Viavi Solutions Inc.

Hello, everyone. My name is David. Welcome to the VIAVI Solutions fourth quarter and full fiscal year 2023 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 Hank Dirksen, VIAVI Solutions CFO. Please begin.

Thank you, David, and welcome to VIAVI Solutions fourth quarter. 2023 Earnings Call. My name is Henk Derksen, BIAVI Solutions CFO. Also joining me on today's call is Oleg Hyken, 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 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. The IRB 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 their usefulness and limitations in today's earnings release. The release plus 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 by 4.30 p.m. Pacific time this evening on our website. Let's start with our quarterly financial results. Fiscal Q4 revenue came in at $263.6 million, slightly ahead of the high end of our guidance range of $242 million to $262 million. up sequentially by 6.4% and down 21.4% on a year-over-year basis. Operating profit margin of 11.7% near the high end of our guidance range of 10 to 12.4% increased by 30 basis points from the prior quarter and decreased 9.6% from the prior year result of leverage on lower revenues. EPS at $0.10 ended above the high end of the guidance range of $0.07 to $0.09, up $0.02 sequentially, and down $0.14 year over year. The current share count was 223.6 million during the quarter, down from 231.3 million shares in the prior year. Cash flow from operations was $23.5 million for the fourth quarter versus $73.6 million in the prior year period. Fiscal 2023 was a challenging year for VIAVI. The full year revenues decreased from record levels of $1.3 billion in 2022 to $1.1 billion in fiscal 2023, down 14.4%, a result of an overall slowdown in service providers, network equipment manufacturer, and semiconductor spend. NSE full-year fiscal revenue came in at $801.2 million, down 15.6% year-over-year from $949.1 million. OSP also experienced contraction as central banks digested currency inventory builds during COVID. reducing revenues from $343.3 million in 2022 to $304.9 million in fiscal 2023, or down 11.2%. Mainly because of low revenues, we have this full year 2023 operating profit margin at 15.6%, declined 6.6% from 22.2% in 2022. Within our NSE segment, operating profit margins declined 8% from 15.6% in 2022 to 7.6% in 2023. Within our OSP segment, operating profit margins reduced from 40.5% in 2022 to 36.5% in 2023, which also includes the impact of startup costs related to our new facility in Chandler. Full year 2023 EPS at $0.55 decreased 42.1% or $0.40 from record EPS levels of $0.95 in 2022. Despite headwinds, cash flow from operations for the full year continued to be solid as we generated $114.1 million in fiscal 2023 and $63 million in free cash flow. compared to 105.6 million pre-cash flow in fiscal 2022. For further improving our balance sheet by retiring the remaining 2023 convertible notes and partly exchanging the 2024 notes comparable terms, we continue to execute on our capital allocation strategy. and deployed $83.9 million towards our share repurchase program and $67.3 million towards acquisitions. This average share count during the year reduced from 231.3 million to 223.6 million shares. As a result, the change in short-term outlook early in fiscal 2023, we announced a restructuring program in February of this year. that cumulated into a reduction of approximately 5% of the labor force with a non-recurring expense of $12 million that is expected to result in net operating expense savings of $28 million on an annual basis. Finalization of this plan is below our original expected non-recurring expense of $15 million. and better than our originally anticipated savings commitment of $25 million. Reduced levels of operating expenses in combination with an improved capital structure will allow us to benefit from more meaningful operating and financial leverage as revenue recovers. Now moving to our reported Q4 results by business segment, starting with NSE. NSE revenue came in at $197.9 million, exceeded our expectations of $179 million to $195 million, albeit down 19.6% year-over-year. NSE revenue of $173.3 million improved 15.8% sequentially and declined 22% year-over-year. at $24.6 million, increased 2.5% from last year. NSE gross profit margin at 62.1% decreased by 280 basis points year over year. Within NSE and E gross profit margins, at 61.5% decreased 270 basis points from the prior year, primarily due to leverage on lower volume in combination with product mix. SE gross profit margins at 66.3% decreased 500 basis points from last year, primarily due to unfavorable product mix. NSEs operating profit margin at 5.8% was near the high end of our guidance range of 3 to 6%. Now turning to OSP. Four-quarter revenue at $65.7 million ended up slightly ahead of the midpoint of our guidance range of $63 million to $67 million, and down 26.3% year-over-year. Gross profit margin at 46.6% decreased 9.3% year-over-year, slightly lower than expected, mainly a result of leverage on lower revenue. Now that the Chandler startup costs are behind us, and as revenue returns, we expect the gross profit margins to normalize to historical levels. The operating profit margin of 29.5% came in slightly below the guidance range of 30 to 31% and declined 9.1% year over year. Now turning to the balance sheet. The ending balance of our total cash and short-term investments was $525.6 million. down 39.3 million compared to the prior year during the fourth quarter the company repaid the remaining 68.1 million principal value of 2023 convertible notes as well as a 0.6 million semi-annual interest payment for a total of 68.7 million dollars At the end of the fourth quarter, 2023, we're left with an outstanding balance of $96.4 million on the 2024 convertible notes that we are planning to pay down with cash on the balance sheet during the upcoming quarters. Our balance sheet is strong. We improved the quality of our debt by reducing our convertible notes exposure, adding long-term fixed-rate debt, and as a result, extended maturities at a lower cost. As mentioned earlier, operating cash flow for the quarter was $23.2 million, an increase of $5.4 million from the prior quarter and a decrease of $50.4 million year-over-year. In addition, we invested $7.4 million in capital expenditures during the quarter compared to $10.8 million in the prior quarter, prior year quarter. Fiscal Q4, and in addition to retiring convertible notes, as mentioned before, we repurchased 1 million shares of common stock for $10 million under the current share repurchase program. On a full year basis, we repurchased 7.3 million shares of common stock for a total of $83.9 million and returned over 100% of free cash flow generation in fiscal 2023 to our common shareholders. As you may recall, in September, we announced that the board authorized a new common stock repurchase program for up to 300 million. As of the beginning of fiscal 2024, we have 234 million available under this program. Now onto our guidance. We expect the first fiscal quarter 2024 revenue to be in the range of 240 to $260 million. Operating profit margins is expected to be 13.5% plus or minus 70 basis points, an anticipated improvement of 180 basis points sequentially, and EPS to be between 9 cents and 11 cents. We expect NSE revenue to be approximately $175 million plus or minus 8 million with an operating profit margin of 4% plus or minus 100 basis points. OSP revenue is expected to be approximately $75 million, plus or minus 2 million, with an operating profit margin of 35.5% plus or minus 50 basis points. Our tax expense is expected to be around $8 million, or 26% for the first quarter, a result of jurisdictional mix. We expect On income expenses to reflect a net expense of approximately $4 million, the share count is expected to be around 224 million shares. With that, I will turn the call over to Oleg.

Thank you, Henk. During 2023 fiscal fourth quarter, we saw initial signs of stabilization and gradual recovery. Despite the slowdown in overall service provider spend, some service providers have begun to free up funds for network maintenance and optimization, which benefits the NFC business segment. As a result, our fiscal fourth quarter revenue came in slightly above the higher end of our guidance, and we expect the stabilization and recovery momentum to continue throughout the fiscal year. NFC revenue declined year on year, but grew sequentially, driven primarily by our NE business segments. NE was up double-digit percentage sequentially, reflecting a rebound in demand from cable service providers upgrading their networks. Demand for level production test equipment from wireless and fiber NAMs and semiconductor companies saw gradual recovery from the lows in the March quarter. Ofcom business continued to perform well, driven by robust demand from the avionics and mil-air customers. Our SE business segment grew 2.5% year-on-year, in line with our expectations. Now turning to OSP. The OSP demand environment continues to be challenging. That said, the fourth quarter revenue came in slightly better than expected, held by stronger demand for anti-counterfeiting products. 3D sensing revenue was impacted by seasonally lower demand for smartphones, and the supply chain transitioned to new form models. Fiscal 2023 was a very challenging year for Viavi. Early in the fiscal year, NSC demand experienced a rapid slowdown in orders from service providers. The slowdown pattern was broad-based across all customers and geographies. The slowdown in spend by service providers then spread to the network equipment manufacturers and semiconductor companies, further impacting demand for our NSC products. The OSP business unit started the fiscal year strong, but so demand for its two major products impacted by macroeconomic headwinds. The demand for anti-controverting products was impacted by the inventory corrections as governments dialed back fiscal stimulus, and 3D sensing was impacted by weaker demand for smartphones. Despite the disappointing year, VIAVI continued to invest in new technologies and applications, expanding into higher growth markets such as resilient P&T, and initiated and completed the restructuring program to reduce expenses. These initiatives, combined with our strong position in our traditional markets, are expected to result in strong operating and financial leverage as our revenue rebounds. In conclusion, I'd like to thank my VIAVI team for managing this challenging environment and express my appreciation to our customers and shareholders for their support. With that, I will now turn it back to Operator for Q&A.