Viavi Solutions Inc.

Ladies and gentlemen, thank you so much for standing by and welcome to the VRV Solutions first quarter 2022 earnings conference call. Just a quick reminder, today's call is being recorded, and at this time, I'll turn things over to the head of investor relations, Mr. Bill Ong. Please go ahead, sir.

Thank you, Bo. Welcome to VRV Solutions first quarter fiscal year 2022 earnings call. My name is Bill Ong, head of investor relations. Joining me on today's call are Oleg Hykin, president and CEO, and Hank Dirksen, CFO. Please note this call will include full-looking statements about the company's financial performance. These statements are subject to risk and uncertainties that could cause actual results to differ materially from 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 full-looking statements, including guidance we provide during this call, are valid only as of today. VRB undertakes no obligation to update these statements. 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 the usefulness and limitations in today's earnings release. The release plus a supplemental earnings slide, which includes historical financial tables, are available on VRV's website. Finally, we are recording today's call and will make the recording available by 4.30 p.m. Pacific time this evening on our website. I would now like to turn the call over to Henk.

Thank you, Bill. Fiscal Q1 2022 reflects a VRV record in revenue non-GAAP profitability, and earnings per share. First quarter revenue came in at $326.8 million, up 14.8% year-over-year, exceeding our guidance range of $303 to $317 million, mainly a result of better than anticipated supply chain management within our NSE business, as well as favorable timing of shipments, in our OSP business segment. Since the outbreak of the pandemic, quarterly revenues have consistently improved sequentially, exceeding a prior record of $313.7 million in revenue in the December quarter 2019 by $13.1 million. VIAVI's record operating profit margin at 22.7% expanded 140 basis points year over year and 190 basis points sequentially and exceeded the guidance range of 21.5 to 22.5 percent. EPS at a quarterly record of 24 cents per share exceeded the 20 to 22 cents guidance range and increased 3 cents or up 14.3% from the year-ago period. The share count of 242.3 million shares includes the dilutive impact of the convertible modes of approximately 8 million shares. Now moving to our reported Q1 results by business segment, starting with NSE. NSE revenue At $227.9 million, increased 24.2% year-over-year, exceeded our guided range of $210 to $220 million. Within NSE, NE revenues increased 26.4% from a year ago to $204.9 million, reflecting strength for our fiber, wireless, and cable products. SE revenue at $23 million, increased 7.5% year-over-year, a result of recovery from our assurance and data center products. NSE gross profit margin at 64.7% increased 50 basis points year-over-year. Within NSE, an E gross profit margin at 64.8% increased 100 basis points from last year, primarily a result of leverage on higher revenue volume. SE gross profit margin at 63.9% decreased 290 basis points year-over-year due to product mix. NSE's operating profit margin at 13.5% exceeded our guidance range of 12 to 13%, primarily a result of operating leverage on higher revenue. Operating profit dollars more than doubled as margins increased 630 basis points from a year ago, reflecting the leverage on growth in combination with the aforementioned higher gross margin and disciplined OPEX control. Now turning to OSP. First quarter revenue at $98.9 million is down 2.3% from last year's revenue record of $101.2 million and reflects OSP's second highest revenue quarter. Revenue exceeded our guided range of $93 million to $97 million, mainly a result of strong customer demand and timing of shipments. Gross profit margin at 57.7% decreased 260 basis points year-over-year and reflects the impact of product mix and slightly higher manufacturing variances compared to last year's records. Operating profit margin of 44.1% is near the high end of our guidance range of 42.5 to 44.5 percent, a decrease of 260 basis points from a year ago as a result of the aforementioned reduction in gross profit margin. Now turning to the balance sheet. The ending balance of our total cash and short-term investments was $921.7 million, an increase of $218 million sequentially from the prior quarter and up $326.2 million compared to the prior fiscal year. In addition to free cash for generation, the increased cash possession reflects the recent $400 million high-yield bond offering we completed at the end of September, offset by the partial impact of a deeming $275 million in principal value of convertible notes in early September. Operating cash flow for the quarter was $53.4 million, a decrease of $10.5 million compared to $63.9 million in the year-ago period, reflecting increased investments in inventory to ensure we continue to meet our on-time commitment to our customer. We invested $15.7 million in capital expenditures during the quarter compared to $8 million in the prior year. The increased capex reflects a new production facility in support of increased future demand built in Arizona. Early September, we entered into a separate, privately negotiated exchange agreement with certain holders of the 1.75% senior convertible 2023 notes and the 1% senior convertible 2024 notes. This transaction reduced the principal value of our 2023 convertible notes from $225 million to $131.2 million, and our 2024 convertible note from $460 million to $278.8 million, resulting in a $85.9 million gap-only loss included in interest expense and other income. The remaining outstanding balance of our combined convertible note is $410 million in principal value at the end of the quarter. a reduction of $275 million compared to the prior quarter and prior year. We settled the combined retirement of $275 million in principal value of convertible notes in part in cash for a total of $197 million, as well as by issuing 10.6 million shares of Yavi common stock. Subsequently, the board authorized the repurchase of up to $190 million of these shares. which commenced at start of the second quarter and is expected to be completed no later than by the end of the third quarter. As of yesterday, November 3rd, we repurchased 2.4 million shares under this program at an average price of $15.48 per share, including commissions. In addition, and under the already existing stock buyback program, we repurchased $8.5 million of Yavi stock at an average cost of $16.52 per share, including commissions during the first quarter. In total, as of the end of the first quarter, we repurchased $95.5 million out of the $200 million authorized share buyback plan. This program is now extended until the end of September 2022. In late September, we completed a $400 million high yield note offering at an attractive rate of 3.75% interest. due in 2029 with net proceeds of approximately $393 million. The proceeds will be used for general corporate purposes, including replenishing the funds used to retire indebtedness. Please see our earnings supplemental deck posted on the VIAVI website for more details. We are pleased with the successful issuance of our first high-yield notes, as well as the retirement of approximately 40% of our convertible notes. This completes an important step in optimizing our capital structure and we expect will create the financial flexibility to allow us to execute our growth objectives. Now on to our guidance. The current macroeconomic environment remains uncertain with significant supply chain challenges as well as the ongoing pandemic. As a result, we expect the fiscal second quarter 2022 revenue to be approximately $303 million plus or minus $7 million. Operating profit margin is expected to be 20.5%, plus or minus 50 basis points, and EPS to be in the range of 18 to 20 cents per share. We expect NSE revenue to be approximately $235 million, plus or minus 5 million, with operating profit margin at 16.2%, plus or minus 50 basis points. OSP revenue is expected to be approximately $68 million, plus or minus $2 million, with operating profit margins at 35.5%, plus or minus 100 basis points. Tax rate is expected to be approximately 17%. We expect other income and expense to reflect a net expense of approximately $6 million, which includes the full impact of the change in interest expense, as a result of the high yield note issuance net of the convertible notes retirement. Absent of any changes to the principal notes, we can expect the net expense of approximately $6 million also for fiscal Q3 and Q4. At current stock price levels, and as we complete the aforementioned share repurchase program, the estimated fully diluted share count used in our calculation is 243 million shares for the second quarter. We also expect the fully diluted share count to reduce to approximately 239 million shares starting at the end of the third quarter and to approximately 237 million shares at the end of the fourth quarter. With that, I will turn the call over to Oleg.