Viavi Solutions Inc.

Welcome to the VIAVI Solutions F3Q23 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, again, press star 1. I'll turn the conference over to Sagar Habar, Head of Investor Relations, VIAVI Solutions. Please go ahead.

Thank you, Jean-Louis. Welcome to VRV Solutions' third quarter fiscal year 2023 earnings call. My name is Sagar Hebar, head of investor relations for VRV Solutions. Joining me on today's call are Oleg Hykin, president and CEO, and Hank Dirksen, CFO. Please note, this call will include forward-looking statements about the company's financial performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations and estimations. We encourage you to review our most recent annual report and SEC filings, particularly the risk factors described in those filings. The forward-looking statements, including guidance 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 reconciled these non-GAAP results to our preliminary GAAP financials and discussed their usefulness and limitations in today's earnings release. The release plus our supplemental earnings slides, which include historical financial tables, are available on VRV's website at www.investor.vrvsolutions.com. 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, Sagar. Fiscal Q3 2023 was a challenging quarter. After the pullback in service provider demand earlier in the year and with more muted revenue patterns for OSP, we are now experiencing weaker spending for lab products within our network enablement segment. As a result, fiscal Q3 revenue came in at $247.8 million, down 21.5% year-by-year, albeit at the high end of our recently updated guidance range of $246 to $248 million. PIB's operating profit margin of 11.4% decreased by 4.8% from the prior quarter and 10.1% from the prior year came in at the high end of our updated guidance range of 10.5 to 11.5%. EPS at $0.08 was down from $0.14 in the prior quarter and $0.22 from the prior year and came in below the initial guide range for the quarter of $0.10 to $0.12. The current share count was $225.3 million during the quarter down from 236.8 million shares in the prior year. The tax rate at 24% as well as other income expense of $4.7 million for the quarter arrived at levels consistent with our expectations. Cash flow from operations was $17.8 million for the third quarter versus $28.9 million in the prior year period as a result of lower revenue levels. Year-to-date cash flow from operations was $90.6 million compared to $104.5 million in the prior year. On February 1st, 2023, the company approved a restructuring and workforce reduction plan to improve operational efficiencies and better align the company's workforce with the current business needs and strategic growth opportunities. The company expects approximately 5% of its global workforce to be affected, and estimates it will incur charges of between $10 and $50 million in connection with this plan, resulting into approximately $25 million in annual savings. We anticipate substantial completion of this plan by June of 2023. Now moving on to our reported Q3 results by business segments, starting with NSE. NSE continued to be impacted by current macroeconomic headwinds with quarterly revenues of $177.3 million, declining 23.2% year-over-year. NE revenue of $149.6 million declined 26.8% year-over-year, driven by the weakness in both service provider and network equipment manufacturing spending. SE revenue at $27.7 million increased 4.5% from last year. NSE gross profit margin at 63.3% decreased by 110 basis points year-over-year. Within NSE, NE gross profit margin at 62% decreased 180 basis points from the prior year, primarily due to lower volume. SE gross profit margin at 70.4% increased 130 basis points from last year, primarily due to an improved product mix. NSE operating profit margin at 1.4% was below our initial guidance range of 7.2 to 8.2%. Now turning to OSP. Third quarter revenue at $70.5 million was down 16.8% year-over-year, Revenue was near the high end of our initial guidance range of $67 million, $71 million. Gross profit margin at 50.6%, decreased 490 basis points from prior year, a result of lower volume in combination with startup costs related to our new facility in Chandler. The operating profit margin of 36.6%, benefited from a year-to-date reversal of variable incentive compensation, and as a result, exceeded our initial guidance range of 29.5% to 31.5%. Now turning to the balance sheet. The ending balance of our total cash and short-term investments was $586.6 million, up $96.9 million sequentially. During the third quarter, we were successful in exchanging 57% of our 2024 convertible notes into a new $250 million face value convertible note with Turing in 2026, generating $113.8 million in proceeds net of debt issuance costs. The $30 million in repurchase of our common stock, we added net $84 million in cash to the balance sheet, The latter in anticipation of retiring the remaining upcoming maturity of $68 million in face value of our 2023 convertible notes in the fourth quarter. As mentioned earlier, operating cash flow for the quarter was $17.8 million, a decrease of $11.1 million year-over-year, a result of lower revenues. In addition, we invested $10.8 million in capital expenditures during the quarter compared to $18.1 million in the prior quarter. During fiscal Q3, we repurchased 2.8 million shares of our common stock for $30 million under the share repurchase plan announced in September, leaving a remaining authorized balance of approximately $244.8 million for repurchase. As you may recall, in September, we announced that the Board authorized a new common stock repurchase plan for up to $300 million and ended fiscal Q3 with a plan balance of up to $274.8 million for share repurchases. Now on to our guidance. We expect the fiscal fourth quarter 2023 revenue to be approximately $252 million, plus or minus $10 million. Operating profit margin is expected to be 11.2%, plus or minus 120 basis points, and EPS to be 7 cents to 9 cents. We expect NFC revenue to be approximately 187 million, plus or minus 8 million, with an operating profit margin of 4.5% plus or minus 150 basis points. OSP revenue is expected to be approximately $65 million plus or minus 2 million with an operating profit margin of 30.5% plus or minus 50 basis points. Our tax rate is expected to be around 25%. As a result of the jurisdictional mix, we expect other income and expenses to reflect a net expense of approximately $4.5 million. The share count is expected to be around 222 million shares. With that, I will turn the call over to Oleg.