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spk09: 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.
spk05: 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.
spk01: 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.
spk06: Thank you, Henk. Our fiscal year 2022 is off to a strong start with record revenue and non-gap profitability in Q1. I'm pleased with both NFC and OSP performance in delivering strong results despite supply chain challenges. The NE segment demand strength was driven by fiber, wireless, and cable. Service providers continue to upgrade and expand their networks with fiber, resulting in a record revenue quarter for our fiber field instruments. Wireless demand continues to be strong, up double digits percentage from a year ago levels. 5G field deployment is accelerating with 5G networks being overlaid on top of existing 4G infrastructure. With 5G ORAN technology now widely used in a lab, we are now starting to see initial deployment of ORAN in the field as well. Cable was also strong and was up from a year ago levels. Much of the recent cable demand was in support of MSO's bandwidth expansion and 5G deployment. Semis and data center demand for 400 gigi continues to be very strong, with early 800 gigi product adoption expected sometime in late calendar 2022. While continued shortages of high-performance semis have challenged our industry, we have been able to successfully mitigate, for the most part, the supply constraints in Q1 and exceeded our revenue guidance. We continue to see supply challenges persisting into Q2 and Q3 and reflect them in our guidance accordingly. Lastly, we expect to see the supply constraints to start alleviating by mid-calendar 2022. The SE business segment continues to recover with the revenue and customer business funnel growing nicely. We expect SE to continue to improve and grow as enterprise customers re-evaluate their IT project needs and 5G assurance opportunities start to materialize in late calendar 2022. Now turning to OSP. The OSP business segment delivers strong revenue and profitability led by robust demand for anti-counterfeiting products. During the past five quarters, we have seen significantly stronger demand for anti-counterfeiting products. As we look ahead to 2022, we expect the demand to moderate down from the current run rate as central banks digest their inventories and adjust monetary policies. That said, we expect the anti-contrafeiting revenue run rate during the calendar 2022 to remain above the pre-COVID levels. 3D sensing revenue was up slightly from a year ago levels, with higher unit volumes due to broader adoption of world-facing applications. In the coming quarter, however, we expect the demand to be moderated downward due to supply chain constraints not related to Viavi. We expect the demand to partially recover in calendar 2022 as component bottlenecks get resolved. Longer term, we expect our principal growth drivers, 5G, fiber, and 3G sensing, to continue driving growth and profitability for Viavi. In conclusion, I'd like to express my appreciation to the VIAVI team for its continued strong execution in delivering another record quarter. I wish all our employees, supply chain partners, customers, and our shareholders to remain safe and healthy. I will now turn the call over to Bill.
spk05: Thank you, Oleg. We will be holding our 2021 Annual Shareholder and Proxy Meeting next week on November 10th. We will also be participating at the JPMorgan CES Tech Forum on January 5th, 2022, and the Needham Growth Conference on January 10th, So let's begin the question and answer session. We ask everyone to limit discussion to one question and one follow-up.
spk09: Thank you, Mr. Ong. Ladies and gentlemen, at this time, if you have a question or comment, simply press star 1. If you are joining us using a speakerphone today, please make sure to lift your hands before pressing star 1. Also, you can remove yourself from the queue if you find your question has been answered by pressing star 1 again. So again, star 1 to ask a question. And we'll take our first question today from Alex Henderson at Needham and Company.
spk11: Thanks a lot. I appreciate it. Nice quarter, and I think you guys are doing the right thing with the bond offering, so I'm glad to see that. In terms of my question, I was hoping you could talk a little bit about the outlook in 5G and to what extent Broadly, you've been seeing supply constraints. If you could give us some quantification on how much the supply constraints impacted the overall business, but in particular the 5G side of it, whether that was a factor or not.
spk06: Sure. Hi, Alex. So, well, 5G is some of our newer instruments. And obviously they're using more advanced chips in some ways. You know, given that the volumes are just starting, we have some inventory already pre-built. But it's actually one of the areas where we are probably seeing some of the more insurmountable shortages, at least in the very short term. This is one area where we still haven't been able to get all the components in-house. But it's still early in the game in the ramp, so it's not as bad, and we've been able, at least in the Q1, we have had enough material to start initial shipments. Q2, we are a bit more constrained, and we continue to work on it. And, you know, when we provide guidance, we base it on the chipset and all the material that we have in-house, and we know we can build. When we guided a Q1, we obviously provided a lower number, and we said, hey, we have a greater opportunity, but we don't know if we're going to get components or not. And fortunately, my team has done a great job and we were able to secure the supply and, you know, that significantly exceeded our guidance. And it's pretty much the same thing this quarter. I mean, there's a lot of demand. We cannot meet it all with everything that we have today. Right now, we go off of the assumption that we have material in hand or coming, and that kind of drives our revenue. And, you know, the good news is the products that we cannot meet, they just basically get pushed out into the next quarter, and the customers are not canceling. With a few exceptions, they're not canceling the orders. They're just pushing out the orders into the future quarters. Specifically to 5G, what we have been seeing on the lab and production side We have not been having any issues. We've been able to get our allocation of servers to deliver the product, although there were some challenges. On the instrumentation side is really the area on the RF instruments where we have a bit of a tighter supply, but then a lot of the adjacent instruments, especially with fiber related to 5G, we have been able to close the gap on supply and ship all of those instruments as well. And the nice thing I would say is our wireless instruments are receiving very good adoption and very strong interest coming from leasing companies as well as multiple contractors. So as the 5G gets accelerated, we feel pretty good about strong demand for our products. I think at this point, we are really focused on closing the gap on some of the chipsets. that we require for volume scaling. And probably it will be, I'd say, February of next year that we should be able to close the gap on the supply.
spk11: So the question really was how much of an impact did it have on revenues in the current quarter that was just reported and in your forecast? I mean, is there $10, $15 million worth of product that you couldn't ship? and what are your assumptions for the fourth quarter? I like, the color's great, thank you very much, but that really wasn't the question. Sure.
spk06: So, well, you're talking about the September, so September quarter, we largely closed the gap, and we, I think we had upside of about $12, $13 million, and what we needed to ship, there was no impact on the September quarter. I think this quarter, there's probably, I'd say, $5 to $10 million left,
spk11: uh gap that we uh is outstanding and uh q3 is probably still too early to uh speculate because we don't know what the deliveries will be and then one last question uh this follow-up question um so you cited the the return to pre-covered levels um just so that everybody's on the same page what kind of revenue streams for osp does that uh represent uh I mean, I know it's in my model, but I'm not sure which period you're specifically referring to.
spk06: So when I talk pre-COVID, I talk about anti-counterfeiting, right, that specifically. So remember, our base rate was around 50 and maybe slightly higher. In the past five quarters, we were running closer to 60 or even a low 60s. I think when we go, we say you go... The new levels, as things kind of work themselves out, it will be obviously running above the 50, probably below 60. So I'd say taking mid-50s is probably a reasonable number.
spk11: Thanks. And the time to taper to that is a couple, two, three quarters?
spk06: I would say starting in the December quarter.
spk11: I see the taper starting now and you hit at that level immediately in the December quarter.
spk06: Yeah, I'd say immediately and probably for next several quarters at least. But then again, you know they could come in just as they took number down. They could come back and take it up, especially some of the really big user economies of the anti counterfeiting. A lot of their printing plants are running at low utilization because of the COVID restrictions, so they are consuming the inventory a bit slower. problems alleviate and they pick up, you know, more shifts, I imagine a lot of it will work out and we'll probably see some increased demand. But net-net, I'd say now the new kind of what we call a steady-state demand is a higher level than it was pre-COVID.
spk08: Okay. I appreciate the answers. Thank you. Sure. Gentlemen, your next question will come from Samit Chatterjee of J.P.
spk09: Morgan.
spk00: Great. Hi, Oleg. Hi, Hank. Thanks for taking my question. I guess just a couple – Oleg, you mentioned in the press release and you talked about it, the $400 million note offering gives you a lot of flexibility in terms of investments both in the business organically and inorganically. So I just wanted to get your thoughts about first organically how you're thinking about areas of investment and what capabilities you need to add and then how does the M&A pipeline look and I have a follow-up after that.
spk06: Sure. We actually have a number of, we're making quite a few investments. We haven't really talked about some of the product lines. And now they're starting to materialize. So clearly fiber, I mean, wireless has been a big recipient of a lot of our new internal R&D. And with a slew of our new products coming out and, you know, the reception they're getting, we feel pretty confident about success of these products in the market. We also have a number of other problems, probably a bit too early to talk about, but it's a whole new set of revenue streams for VIAVI that we haven't, they're not in our current mainstream, and we continue to spend about, I'd say probably, I'd say 10 to 15% of R&D in that area, and we'll be getting more vocal about it in the next calendar year as many of these products are now approaching What I would call a prime time and the other element last one is our SC. So as you know, I've been always very cautious about it. We now starting to feel more and more bullish about our service enablement business. It's been thoroughly restructured. We have our new architecture and we are getting a lot of good traction from the market in 5G space as well as the. A lot of the. various enterprise and service provider applications. So we are cautiously optimistic that our SE business is starting to grow again, and with every quarter, we'll develop stronger and stronger convictions.
spk00: Oleg, any comments on the M&A pipeline? Sorry, before I ask my follow-up.
spk06: So, Emane, clearly we have our funnel. I mean, we always like to look at the private company opportunities. I mean, there's always, obviously, some public opportunities we continue to explore, and clearly that $400 million gives us tremendous flexibility to go do deals, especially from the carve-outs and private company acquisitions.
spk00: And for my follow-up, and this is more a layman question here, which is, I mean, you're mentioning the supply constraints that you're seeing. You're seeing strong demand, but you're not able to ship to your customers. And if your customers, be it a cable provider or a telco, if they are looking to deploy equipment, how are they responding to that shortage? Are they still pushing ahead with the deployments? And then once in a couple of quarters, the supply eases. Is that demand for test equipment permanently lost, or... Do they necessarily just slow down the deployment activity and we just catch up to this pent-up demand in a couple of quarters when supply eases?
spk06: So I would say less than 10% of the demand gets lost. It doesn't get lost. What it does is they go spend money on the next thing. And it's usually when they have some budget flash and they need to spend. By and large, customers are placing orders and You know, it's a best effort. We deliver whatever we can in this quarter and then we fulfill the rest of the demand down the line. So I think in that respect, you know, I'd say majority, I'd say 90% of the demand is not perishable. And what's actually the nice thing about also here is the customers now appreciate the shortages of semiconductor supply. So even before, before they would wait and try to place order only as close to the time they needed as they want. Now they are actually engaging with us much earlier and discussing the needs in the next six to nine months and providing us advanced visibility and placing orders. And many of them are entering into things like material responsibility agreements where they will guarantee taking the product because we have to go and source the material and buy all the components. So if they later change their requirements, they have to compensate us for that. So it just shows you the robustness and strength of their conviction and that the demand is real. Thank you.
spk08: Thanks for taking my questions. Sure. And next we'll move to Mehdi Hosseini of SIG.
spk07: Yes, thanks for taking my question. When I look at your reported September revenue and your guide for December on aggregate, it's pretty much in line with what I was expecting. And if I were to take your comment that there's a 5 to 10 million of a gap in supply and demand, to me that's rather upside. So perhaps in that context, you can tell us what are the key end market segments that are driving this upside?
spk06: Well, so, Mehdi, I think you're way too kind. I'm actually, I think we're about 10 million lower than I would have expected, because I know you're right, you got your model. I mean, the area where we've been a bit surprised, as you've heard about a major mobile phone supplier who is a major customer of ours, has faced shortage of components. Unfortunately for us, we were one supplier who delivered our fair share, but as a result, by delivering strong September quarter, we now have to take a pause in the December quarter to allow them to burn off the product that we shipped because of the shortage of the components, they're not going to be able to consume it at the same rate. So now, we do believe our demand will rebound in the March and June quarter, and actually, our second fiscal half will be stronger in 3D sensing as a result because of the inability for them to pre-build everything earlier on. So there we've seen quite a bit of demand push out because of the shortages. And I would say we were expecting the anti-counterfeiting to start pulling back in the March quarter. Some of it got pushed in a bit earlier. I'd say between that on OSP side, I think on NSC side, I think we're probably leaving about $10 million on the table because of shortage of components. So there we would have been around 245 or so million dollar revenue range. On the OSP, there's probably about a good, let's say $10 million drag in the opposite direction because of the reduction in anti-counterfeiting and um you know rebalancing of it into original 3d sensing so you know between the two of them i mean i actually thought um uh like a couple months ago our december would be an all-new record uh for viavi uh but you know uh but so it is got it okay um i also want to um
spk07: follow up my second question that has to do with the big picture. Last time we got an update on the model was Analyst Day back in September of 2019. And so far, you've actually tracked to that model, like a 1.3 billion of revenue opportunity and 90, 95 cents of earning. So when are we going to get the next update, especially as we start thinking of FY23? Does that hinge on and many opportunities that you're working on you want it you want to wait till you close one a couple of these tokens or or Is it more related with?
spk06: Just giving it your arms around it core business or combination of the two Yeah, so when we give a model we really base it on the business that we own any acquisition will be an upside to that model and And as you know, we are approaching next September. We're going to do the next analyst day where we provide kind of visibility ahead. We certainly are pleased that even we did count on some recession or pullback. We did not foresee the once in a century pandemic. But even with that, we are actually spot on what we were looking to be in terms of both revenue and profitability. We may even do a little better. But we will start. I'd say beginning of next calendar year talking about what's next, what's for we have in terms of growth and there we mainly talk about organic all the inorganic opportunities that we don't discuss as a matter of our policy. They will be all on top of our guidance and so by the time the September comes, I think you will have a pretty good idea where we're going and we'll just formalize our strategy, guidance and the projections by then.
spk08: Thank you. And next we'll go to Michael Genovese of West Park Capital.
spk10: Thanks. I appreciate all the detail on the call so far, and I really just have a few clarifications of things that I missed because I'm slow. On the core OSP, I didn't quite understand on 2Q, are we going to the mid-50s level In 2Q, was that the guidance?
spk06: Sorry, could you repeat again? You're talking about which guidance?
spk10: Core OSP, anti-counterfeiting.
spk06: Core OSP. So we said, you know, that includes, you know, mainly anti-counterfeiting. You know, the run rate pre-COVID was around 50 million. It's went up a little bit. But the last five quarters, we were running closer to 60 or even low 60. All we're saying is it's starting in the December quarter, it's starting to moderate somewhere in between the COVID run rate and pre-COVID run rate. So take her somewhere in the middle of mid-50s as the kind of base demand.
spk10: Got it. 2Q is December. Got it. Okay.
spk06: So that's 2Q.
spk10: Now, I know you've said it a couple of times, but I kept missing it. Did you say that 3D sensing in the quarter was slightly up or slightly down year over year?
spk06: So we had a September quarter was up. It was very strong quarter. We had a very robust customer forecast because they saw a significant increase in unit volume because of the world-facing cameras. So even with the ASP reduction roadmap, the volume was more than offset the ASP reduction that we shipped in the September quarter. Well, come the December quarter, given the shortages of other components to the forecast that our customer anticipated, we now actually have a bit of a surplus in their inventory of our filters. So they reduced their demand for the Q2 to work off the access from Q1 that they cannot consume because of the shortage of components. And I would say the, Q3, Q4 will restart again at the regular run rate.
spk10: Yeah, I understand that. But I guess if 2Q is just roughly order of magnitude down year over year and sequentially, it's not the same number, but roughly 50% down year over year and sequentially. But do you expect the back? I know you make comments on the back half, but do you expect that to be sort of flattish year over year. So on the comparison, we're basically just down half of a December quarter. I mean, is that a good way to think about it? We're down year over year, half of last year's December quarter, and that's where we should model the year. Does that make sense? Are you talking about 3D sensing? Yes, 3D sensing, yes. So basically flat year over year, except that the December quarter is basically half of what it was last year.
spk06: Yes, so... Right. We were planning, we were looking beginning of the year kind of anticipation how many units our customer was going to build, the mix of two filter, you know, world facing and rear facing camera or just only one camera. We are just kind of looking at the forecast of units and with the ASP reduction, we felt it would be roughly flat year over year, right? With the reduction in unit volume, we now think we'll probably be, for the year, we'll be about 10% down, right? Because there is fundamentally going to be fewer units consumed because of shortages of the other components. They're going to build fewer units.
spk10: Great. I appreciate that answer. And sorry I made you clarify the other things so many times, but I appreciate it. Thank you, Oleg.
spk08: No, sure, sure. No problem. Thank you. Gentlemen, your next question will come from Tim Savageo of Northland Capital Markets.
spk03: Good afternoon, and congrats on a great first fiscal quarter. Let me try this OSP thing one more time, and then I'll follow up on the test side. So just to your guiding, basically down $30 million sequentially. It sounds like that's more than 50% 3D sensing in terms of the impact. Maybe, I don't know, maybe two-thirds of that. Is that fair to say? Can you characterize it in that fashion? Because if you look at the total sequential decline, what's coming out of 3D and what's coming out of currency? And I'll follow up.
spk06: Well, so we don't break down, but it's substantially less than half. is the 3D. We had a very strong September quarter anti-counterfeiting demand. In fact, that one was substantially higher than the normal run rate. And 3D sensing, it's a combination of, I'd say, probably, it's a bit more than half is anti-counterfeiting and a little bit less than half is 3D sensing.
spk08: Excellent, thanks.
spk03: And on we go to the comms side of things. So obviously you saw some upside in network enablement in the September quarter and are guiding for further sequential growth in December. And you've heard this question from me before, but to what extent does that contemplate sort of a strong year-end spending dynamic? One might even call it a budget flush. amongst some of the big U.S. carriers in particular, C-band spending looks to be ramping into year-end, as well as cable spend, or to what extent is that kind of more normalized demand?
spk06: Yeah, so I would say this year there is very little budget flush because, you know, reality is budget flush happens when you have plenty of inventory, plenty of components, and you can quickly, you place an order in end of November and you get product by the end of December, right? In this environment, you cannot even pivot that quickly. And also, we look at the orders that we are getting. They are very much programmatic orders of big programs where they're doing a wholesale and new network deployment or upgrade or refitting their field uh staff with new equipment so we're actually seeing a big change um in the mindset for a lot of operators and the way they approach maintenance of their network and i i think you know first time i'd say in five years since i joined that i'm seeing the maintenance and network operations becoming a much more dependent on highly automated intelligent uh test and measurement which improves productivity of the field staff and the resiliency and performance of the networks. And also what we're seeing, it's not just handheld tools. We're selling a lot of big iron, what I would call it, like racks of test equipment that sits in the network and monitors polices with a lot of software. So, I mean, even though it's still called NE for us, it's a It's not just like your little handheld, by and large. It includes a lot of the, I would call, big iron-type products that go into core of the network.
spk03: Right. So, and I take your point on, you know, delivery of product. Maybe we see an order flush, sort of a budget flush or something like that, where you have carriers kind of getting in line there.
spk06: Yeah, but, you know, a lot of the orders, They provide guidance, and if it was purely a flash, they say, hey, I need this much. Can you deliver? If not, they'll move on to maybe the next thing they want to buy. But we can tell them, hey, no, I cannot deliver. It's like, okay, well, when can you deliver? Let's put a schedule because we need that rather than we need to spend the money. So actually at this point in time, I'm not seeing much flashing. That's why if you look at a lot of service providers' announcements, they all massively underspend their capex.
spk04: and um it's not for the lack of trying it's just fundamentally there's just not no supply yeah great thanks very much we'll hear next now from nita marshall at morgan stanley great thanks um a couple questions for me maybe on the first question just on supply chain you know understanding you know, some impact, but relatively minor for you guys. Just wondering if customer demand, like you're seeing kind of your customer demand come down any just because they can't put all of the pieces of the project together, so they don't need kind of the test and measurement, just kind of a derivative of supply chain impacts on customer demand. And then maybe just a second question, are any of the limitations that you're seeing something that would you know, you're having to pay more for that equipment. Are there any price changes that you think you'll need to pass on or, you know, relative ability that you think you'll have to pass on some of those price changes? Thanks.
spk06: Sure. So I think the first question about the, you know, how they spend, I mean, it's fundamentally they have plans, you know, a lot of what drives our spend is fiber plant expansion and deployment. and the 5G deployment. And all of that is, you know, you can't build out, turn on, optimize, troubleshoot without the instruments. So you need to equip your technicians or construction crews with all the instruments. So that's part of the demand. And the other one is improving the reliability of the network and performance of network. That one is kind of more, I would say, heavier demand on the equipment that sits inside the network, right? I think on there, it's just part of their just general strategy build-out plans. And they've been talking to us for multiple quarters, and now it's materializing. So it's not a flash in the pan, so to say, right? In terms of the components, you know, I tell you, I think we've been probably better than most of our competitors at being able to get components. But also, to be fair, it's a lot easier to get. We don't need that much volume. to meet our demand because our gross margins on our products are fairly high. So even when we pay significant premium on our components, the net impact is not that great on the margins or the pricing. And we have been passing on, you know, increased costs like cost of logistics and various surcharges. But more importantly, we've also been systemically implementing over the last several quarters, price increases, which in some cases already started going into effect very early, but really will kick in beginning of the calendar year. And it's very closely matches what we are seeing on the semiconductor space. I mean, you're seeing across the board 10 to 20% price increases on semi-components, probably starting, I would say, in earnest beginning of January. So we figured we need to be ahead of that and get all our contracts and get all the customer pricing adjusted sooner rather than later. That's why even though we had significant expedite fees and surcharges and premiums to secure these components, we're not getting them just because we have a nice smile and say pretty please. We actually pay quite a bit of money to get our unfair share of But we have also been communicating that we're going to pass these increased costs to our customers. And so far, we have not had a single customer that declined to take the business. And they're seeing the same thing, that prices are going up across the board.
spk08: Great. That's super helpful. Thanks so much. Sure. And next, we'll hear from Richard Shannon of Craig Howland.
spk02: Well, thanks, guys, for taking my questions. Maybe I'll head over to the topic of your 5G field instruments. Oleg, I think you made a brief remark in the prepared section on how that's going. I think you said things are moving along well here in the early stage. Maybe you can kind of characterize the rate of success where it kind of leads you to share relative to your expectations as you really started to kind of do R&D into this area a couple of years ago and give us some color to that. That'd be great, please.
spk06: Sure. So what we're seeing right now is the initial deployment where people are starting to go beyond the engineering or the NAM field technicians putting up the pilot projects. So it's starting. And anyway, I'm actually very happy that it's only just starting and it's relatively slow because I could not deliver if they truly place full orders I couldn't deliver thousands of units today, even if I wanted to. So, in a way, it's kind of fortunate that, you know, some of the deployment got delayed, and we're in the early stages, and we have enough material to support it. But we also see that as things accelerate, we'll need substantially more material that probably will not really be available until, I'd say, February of 2020. Next calendar year. So in that respect, you know, we've had enough material on in stock to kind of get everybody going There by no means they're all getting what they want, but it's enough to keep them locked in into the avi test flow via methodology and enough to get everybody trained and prepped for the accelerated rollout
spk02: Okay, that's fair color. Appreciate that. My second question is quickly on cable TV. It's an area that you, for the most part of last year, haven't highlighted that much, but I think there's a second quarter in a row that you have. I guess maybe you can give us some color within the SC business, how big of a contributor that is, and how sustainable do you see the upswing here in cable TV?
spk06: So the cable, you know, so It's not, you know, we're still obviously selling some of the handheld instruments, but it's significantly down because DOCSIS 3.1 was deployed already for quite a while, and it's really more of a replacement and maybe some additional things we are providing. The next, I'd say, big wave will be with DOCSIS 4.0, but it's probably a couple of years out. But, you know, we're still selling quite a bit of equipment, but what's really driving cable for us It's not really copper per se it's fiber. Okay, because increasingly, you know cable companies are no longer cable their fiber operators and More and more what we are shifting towards is they're buying a lot of our fiber equipment pretty much in line with the telcos and wireless carriers and what's even more interesting as they push fiber deeper and deeper into the network the losing visibility of uh of all the different segments of their network because before you had copper and you had these um amplifiers and they provided feedback and visibility now as you replace it all with fiber and you have multiple node splits you need to start monitor fiber plant so we actually see in cable companies becoming big buyers of our fiber monitoring equipment where you monitor hundreds of lines of fiber over a large area and you put these things all over their network to provide visibility and monitoring of their fiber performance. So I think very quickly, the distinguishing factor between telcos, wireless carriers, and cable are becoming more and more diminished, and they are becoming predominantly fiber customers, but a different flavor of fiber test. But the platform is very similar across all three.
spk02: Okay, that's a great perspective, Olga. Thanks. That's all for me.
spk06: And one thing I would add also, many cable companies are also getting into the 5G. They're provisioning 5G kind of infrastructure. So they're also buying 5G equipment from us, which is very counterintuitive, obviously.
spk08: Thank you. And gentlemen, it appears we have no further questions today. Mr. Ong, I'll turn the call back over to you for any closing comments.
spk05: Thank you, Bo. This concludes our earnings call for today. Thank you, everyone.
spk08: And again, thank you all for joining us.
spk09: We wish you all a great afternoon and have this connect.
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