk>.

Ilan Daskal: W. W. W dot invest or does the IV solutions Dot com.

Ilan Daskal: Finally, we are recording today's call and will make the recording available on our website by 430 P. M Pacific time this evening.

Ilan Daskal: Operating margin decreased 390 basis points from the prior quarter and on a year-over-year basis was down 210 basis points. EPS at $0.06 was within our guidance range of $0.05 to $0.09 and was down $0.05 sequentially and on a year-over-year basis was down $0.02. Moving on to our Q3 results by business, NSE revenue for the third fiscal quarter came in at $169.8 million, which is below our guidance range of $173 to $179 million. This was mainly driven by a more conservative spend environment at enterprise customers.

Ilan Daskal: Now I would like to review the results of the third quarter of fiscal year 'twenty 'twenty four.

Ilan Daskal: Net revenue for the quarter was $246 million, which was above the low end of our guidance range of $245 million to $263 million.

Ilan Daskal: Revenue was down sequentially by three 3%.

Ilan Daskal: And on a year over year basis was down zero point to 7%.

Ilan Daskal: Operating margin for the third fiscal quarter was nine 3%, which is slightly above the low end of our guidance range of eight 8% to 12%.

Ilan Daskal: Operating margin decreased 390 basis points from the prior quarter.

Ilan Daskal: And on a year over year basis was down 210 basis points.

Ilan Daskal: E P. S at two <unk> within our guidance range of five to nine cents and was down 5% sequentially and on a year over year basis was down two sets.

Ilan Daskal: On a year-over-year basis, NSE revenue was down 4.2%. NE revenue for the quarter was $151.7 million, which is a 0.1% year-over-year decline. SE revenue was $18.1 million and declined 28.7% from the same period last year, driven by a slowdown in enterprise customers.

Ilan Daskal: Moving on to our Q3 results by business segment.

Ilan Daskal: NSE revenue for the third fiscal quarter came in at $169 $8 million, which is below our guidance range of $173 million to $179 million.

Ilan Daskal: This was mainly driven by more conservative spend environment and enterprise customers.

Ilan Daskal: On a year over year basis, NSE revenue was down 4.2%.

Ilan Daskal: And your revenue for the quarter was $151 $7 million, which is a 0.1% year over year decline.

Ilan Daskal: S E revenue was $18 $1 million and declined 28, 7% from the same period last year.

Ilan Daskal: Even by a slowdown in enterprise customer spend.

Ilan Daskal: NSE gross margin for the quarter was 61.4%, which is 190 basis points lower on a year-over-year basis. NE gross margin was 61.5%, which is a decrease of 70 basis points from the same period last year, as a result of lower volume as well as product. SE's growth margin was 60.8 percent, which is a decrease of 930 basis points from the same period last year as a result of lower volume. NSE's operating margin was negative 1.8 percent, which is a 540 basis points decline sequentially and a 320 basis points decline on a year-over-year basis. NSE's operating margin was below our guidance range of zero to three percent.

Ilan Daskal: NSE gross margin for the quarter was 61, 4%, which is 190 basis points lower on a year over year basis.

Ilan Daskal: In <unk> gross margin was 61, 5%, which is a decrease of 70 basis points from the same period last year as a result of lower volume as well as product mix.

Ilan Daskal: S E. Gross margin was 68%, which is a decrease of 930 basis points from the same period last year as a result of lower volume.

Ilan Daskal: Nse's operating margin was negative one, 8%, which is a 540 basis points decline sequentially and a 320 basis points decline on a year over year basis.

Ilan Daskal: N S E operating margin was below our guidance range of zero to 3%.

Ilan Daskal: OSP revenue for the third fiscal quarter came in at $76.2 million, which was above the high end of our guidance range of $72 to $74 million and was up 8.1% on a year-over-year basis. OSP's gross margin was 50.1%, which is a decrease of 50 basis points from the same period last year and was primarily due to a reversal of variable incentive compensation that benefited Q3 last year. OSP's operating margin was 34.3%, which is 210 basis points lower sequentially and decreased 230 basis points on a year-over-year basis as a result of a reversal of variable incentive compensation OSP's operating margin exceeded the high end of our guidance range of 29.8% to 33.8%.

Ilan Daskal: OSP revenue for the third fiscal quarter came in at $76 $2 million.

Ilan Daskal: It was above the high end of our guidance range of $72 million to $74 million.

Ilan Daskal: And it was up eight 1% on a year over year basis.

Ilan Daskal: <unk> gross margin was 51%, which is a decrease of 50 basis points from the same period last year and was primarily due to a reversal of variable incentive compensation did benefited Q3 last year.

Ilan Daskal: Osp's operating margin was 34, 3%, which is 210 basis points lower sequentially.

Ilan Daskal: <unk> decreased to 130 basis points on a year over year basis as a result of a reversal of variable incentive compensation that benefited Q3 last year.

Ilan Daskal: OSB operating margin exceeded the high end of our guidance range of 29, 8% to 33, 8%.

Ilan Daskal: Moving on to the balance sheet and cash flow, total cash and short-term investments at the end of Q3 was $486.1 million, compared to $571.8 million in the second quarter of fiscal 2024. Cash flow from operating activities for the quarter was $19.5 million versus $17.8 million in the same period last year. We have not purchased any shares of our stock in the third quarter.

Speaker Change: Moving on to the balance sheet and cash flow.

Ilan Daskal: Total cash and short term investments at the end of Q3 was $486 1 million compared to 571 $8 million in the second quarter of fiscal 'twenty 'twenty four.

Ilan Daskal: Cash flow from operating activities for the quarter was $19 $5 million versus $17 8 million in the same period last year.

Ilan Daskal: We have not purchased any shares of our stock in the third quarter.

Ilan Daskal: During the quarter, we repaid our outstanding balance of our 2024 convertible notes in the amount of $96.4 million. The fully diluted share count for the quarter was 224.6 million shares, down from 225.3 million shares in the prior year and versus 224.7 million shares in our guidance for the third quarter. Catex's revenue for the quarter was $3.2 million, which is $7.6 million lower versus the same period last year when we were completing the construction of our new facility in Chen. Moving on to our guidance.

Ilan Daskal: During the quarter, we repaid our outstanding balance of our 2024 convertible notes in the amount of $96 4 million.

Ilan Daskal: The fully diluted share count for the quarter was $224 6 million shares.

Ilan Daskal: <unk> from $225 3 million shares in the prior year and versus the $124 7 million shares in our guidance for the third quarter.

Ilan Daskal: Capex for the quarter was $3 $2 million, which is $7.6 million lower versus the same period last year. When we were completing the construction of our new facility in Chandler.

Ilan Daskal: Moving on to our guidance.

Ilan Daskal: For the fourth fiscal quarter of 2024, we expect revenue in the range of $246.258 million. Operating margin is expected to be 10.6% plus or minus 120 basis points, and EPS to be between six cents and eight. We expect NSE revenue to be approximately $184 million, plus or minus $5 million, with an operating margin of 2.5%, plus or minus 110 basis points. OSP revenue is expected to be approximately $68 million, plus or minus $1 million, with an operating margin of 32.5%, plus or minus 150 basis points.

Ilan Daskal: For the fourth fiscal quarter of 2024, we expect revenue in the range of 246 and $258 million.

Ilan Daskal: Operating margin is expected to be 10, 6% plus or minus 120 basis points.

Ilan Daskal: And EPS to be between six and eight.

Ilan Daskal: We expect NSE revenue to be approximately $184 million, plus or minus $5 million with an operating margin of two 5% plus or minus 110 basis points.

Ilan Daskal: OSP revenue is expected to be approximately $68 million, plus or minus $1 million with an operating margin of 32, 5% plus or minus 150 basis points.

Ilan Daskal: Our tax expenses for the fourth quarter are expected to be about $8 million, plus or minus $500,000, as a result of jurisdictional means. We expect other income and expenses to reflect a net expense of approximately $3 million. And the share count is expected to be around 225.5 million shares. With that, I will turn the call over to Oleg.

Ilan Daskal: Our tax expenses for the fourth quarter are expected to be about $8 million plus or minus $500000 as a result of jurisdictional mix.

Ilan Daskal: We expect other income and expenses to reflect a net expense of approximately $3 million.

Oleg: And the share count is expected to be around to $125 5 million shares.

Ilan Daskal: With that I will turn the call over to Eric.

Oleg: Thank you Elon.

Oleg Khaykin: Viavi and the market spend environment continues to be challenging, particularly for service providers and enterprise customers. In view of these continued headwinds, our revenue came in at the lower end of our guidance, with stronger OSP demand partially offsetting weaker-than-expected NSE demand. Our EPS was in the lower half of our guidance range, driven by lower NFC volume and less favorable products. Starting with NSE, for the third quarter, NSE revenue came in below the lower end of our guidance. NSE revenue declined on a year-over-year basis, driven by software North American service provider, NAMS, and enterprise customers demand. Declining field instruments was driven by reduced demand for field fiber and cabling.

Oleg: The end market spend environment continues to be challenging, particularly for the service providers and enterprise customer segments.

Oleg Khaykin: In view of these continued headwinds our revenue came in at the lower end of our guidance with stronger OSP demand, partially offsetting weaker than expected NSE demand.

Oleg Khaykin: Our EPS was in the lower half of our guidance range, driven by lower NFC volume and less favorable product mix.

Oleg Khaykin: Starting with NFC for the third quarter.

Oleg Khaykin: NSE revenue came in below the lower end of our guidance and they see a revenue decline on a year over year basis, driven by softer North American service provider <unk> and enterprise customers demand.

Oleg Khaykin: Decline in field instruments has driven was driven by reduced demand for field fiber and cable instruments revenue.

Oleg Khaykin: Revenue decline in SE was primarily due to the push-out of several major projects by our enterprise. Fiber lab and production demand was relatively flat, with stronger 800 gigabit demand offsetting weaker computing and storage. And Ofcom remained a bright spot, seeing a year-over-year increase in revenue driven by growth of customer orders for our P&T. Looking ahead, a seasonally stronger Q4 across all product segments, notwithstanding, we expect the conservative spend environment to persist for the remainder of calendar 24.

Oleg Khaykin: Klein in S. E was primarily due to the push out of several major projects by our enterprise customers.

Oleg Khaykin: Fiber lab and production demand was relatively flat with stronger 800 gig demand offsetting weaker computing and storage.

Oleg Khaykin: And Ofcom remained a bright spot seeing year over year increase in revenue driven by growth of customer orders for our P&C business.

Oleg Khaykin: Looking ahead, our seasonally stronger Q4 across all product segments, notwithstanding we expect the conservative spend environment to persist for the remainder of calendar 'twenty four.

Oleg Khaykin: Now turn to your OSP. In fiscal third quarter, OSP grew on a year-over-year basis, driven by higher demand for anti-counterfeiting and 3D sensing products. Overall, our peer results exceeded the higher end of our guidance. Looking ahead, we expect OSP to be seasonally down in the June quarter, mostly driven by seasonally weaker demand for 3D sensing products. We expect the demand for 3D sensing to rebound in the first half of 2025, fiscal 2025, together with a continued recovery in demand for anti-counterfeiting products.

Oleg Khaykin: Now turning to OSP.

Oleg Khaykin: In fiscal third quarter OSP grew on a year over year basis, driven by higher demand for anti counterfeiting and <unk> sensing products.

Oleg Khaykin: Overall OSP results exceeded the higher end of our guidance range.

Oleg Khaykin: Looking ahead, we expect the OSP to be seasonally down in the June quarter, mostly driven by seasonally weaker demand for three D. Sensing products, we expect the demand for three D sensing to rebound in the first half of 'twenty five fiscal 'twenty five together with the continued recovery in demand for the anti counterfeiting products.

Oleg Khaykin: In conclusion, I would like to thank my Viavi 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 it back over to our operator for Q&A. Thank you. The floor is now open to your questions.

Oleg Khaykin: In conclusion, I would like to thank my the avid 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 it back over to operator for Q&A.

Speaker Change: Thank you the floor is now open for your questions.

Operator: To ask a question this time, please press star then the number 1 on your telephone keypad. We are going to pause for just a moment to compile the Q&A roster. Our first question comes from the line of Ruben Roy with Stipo. Please go ahead.

Speaker Change: I ask the question. This time. Please press Star then the number one guys telephone keypad.

Operator: We're going to pause for just a moment to compile the Q&A roster.

Ruben Roy: Our first question comes from the line.

Ruben Roy: <unk> with Stifel. Please go ahead.

Ruben Roy: Thank you. Oleg, I was wondering if you could maybe provide a little more detail on how the quarter progressed. It sounds like enterprise might have worsened relative to how you were thinking about things 90 days ago. And, you know, an update on Service Provider, you know, sort of the same, I guess, as we've been seeing. So maybe not a surprise there. But any additional detail on how the quarter progressed, linearity, et cetera, across those two and the markets would be interesting, thank you.

Ruben Roy: Thank you Oh like I was wondering if you could maybe provide a little more detail on how the quarter progressed. It sounds like enterprise might've worsened relative to how you're thinking about things 90 days ago.

Ruben Roy: And you know and update on service provider, you know sort of the same I guess.

Ruben Roy: As we've been saying, so maybe not a surprise there, but any additional detail on.

Ruben Roy: You know, how the quarter progressed linearity et cetera across those two.

Ruben Roy: The end markets would be.

Oleg Khaykin: <unk>. Thank you.

Oleg Khaykin: Yes, I mean, as you know with the service providers, we usually get quite a bit of.

Oleg Khaykin: Yeah, I mean, as you know, with the service providers, we usually get quite a bit of in-quarter bookship. And what we saw, especially in North America, there was just...

Oleg Khaykin: In quarter book ship, and what we saw especially in the North America. There was just.

Oleg Khaykin: Very anemic span and, you know, I mean, if anything, I would say gradually decreasing interest in even though some of the projects that you were, which were announced, they're just being delayed or ramping slower with the service provider cost. On the enterprise space, on the good, positive side, we are getting some very big deals. On the negative side, when any one of these deals slips, and we had the deals which were committed for the quarter, and literally at the end of the day, a major deal slipped to the next Monday of the quarter. So it just shows you that customers are also trying to manage their spend. And I mean, it was really ironic because it just made no sense.

Oleg Khaykin: Very high NIM expand.

Oleg Khaykin: I mean, if anything.

Oleg Khaykin: I would say gradually decreasing.

Oleg Khaykin: Interest and even though for some of the projects that you work, which were announced.

Oleg Khaykin: They're just being delayed or.

Oleg Khaykin: Ramping slower with the service provider customers on the enterprise space, It's really easy.

Oleg Khaykin: On the good positive side, we are getting some very big deals on the negative side.

Oleg Khaykin: Any one of these deal slips and we had the deals which we're committed for the quarter and literally the end of the day.

Oleg Khaykin: A major deal slipped to the next Monday of the quarter. So it just shows you. The customers are also trying to manage their spend and I mean, it was really ironic because.

Oleg Khaykin: Since the very beginning of the quarter, they were saying, "We want to take this product." And at the end, they literally just decided to book it on Monday after the end of the quarter. Had we gotten this deal when we were supposed to get it, it would be right in the middle of our guidance.

Oleg Khaykin: Just made no sense since the very beginning in the quarter. There are saying, we want to take this product to and at the end.

Oleg Khaykin: They literally just decided to book it.

Oleg Khaykin: On Monday after the end of the quarter had we gotten this deal when they are supposed to get it it would be right at the middle of our guidance so in that respect.

Oleg Khaykin: So in that respect, to me, I still view it as a decreasing customer spend or a more conservative customer spend. I mean, the thing is, customers are not canceling orders. But what they are doing is pushing and trying to manage their individual quarter capex as well. And that's the general pattern we are seeing. What used to take, let's say, on the enterprise side, three months to close the deal. On the carrier side, six months.

Oleg Khaykin: To meet.

Oleg Khaykin: Do you view it as a decrease in customer spend or more conservative customer spend.

Oleg Khaykin: Thing is the customers are not canceling orders, but what they are doing is they are pushing and trying to manage there.

Oleg Khaykin: Individual quarter, Capex as well and.

Oleg Khaykin: That's the general pattern, we are seeing what used to take let's say on the enterprise side three months to convert the deal on the carrier side six months. It's now taking a few months longer deals, they're not going away. The customers are still interesting and a product, but they are spreading it out over more quarters are pushing it.

Oleg Khaykin: It's now taking a few months longer. Deals are not going away. The customers are still interested in the product, but they are spreading it out over more quarters or pushing it down the line. So that's really, I would say, truly, I would say the last two weeks. Some of the major projects which should have come through in the SE got pushed to the next quarter and beyond.

Oleg Khaykin: Down the line. So that's a really I would say truly I'll say the last two weeks some of the major projects, which should have come through in the SC got pushed to the next quarter and beyond.

Ruben Roy: Okay, that's really helpful, Oleg. Thank you.

Speaker Change: Okay. That's really helpful. Thank you I guess, a follow up would be.

Ruben Roy: I guess a follow-up would be, you know, obviously there's not a lot of visibility here, but in terms of how you think second half to first half or typical seasonality across the quarters, would you expect, you know, sort of seasonal trends to persist? Uh, you know, as you think about September, you know, typically that's a lower quarter. So just wondering how you're thinking about that.

Speaker Change: Obviously, there's not a lot of visibility here, but.

Ruben Roy: In terms of how you think second half to first half or typical seasonality across the quarters would you expect sort of seasonal trends to persist.

Ruben Roy: As you think about September you know typically that's a lower quarter. So just wondering how youre thinking about that.

Oleg Khaykin: Yeah, I mean, this September is generally a lower quarter driven by service providers, right? Because, for some of them, it's the beginning of their fiscal year. For some of them, it's the first half. I mean, beginning of the second half.

Ruben Roy: Yeah, I mean, the September is generally a lower quarter driven by.

Oleg Khaykin: Yeah.

Oleg Khaykin: By service providers right.

Oleg Khaykin: Because they just basically for some of them at the beginning of their fiscal year for some of that mix of first half.

Oleg Khaykin: Second beginning of the second half. So then they see how much money. They left and then they decide either in December quarter, our June quarter to place. The orders now one of the major changes that would see for the second half.

Oleg Khaykin: So then they see how much money they have left, and then they decide either in the December quarter or the June quarter to place the orders. Now, one of the major changes I would see for the second half is that I don't see a service provider getting any better. I think for the remainder of calendar 24, it's going to be more of the same kind of very tactical approach. One thing we were expecting in the second half is a significant uptick in cable.

Oleg Khaykin: I don't see a service provider getting any better I think for the remainder of calendar 'twenty four is going to be more of the same kind of very tactical approach.

Oleg Khaykin: What became more apparent is that a number of cable players are pulling back on their more aggressive plans that they had early in the year to do the upgrades. And they're still proceeding with the upgrades, but what they're going to do is they're going to spread it over two, three quarters rather than doing it all at once in three to six months. And as a result, some of the uptake to negate the seasonality in the September quarter that we were expecting probably will not show up.

Oleg Khaykin: One thing we were expecting in the second half.

Oleg Khaykin: Significant uptake.

Oleg Khaykin: In cable.

Oleg Khaykin: What became it became more apparent is that.

Oleg Khaykin: Number of cable players are pulling back on their more aggressive plans that they had early in a year or two.

Oleg Khaykin: Do the upgrades and they are still proceeding with the upgrades, but what they're going to do is they're going to spread over two or three quarters rather than.

Oleg Khaykin: Doing it all at once and over the next three to six months and as a result, some of the uptake to negate the seasonality in the September quarter that we were expecting probably will not show up there. So.

Oleg Khaykin: So I would expect the field instruments service providers to be fairly similar to the first half, and I need to expand and just continue to sweat the asset. On the positive side, we do see the lab business, particularly in fiber computing and storage, should be getting better in the second half as more projects are going to move forward with the next technology nodes being introduced. You know, we expect the beginning of the migration and development at 1.6 terabit speeds. So in that respect, it will be, I would say, a somewhat better outlook. I also expect, on our SE side, to have a better second half.

Oleg Khaykin: So I would expect the field instruments service providers to be fairly similar to the first half.

Oleg Khaykin: Fairly I knew him expand and just continue to what they call a sweat the assets.

Oleg Khaykin: On the positive side, we do see the lab business, particularly in.

Oleg Khaykin: Fiber computing and storage.

Oleg Khaykin: B are getting battery in the second half.

Oleg Khaykin: As more projects are going to move forward with.

Oleg Khaykin: And next technology nodes being introduced.

Oleg Khaykin: <unk>.

Oleg Khaykin: We expect.

Oleg Khaykin: Beginning of the migration and development and one six terabits as speeds. So in that respect there will be I would say somewhat better outlook.

Oleg Khaykin: I also expect on our side to have a.

Oleg Khaykin: Better second half.

Oleg Khaykin: I mean, with the anemic spend that we saw in this quarter or last quarter, things being pushed out, the positive thing is our, you know, design win and booking funnel continues to perform really well. And as those things start going into being adopted by customers, we expect that business to continue to recover gradually. And last but not least, I think the upcoming avionics communication P&T business will continue to do well. And we expect that part of the business to continue to see good momentum. One thing I forgot to mention is wireless.

Oleg Khaykin: With the anemic spend that we saw in this quarter or last quarter things.

Oleg Khaykin: Things being pushed out the positive thing is our.

Oleg Khaykin: Design win and booking funnel continues to perform really well and as those things start going into.

Oleg Khaykin: <unk> being adopted to the customers we expect.

Oleg Khaykin: That business to continue to recover gradually and last but not the least is I think the Ofcom avionics communication PMT business will continue to do well and we expect that.

Oleg Khaykin: As part of our business continue to.

Oleg Khaykin: Hey, good momentum one thing I forgot to mention is wireless.

Oleg Khaykin: Clearly, I don't need to remind everybody the current state of the 5G deployment. A number of our major customers have seen a significant drop in their sales. That doesn't mean they don't continue to develop the technology. They continue to buy and purchase products, but at a lower rate and lower intensity than in the prior years, as the, you know, end market demand for 5G infrastructure has weakened significantly. So that's where we are.

Oleg Khaykin: Clearly I don't need to remind everybody of the current state of the <unk> deployment.

Oleg Khaykin: A number of our major customers have seen significant drop in their sales that doesn't mean, they don't continue to do the development they continue to buy and purchase products, but at a lower rate and.

Oleg Khaykin: Lower intensity than in the prior years.

Oleg Khaykin: End market demand for <unk> infrastructure.

Oleg Khaykin: As we can significantly so that's where we are on the on OSP side I think generally second half is a stronger half.

Oleg Khaykin: On the OSP side, I think generally the second half is a stronger half. I mean, I think we're all waiting for a major mobile phone announcement. I mean, clearly, the volumes are lower, but it's still the second half of the calendar year is generally a stronger seasonal quarter. And we do expect other parts of our OSP business to continue to recover. Very helpful. Thank you for all.

Oleg Khaykin: I mean, I think we're all waiting for.

Oleg Khaykin: The major mobile phone announcements I mean, clearly the volumes are lower.

Oleg Khaykin: It's still in the second half of the calendar year is generally a stronger seasonal quarter and would you expect.

Oleg Khaykin: Other parts of the our OSP business to continue to recover.

Ruben Roy: Very helpful. Thank you for all of that detail, Oleg.

Oleg Khaykin: Very helpful. Thank you for all that detail alike.

Ruben Roy: Sure.

Ryan Koontz: Our next question comes from the line of Ryan Koontz with D.W. Peace. Go ahead.

Ruben Roy: Our next question comes from the line of Ryan Tunis with Needham. Please go ahead.

Ryan Koontz: Thanks for the question and nice to join the call. With regards to the NSE business, a couple questions there. You've done a good job unpacking, I think, most of the clarification here, but the miss on the FEMIS, can you give us any color there? And then with regard to the broader – your view of the broader kind of wireline telco business for fiber builds, et cetera, I wonder if you have any idea what you're thinking of a rebound for field might look like in terms of timeframe there. Thank you. Yeah.

Ryan Boyer Koontz: Thanks for the question and nice join the call.

Ryan Koontz: With regards to the NSE business a couple of questions. There you've done a good job and pack and I think most of the clarification here, but the miss on.

Ryan Koontz: The S E. Miss can you give us any color there and then with regard to the broader.

Ryan Koontz: Your review of the broader kind of wireline telco.

Ryan Koontz: Business for fiber builds et cetera, what are if you have any idea of what youre thinking of a rebound for field might look like in terms of timeframe. There. Thank you, yes, so I mean the SC.

Oleg Khaykin: Yeah. So, I mean, on SE, I mean, we have two parts in our SE. There's a carrier software business, and then there's the enterprise business. So, the enterprise business, we mainly play in healthcare, financial services, and, you know, large-scale manufacturing businesses. And there we had effectively something between $3 and $4 million in an order that booked on Monday. We were expecting it early in the quarter. It got delayed, delayed, and it got booked on the Monday of the June quarter.

Speaker Change: I mean, we have two parts in our CE Theres a carrier software business and then there is the enterprise business. So the enterprise, we mainly play in healthcare financial services.

Oleg Khaykin: <unk>.

Oleg Khaykin: <unk>.

Oleg Khaykin: Large scale manufacturing businesses and.

Oleg Khaykin: There we had effectively.

Oleg Khaykin: Something within three and $4 million of order that booked on Monday, we were expecting it early in the quarter it get delayed delayed and it got booked on Monday of the.

Oleg Khaykin: June quarter, so as you can imagine.

Oleg Khaykin: So, as you can imagine, that business is a very high-margin business. And as a result, not only did we have about $3 to $4 million shortfall, but it also was a significant hit to the gross margin and thereby all the way down to the operating income, where you had, you know, roughly $3 million impact on the bottom line, one and a half penny. So, clearly, this is, on the positive side, as I said, it's great that we're winning these big deals today rather than a lot of quarter million, half a million dollar deals. But when some of them really don't materialize when they're supposed to, that tells me that the environment is getting a lot tighter and more conservative among our major customers. Now the rest of NSC.

Oleg Khaykin: That business is a very high margin business and as a result, not only did we had about $3 million to $4 million shortfall. It also was a significant hit.

Oleg Khaykin: To the gross margin and thereby all the way down to the operating income where you had roughly $3 million impact to the bottom line, one and a half penny so so.

Oleg Khaykin: So clearly it is on the positive side as I said, it's great that we're winning these big deals today, rather than a lot of quarter million half a million dollar deals, but when some of them really don't materialize when theyre supposed to.

Oleg Khaykin: That tells me that the environment is getting a lot tighter and.

Oleg Khaykin: A more conservative among our major customers now the honest.

Oleg Khaykin: The rest of NFC.

Oleg Khaykin: I would say, generally, service providers are pretty anemic in their spend, but I would say, you know, it's not universally true everywhere else. I mean, in areas of Europe, and amazingly in Latin America, our business is doing pretty well. I would say that North America is the weakest link in the whole equation, and I would say, you know, the popular word we're hearing from our customers, we're just going to sweat the assets until, you know, we see a market turning around, or until one of their competitors starts getting aggressive.

Oleg Khaykin: I would say the.

Oleg Khaykin: Generally service providers are pretty anemic and their spend but.

Oleg Khaykin: But I would say, it's not universally true everywhere else I mean.

Oleg Khaykin: Areas of Europe, Amazingly Latin America business is doing pretty well, it's I would say that North America is the.

Oleg Khaykin: The weakest link in the whole equation and I would say the popular award we are hearing from our customers that we're just going to sweat the assets until.

Oleg Khaykin: We see market turning around or until one of their competitors start getting aggressive and right now I see it.

Oleg Khaykin: And right now, I see it, you know, the environment is basically wink wink, nod nod, I'm not spending any money, I'm not doing anything aggressive, let's just generate cash and pay down the debt. And we're seeing the same, you know, the same thing going across the board with all

Oleg Khaykin: Environment is basically wink wink nod nod I'm not spending any money I'm not doing anything aggressive, let's just generate cash and pay down the debt.

Oleg Khaykin: Are we seeing the same.

Oleg Khaykin: The same thing going across across the board with all the major service providers.

Speaker Change: Super helpful. Thank you and on the.

Oleg Khaykin: Super helpful, Oleg, thank you. And on the gross margin line, any changes there in terms of, you know, pricing or structure that we should think of that might be an ongoing setback to gross margins, or is it purely just volume-based from your perspective? Well, the answer is the

Oleg Khaykin: On the gross margin line in any changes there in terms of pricing or structure that we should think of that might.

Oleg Khaykin: Ongoing step back to gross margins or is it purely just volume based from your perspective, well that's actually the good news I mean, we're not seeing much ASP pressure I mean, there's clearly a once in a while you do some big deal you would give some discount but overall the asps are holding very well the margins are holding.

Oleg Khaykin: Well, that's actually the good news. I mean, we're not seeing much ASP pressure. I mean, there's clearly once in a while you do some big deal, you give some discount.

Oleg Khaykin: But overall, the ASPs are holding very well, the margins are holding, and standard margins are holding well. But when your volume drops, even when you have a significant chunk of your manufacturing is contract manufacturers, you do have the operations team, and that piece becomes less and less absorbed, and it puts a lot of pressure on the margin. And of course, the big impact in this past quarter was the significant software order that slipped into the next quarter. And as a result, that is a pure margin hit on the mix for the March quarter. Thanks, Richard. Thanks.

Oleg Khaykin: Tendered margins are holding well, but when your volume drops even.

Oleg Khaykin: One you have a significant chunk of your manufacturing is.

Oleg Khaykin: Contract manufacturers you do have the operations team and that piece becomes less and less absorbed and it puts a lot of <unk>.

Oleg Khaykin: Pressure on the margin and of course, the big impact in this past quarter is.

Oleg Khaykin: A significant software order that.

Oleg Khaykin: Slipped into the next quarter and as a result that is a pure margin a margin hit on the on the on the mix for.

Oleg Khaykin: For the March quarter.

Ryan Koontz: Thanks, Greg. Thanks so much. That's all I have.

Speaker Change: Thanks, Greg. Thanks, so much that's all I have.

Michael Edward Genovese: comes from the line of Michael Genovese with Rosenblatt, Please go ahead.

Ryan Koontz: Comes from the line of Michael Genovese with Rosenblatt. Please go ahead.

Michael Edward Genovese: Great, thanks. Oleg, how do you think that service provider, you know, telco spending will be different in 25? Like, what's going to happen as we get into calendar 25 that's different from 24?

Speaker Change: Great. Thanks.

Michael Edward Genovese: Oh, yes.

Michael Edward Genovese: Yes.

Michael Edward Genovese: How do you think that service provider <unk>.

Michael Edward Genovese: Telcos spending will be different in 25, like what's going to happen as we get into calendar 'twenty five that's different from 24.

Oleg Khaykin: Well, I mean, on 25, when we get to 25, that basically would mean a lot of the instruments, you know, field instruments, installed bass, that were sold in 22, which was a very strong year, they will all be turning three years old. And there's also quite a bit of instruments that were sold in 21 and 20, and they'll be turning four and five.

Michael Edward Genovese: Well I mean.

Michael Edward Genovese: <unk> 25, when we get to 25% that's basically would mean a lot of the.

Oleg Khaykin: Instrument in our field instrument installed base.

Oleg Khaykin: We will be that was sold in 'twenty, two which was a very strong year. It will all be churning.

Oleg Khaykin: Three years old and there is also quite a bit of instruments were sold in 'twenty, one and 'twenty and there'll be turning four and five and the reality is I mean, once you get to that level.

Oleg Khaykin: And reality is, I mean, once you get to that level, I mean, really, between around four years of age, I mean, you have to start replacing them because what's the what the increasing you start doing is as things start getting obsolete or get damaged. You know, they just keep leveraging, maybe using one instrument for two people, it gets to the point where you need to start doing wholesale replacement. I mean, we saw a similar picture at 17, 18. There was nobody was buying anything.

Oleg Khaykin: It really is.

Oleg Khaykin: At around four years of age.

Oleg Khaykin: You have to start replacing because.

Oleg Khaykin: Increasingly you start doing things.

Oleg Khaykin: Things start getting absolute it or get damaged.

Oleg Khaykin: They just keep.

Oleg Khaykin: Leveraging maybe using one instrument for two people it gets to the point, where you need to start doing wholesale a replacement.

Oleg Khaykin: We saw a similar picture in 17 and 18, there was nobody was buying anything and then it resulted in a very significant spend for two two and a half years in 'twenty one 'twenty two so I think.

Oleg Khaykin: And then it resulted in a very significant span for two, two and a half years in 21, 22. So I think, you know, it will become more and more difficult. I mean, you know, we see the big weather events, damaging networks, where things do break and things do go bad. And, you know, at a certain point, you get to the point where you have to start doing a significant upgrade to your field workforce. And I mean, that's how I see it. The longer you delay it, the more you're going to spend, and the more intensively you're going to have to spend.

Oleg Khaykin: It will be it will become more and more difficult I mean, we.

Oleg Khaykin: We see the.

Oleg Khaykin: Yeah.

Oleg Khaykin: The big weather events, damaging networks AD networks were in <unk>.

Oleg Khaykin: Things do break and things do go bad and.

Oleg Khaykin: At a certain point you get to the point, where you have to start doing a significant upgrade to your field.

Oleg Khaykin: Workforce.

Oleg Khaykin: I mean, that's how I see I mean, the longer you delay the more you're going to spend and more intensively youre going to have to spend.

Michael Edward Genovese: That all makes sense. I guess in some of the work that we've done, you know, we've heard about Tier 1 U.S. service providers that have basically said, like, 24 is just not a year of network expansion or growth capital, but we're, you know, we're sort of planning for 2025. I was wondering if you hear any of that type of commentary from your customers.

Oleg Khaykin: Yes.

Speaker Change: That all makes sense I guess in some of the work that we've done we've heard about tier one U.

Michael Edward Genovese: U S service providers that are basically.

Michael Edward Genovese: Like 'twenty four is just not a year of network expansion or growth capital, but we're sort of planning for for 2025 I was wondering if you if you hear any of that.

Michael Edward Genovese: Type of commentary from your customers.

Oleg Khaykin: You know, I believe it when I see it. You know, money talks and bullshit walks, to use a very technical term here. I mean, they can all say whatever it is.

Michael Edward Genovese: Sure.

Speaker Change: I believe it when I see it.

Oleg Khaykin: Money talks and bullshit walks she is a very technical term here I mean, they all can say whatever it is I mean look with.

Oleg Khaykin: I mean, look, we've seen the cable players were going to do a major upgrade expansion. And you know, they just kind of looked around, and they just saw that the interest rates were not getting longer. And, you know, they're all taking a very prudent view to just kind of kick the can down the road. And, you know, look, from what I see here, unless somebody starts getting hungry and tries to grab market share and get ahead of their competition.

Oleg Khaykin: Seeing the cable players, we're going to do a major upgrades expansion and just kind of looked around and they just see the interest rates are not getting longer and they all taking a very prudent.

Oleg Khaykin: So you just kind of kick the can down the road and look what from what I see here is.

Oleg Khaykin: Unless somebody starts getting hungry and tries to grab market share and get ahead of their competition right now.

Oleg Khaykin: Right now, I wouldn't call it a collusion, but it's kind of everybody. It's, I would call it, probably more of a Mexican standoff. Everybody's standing with their guns loaded, looking at each other. And so long as nobody pulls the trigger, you know, things are going accordingly. But, you know, but, you know, you're bringing up a good point.

Oleg Khaykin: But I wouldn't call it a collusion, but it's kind of a.

Oleg Khaykin: Everybody, it's I would call like a more probably more of a Mexican standoff, everybody standing with their guns loaded looking at each other and so long as nobody pulls the trigger.

Oleg Khaykin: Things are going.

Oleg Khaykin: Accordingly, but.

Oleg Khaykin: But you bring up a good point I mean, if they do decide to start expanding their network upgrading networks. They know you're actually going to create a double whammy of demand because not only now you need to replace the installed base for maintenance of your network.

Oleg Khaykin: I mean, if they do decide to start expanding the network, upgrading the network, then now you're actually going to create a double whammy of demand, because not only do you need to replace the installed base for maintenance of your network. Every time you start doing a build out and expansion, you need to buy new tools for that as well. To the extent you do believe 25 will be the beginning of the network expansion, as well as the upgrade of the network, it would actually put even greater pressure on the installed base of equipment.

Oleg Khaykin: Every time, you start doing a build out and expansion you need to buy new tools for that as well so.

Oleg Khaykin: To the extent you do believe 25 will be.

Oleg Khaykin: Expansion of the beginning.

Oleg Khaykin: Expansion of the network as well as the upgrade of the network it actually would put even greater pressure to upgrade and.

Oleg Khaykin: Replace the installed base of equipment in the field.

Speaker Change: Alright, so we need to shoot out that makes sense.

Michael Edward Genovese: So we need a shootout. That makes sense. We need a shootout

Oleg Khaykin: Somebody has to go for higher market share. I mean, look, I mean, think about it, right? If your competitors are not trying to muscle in on your market, and it's a fairly steady state equilibrium market, every quarter that everybody stays disciplined, you're generating a massive amount of cash. You're not spending capex, you're really economizing on apex, and you continue to collect your subscriptions. I mean, that is like the best possible scenario you could have, right?

Michael Edward Genovese: So sure that somebody has to go for higher market share.

Oleg Khaykin: Look I mean think about it right.

Oleg Khaykin: Your competitors are not trying to muscle in on your market and it's a it's a fairly steady state equilibrium market.

Oleg Khaykin: Every quarter that everybody.

Oleg Khaykin: Stays disciplined you are generating massive amount of cash youre not spending capex.

Oleg Khaykin: Economizing on Opex and you continue to collect your.

Oleg Khaykin: Sure.

Oleg Khaykin: I mean that is the best possible scenario you can have right.

Oleg Khaykin: To generate cash, and you take the cash and take down your debt. The moment somebody, the moment the first person tries to grab a share and try to get ahead, that's when all the bets are off, and then it's off to the race. All right, I appreciate it.

Oleg Khaykin: To generate cash and you take that cash and take down your debt. The moment somebody the moments first person tries to grab share and tried to get ahead. That's when all the bets are off and then it's off to the races.

Speaker Change: Great Alright, I appreciate it thank you very much.

Oleg Khaykin: Sure.

Meta A. Marshall: Our next question comes from the line of Meta Marshall with Morgan Stanley. Please, go ahead.

Oleg Khaykin: Our next question comes from the line of meta Marshall with Morgan Stanley. Please go ahead.

Karan Juvekar: Yes, hi, this is Karan Juvekar from Meta Marshall. Just a quick question on the NSE operating margin side. I understand that you're sort of seeing headwinds, just given volumes and the guide for next quarter. I guess just, is there anything outside of just some volumes coming back that could help maybe get you back to the mid-single-digit operating margins? Or, I guess just how should we think about recovery on that side?

Meta A. Marshall: Yes, Hi, this is <unk> on for meta Marshall.

Karan Juvekar: Just a quick question on the NSE operating margin side.

Karan Juvekar: I understand that you're sort of seeing headwinds just given volumes.

Karan Juvekar: And the guide for next quarter I guess, just is there anything outside of just some volumes coming back that could help maybe to get you back to the mid single digit operating margins or I guess, just how should we think about recovery.

Karan Juvekar: On that side.

Oleg Khaykin: Well, I think maybe Asar and Ilan can continue. Clearly, volume is the biggest thing, right? Because you can squeeze your OPEX all you want. You can, you know, reduce your OPEX.

Speaker Change: Well I think maybe I'm sorry, any lung can continue clearly volume is the biggest thing right. Because you can squeeze your opex already one you can.

Speaker Change: Reduce your opex, but it's.

Oleg Khaykin: But it's, you know, when you're running a business where the incremental variable margin is north of 70% on the lab or the software products, north of 60% on the field instruments. I mean, it all drops to the bottom line because your fixed costs are largely covered. So, A, I think clearly a recovery in volume is the single biggest driver, but also recovery in the SE business because it's a very high contribution margin to the bottom line. So every dollar of revenue in a software business obviously contributes a significant chunk of it to the bottom line. Yeah, I mean, exactly.

Oleg Khaykin: When you were running a business of that.

Oleg Khaykin: Incremental variable margin is north of 70% on the lab or.

Oleg Khaykin: Software products north of 60% on the field instruments I mean, it all drops to the bottom line because your fixed cost is largely covered so I.

Oleg Khaykin: I think clearly a recovery in volume is a single biggest driver but also.

Oleg Khaykin: Recovery in the.

Oleg Khaykin: Business, because it's a very high high contribution margin to the bottom line. So every dollar of revenue in our software business, obviously puts significant chunk of it to the bottom line, yes, exactly that I mean, obviously the follow through from the top line. It all depends on the top line.

Ilan Daskal: Yeah, I mean, exactly that. Obviously, the fall through from the top line depends on the top line growth. And, you know, the pricing environment, as Oleg mentioned earlier, continues to be stable. So it's just about the volume.

Ilan Daskal: <unk> and <unk>.

Ilan Daskal: Pricing environment as already mentioned earlier.

Ilan Daskal: Continues to be stable. So it's just about the volume.

Karan Juvekar: Okay, I appreciate that. And then a quick follow up.

Speaker Change: Okay I appreciate that and then a quick follow up I know you mentioned that the PMT business is doing.

Karan Juvekar: Better than some of the other businesses I guess any detail on sort of where you're seeing the strength on the positioning navigation and timing side, and where you sort of expect maybe an inflection or continued strength going forward on the P&C side, I mean any detail there would be helpful.

Karan Juvekar: I know you mentioned that the P&T business is doing better than some of the other businesses. I guess any detail on sort of where you're seeing the strength on the position and navigation timing side and where you sort of expect maybe an inflection or continued strength going forward on the P&T side? Any detail there would be helpful. It's mostly in the aerospace and defense.

Oleg Khaykin: It's mostly in the aerospace and defense sector. I mean, we've all seen significant issues with the GPS signal in Europe and the Middle East.

Karan Juvekar: It's mostly in the aerospace and defense.

Oleg Khaykin: Our sector I mean, we've all seen.

Oleg Khaykin: Significant issues with the GPS Cigna.

Oleg Khaykin: And as you can imagine, it is becoming a very hot topic with aircraft manufacturers and defense contractors. Pretty much everything relating to communications or positioning is now becoming vulnerable, and that's generating a lot of interest for our products. Also, avionics is, with the recovery in the commercial aviation market, we're seeing very strong demand for our next generation avionics products. And just the traditional public safety and military and defense communication testing, we're seeing a healthy demand environment for the base business.

Oleg Khaykin: Signal in Europe, and Middle East and as you can imagine.

Oleg Khaykin: Is becoming a very hot topic with <unk>.

Oleg Khaykin: Aircraft manufacturers with the.

Oleg Khaykin: Defense contractors.

Oleg Khaykin: Pretty much everything relating to communications, our positioning is now becoming vulnerable and that's generating a lot of interest for our products.

Oleg Khaykin: Also the.

Oleg Khaykin: The Onyx.

Oleg Khaykin: With the recovery in the commercial aviation market, we're seeing very strong demand for our.

Oleg Khaykin: Next generation of the <unk> product and just even traditional.

Oleg Khaykin: Public safety.

Oleg Khaykin: And military and defense Communications testing, we are seeing.

Oleg Khaykin: But for a lot of our kind of more advanced products that we introduced in the past several years and the acquisition that we made of Jackson Labs about a year and a half ago, we are seeing very robust interest in our products and growth in them.

Oleg Khaykin: Healthy demand environment for the base business, but.

Oleg Khaykin: For a lot of our kind of more advanced products that we introduced in the past several years and the acquisition that we've made.

Oleg Khaykin: Jackson Labs.

Oleg Khaykin: Pier and a half ago, we are seeing.

Oleg Khaykin: Very robust interest in our products and.

Oleg Khaykin: Growth in that area.

Speaker Change: Okay. Thank you.

Operator: There are no further questions at this time, so I now turn the call back over to Ilan Daskal.

Industrial: There are no further questions at this time, so I'll now turn the call back over to industrial.

Ilan Daskal: Thank you, Jericho. This concludes our earnings call for today. Thank you, everyone, for joining us.

Ilan Daskal: Thank you Jerry call. This concludes our earnings call for today. Thank you everyone for joining us.

Operator: This concludes today's conference call. You may now disconnect.

Speaker Change: This concludes today's conference call you may now disconnect.