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spk06: 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.
spk05: 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.
spk04: 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.
spk00: Thank you, Henk. Fiscal third quarter 2023 was a challenging quarter for VIAVI. The rapid slowdown that we saw in the service provider spend at the end of the fiscal first quarter has spread to our systems and semiconductor customers. Viavi revenue and non-GAAP operating margins came in below the lower end of our initial guidance range, driven by weakness in our NSE segment. NSE declined year-on-year, as well as on a sequential basis, primarily driven by our NE business segment. NE was down a double-digit percentage year-on-year and sequentially, reflecting weakness in our lab and field products. The pullback in R&D spend at network equipment manufacturers was much higher than anticipated, leading NSC revenue and non-GAV operating profit margins to come in below the lower end of our initial guidance. This was partially offset by stronger demand for our optical lab products, driven by the development of high-speed optical infrastructure, including 800 gigi. Our SE business segment grew 4.5% year-on-year, in line with our expectations. Looking ahead, we believe our NSC business bottomed out in the Q3, and we are starting to see some early signs of recovery. Specifically, during this quarter, we are seeing initial signs of recovery for field instruments and stabilization and gradual recovery for some lab and production business. We expect the stabilization recovery momentum to continue into the second half of calendar 2023. One bright spot is our avionics and resilient P&C businesses, which continue to see healthy demand from male-era customers. Now turning to OSP. OSP decreased year-on-year and sequentially, consistent with our guidance. While core OSP came in slightly ahead of our expectations, the 3D sensing demand was slightly lower. We expect fiscal year fourth quarter to be slightly down quarter on quarter, driven by lower demand for anti-counterfeiting products due to post-COVID fiscal tightening. The 3D sensing business is also expected to be somewhat weaker than seasonal due to lower demand for smartphones and supply chain transition to new phone model designs. That said, we expect stronger second half of calendar year 2023, driven by recovery and anti-counterfeiting demand and seasonal strength in 3D sensing. In conclusion, I would like to thank my VI team for managing this challenging environment and express my appreciation to our employees, customers, and shareholders for their support. I will not turn the call over to Sagar.
spk05: Thank you, Oleg. This quarter, we'll be participating at Rosenblatt's Virtual Tech Summit on June 8th. John-Louis, let us begin the question and answer session. We ask everyone to limit discussion to one question and one follow-up.
spk06: We will now begin the question and answer session. If you have a question, please press star 1 on your telephone keypad. Your first question comes from the line of Michael Genovese of Rosenbald. Please go ahead.
spk03: Thank you very much. Hey, Oleg. I'm trying to figure out what kind of implication we should draw from this sudden and big slowdown in lab tests. You know, I mean, basically, what does it mean for the OEMs? Because, you know, as you said, the field test is, you know, seems fairly solid going forward. And, you know, I'm just trying to understand, is it more on the semiconductor side that you saw it? Or what do you think that it tells us when they start understanding about their own businesses, both for NAMs and semiconductor manufacturers? Sure.
spk00: Well, you know, if I look at it, so think of it this way, right? Initially, the service providers kind of slammed on the brakes in September quarter. It took maybe one to two quarters to percolate it to the NAMs and then to the semiplayers because, you know, in September, they still delivered because they had a, you know, backlog. There's some more of them had backlog in December. By March, they clearly saw big orders decline. And I think what often happens, there is a knee-jerk reaction to slam on the brakes on spending. And, you know, we expected the lab equipment to be, you know, pulled back somewhat because, you know, the lagging effect would get to the NAMs and semi-companies. I think what I was surprised is that the size of slowdown. I expected maybe 15%. kind of pull back. I mean, we saw in some cases 30 to 40%. So it's been quite significant. It's not any one. It's pretty broad-based. It's the wireless NAMs. It's networking NAMs. It's somewhat broad-range, broad-based semiconductor companies, storage, processing, you know, communication. The only area that was a bright spot is the high performance optical gear and that piece of the business continue to be doing really well. And I think a lot of it is due to a significant backlog of the business that they are still building and, you know, and I think probably to some extent sanctioning of Huawei. You know, the U.S. carriers and European and U.S. NAMs are picking up some share, and that may be driving some of that demand. But on the broad-based communication ICs, storage ICs, processor ICs, all these companies saw meaningful pullback, as well as the telecom, datacom, and wireless networking gear manufacturers.
spk03: Okay, thanks for that. Just a clarification and my follow-up. I assume that in lab tests, that's not an area where inventory is ever really an issue, right? So we're not seeing an inventory correction. We're seeing sort of a demand.
spk00: No, no, there is no inventory. It's very much driven by programs. So I think, you know, the way I look at it, it was a knee-jerk reaction to hit the brakes on SPAN. We are seeing, so while, let's say, on field instruments, We saw December quarter was kind of like bottoming out quarter, and we start seeing things kind of gradually starting to recover in the March quarter. I would say the lab instruments appear to be a very hard drop in the March quarter. And in this quarter, we're seeing stabilization with maybe a little bit of the uptake on the lab instruments. So things are starting to kind of come off because I think there was a general shock now and overreaction, which was kind of surprising because we told everybody in October, hey, it's coming. It's just a matter of how quickly it percolates into the supply chain, and I think March was a very hard quarter.
spk06: Thank you. Your next question comes from the line of Tim Savageau. Please go ahead.
spk02: Hi, good afternoon. That was a magnificent pronunciation. Speaking of bright spots, when you noted the field weakness back toward the end of last year, you noted cable as a bright spot at that point. I wonder if you can give us an update on what you've seen out of the cable market, you know, in the March quarter recently and what your expectations are for the balance of the year.
spk00: So March quarter, I mean, we saw cable players have kind of finalized their, you know, CapEx decisions. And they started releasing the orders or communicating orders in March and kind of finalized orders early this quarter. And we already expect to see some revenue this quarter being shipped and in the fiscal Q1. Generally, cable players, they pretty much blow through whatever they're going to spend. They spend it in the June and September quarter with maybe a little bit in December. So that is still, I mean, clearly they are trying to close the gap with a lot of fiber and also counter some of the 5G risk for consumer access. So that's been a positive, and it's mostly North American story. Okay.
spk02: Okay. And thanks for that. Switching over to the March quarter results. I mean, to the extent you saw what looks to be about a $30 million sequential decline in any way to break that down, I guess, between, you know, greater than expected lab weakness or, you know, I'd imagine you normally see some seasonality on the field side, but Sounds like you said you might have seen some sequential growth on the field side. So if we look at those couple of moving parts there, you know, what were the real drivers between field and lab?
spk00: I would say on the field side, what we saw is stabilization, and the June quarter is the beginning of recovery. Predominantly, the drop was from lab and production, which is very painful because this is revenue at much higher gross margins than average, so it also put the pressure on the mix. So, predominantly, I would say a lion's share of the quarter-on-quarter drop was drop in lab and production. And we view this quarter, it's going to be largely stabilized and maybe even start recovering. So I'd say this quarter it's flat to slightly up, going to be 411 production and beginning of recovery for the instruments.
spk02: Okay, thanks very much.
spk00: Sure.
spk06: Again, if you would like to ask a question, press the number, pardon me, if you'd like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from Meta Marshall. Please go ahead.
spk01: Great, thanks. Maybe just if we could get a rough mix of the NE business between lab production and field instrumentation, if there's any kind of like rough buckets just to kind of help us contextualize when we are seeing recovery in one element of the business versus the other, if there's just any directional guidance that we could have there.
spk00: I'll start and I'll turn it over to Hank. You know, we've been working very hard over the last six years or so to reduce our dependency on the service provider or field instruments. One of our very bright stars was really significant growth in lab and production. So it actually got to the point where it's a meaningful share of our revenue. That's the sharp pullback during the March quarter was a great impact and I'll turn to Hank to provide some general
spk04: Thank you. Typically, the mix within an E is more than 50% field, 55%, 45%, what we call lab products. Lab and production includes some wireless components. In the March quarter, it was slightly different. It was closer to 60%, 40%. So that sort of speaks to the significance of the decline that we saw in that lab business, as we just discussed.
spk01: Okay, perfect. And then on the 3D sensing side, you guys noted just kind of some headwinds in fiscal Q4 on new phone model designs. Is there a change in content that we should be mindful of, or it's just you don't know what model it is, so they're not holding as much inventory of any filters?
spk00: Well, there is going to be, obviously, a new model launched, as well as the older models, we'll say. But even in the new and the old models, some of the modules are being redesigned, and they're going to use the newer, even though the same size, but more advanced, higher performance filter. So all the contract manufacturers and OEMs that are trying to work down the existing inventory, which is not that big, but also they are transitioning to the new model here. So, of course, everybody wants to consume whatever they have on hand and then do a switch over. And, of course, as you know, the phone sales are down year on year. So, combination of lower demand and, you know, consumption of the whatever inventory anybody has on hand is what's muting some of the volume. Okay, perfect. Thank you. I'll pass it on. Sure.
spk06: There are no further questions at this time. I will turn the call back over to Sagar Habar, Head of Investor Relations. Thank you, John-Louis. This concludes our earnings call for today.
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