Viavi Solutions Inc.

Good afternoon, everyone, and welcome to VRB Solutions' fourth quarter and full year 2024 earnings call. My name is Vibhuti Nair, Head of Investor Relations for VRB Solutions. And with me on today's call is Oleg Hykin, our President and CEO, and Ilan Daskal, our 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 the guidance that we provide during this call, are valid only as of today. The IBE undertakes no obligation to update these statements. Please also note that unless we state otherwise, all results discussed on this call, 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, as well as 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 we will make the recording available on our website by 4.30 p.m. Pacific time this evening. Now, I would like to turn the call over to Elad.

Thank you, Vibhuti. Good afternoon, everyone. And now I would like to review the results of the fourth quarter of fiscal year 2024. Net revenue for the quarter was $252 million, which was at the midpoint of our guidance range of $246 to $258 million. Revenue was up sequentially by 2.4%, and on a year-over-year basis was down 4.4%. Operating margin for the fourth quarter was 10.9%, which was above the midpoint of our guidance range of 9.5% to 11.8%. Operating margin increased 160 basis points from the prior quarter and on a year-over-year basis was down 80 basis points. EPS at 8 cents at the high end of our guidance range of 6 to 8 cents and was up 2 cents sequentially. On a year-over-year basis, EPS was down 2 cents. For the full fiscal year, revenue was $1 billion, down 9.6% on a year-over-year basis, primarily due to conservative spend by service providers and NEMS. Operating margin for the full year was 11.5%, down 410 basis points from fiscal year 2023. And full year EPS was 33 cents, down 22 cents from the prior year, primarily due to lower year-over-year revenue. Moving on to our fourth fiscal quarter results by business segment. NSE revenue for the quarter came in at $182.2 million, which is at the lower end of our guidance range of $179 to $189 million, And on a year-over-year basis, NSE revenue was down 7.9% for the quarter. NE revenue for the fourth quarter was $158.5 million, which is a 9.7% year-over-year decline as a result of continued conservative spend by service providers and NEMS. SE revenue was $23.7 million and up 5.8% from the same period last year. partially supported by revenue that was pushed out from Q3. NSE gross margin for the quarter was 62.1%, which is flat on a year-over-year basis. NE gross margin was 61.3%, which is a decline of 40 basis points as compared to the same period last year. SE gross margin was 67.5%, which is an increase of 190 basis points from the same period last year and was driven by product mix. NSC's operating margin for the fourth quarter was 1.8%, which is an improvement of 360 basis points sequentially and 400 basis points lower than the same period last year. NSC's operating margin was at the low end of our guidance range of 1.4%, to 3.6% due to lower revenue. OSP revenue for the quarter came in at $69.8 million, which was above the high end of our guidance range of $67 to $69 million, and was up 6.2% on a year-over-year basis as a result of strengths across all products. OSP gross margin was 53%, which is an increase of 640 basis points from the same period last year, and was primarily driven by higher revenue, favorable product mix, and production ramp at our new manufacturing facility in Chandler. OSP's operating margin was 34.8%, which is up 50 basis points sequentially, and 530 basis points increase on a year-over-year basis as a result of the higher gross margin fall through. OSP's operating margin exceeded the high end of our guidance range of 31% to 34%. Moving on to the balance sheet and cash flow. Total cash and short-term investments at the end of Q4 was $496.2 million compared to $486.1 million at the end of the third fiscal quarter of 2024. Cash flow from operating activities for the fourth quarter was $26.2 million versus $23.5 million in the same period last year. During the quarter, we purchased 1.3 million shares of our stock for about $10 million. For the full year, we purchased 2.3 million shares for about $20 million. We have approximately $215 million remaining under our current authorized share repurchase program. The fully diluted share count for the quarter was 224.2 million shares, down from 224.6 million shares in the prior quarter, and versus 225.5 million shares in our guidance for the fourth quarter. CapEx for the quarter was $3.8 million compared to $7.4 million in the same period last year when we were completing the construction of our new facility in Chandler. In June 2024, we initiated a restructuring and workforce reduction plan to improve operational efficiencies and better align with the current business needs. We expect approximately 6% of our global workforce to be impacted and estimate to incur approximately $15 million of restructuring charges in connection with this plan. As a result of this initiative, we anticipate to achieve by the end of fiscal 2025 an annualized cost savings run rate of approximately $25 million, which will mainly benefit our operating expenses. Moving on to our guidance. We expect that the first half of fiscal 2025 will continue to experience a conservative spend environment by service providers and NEMS. That said, we believe that we are nearing the bottom of the down cycle and we expect a gradual recovery in demand in the second half of this fiscal year. Given the lingering softness, we are guiding for the first fiscal quarter of 2025 revenue in the range of $235 million and $245 million. Operating margin is expected to be 10.8% plus or minus 90 basis points, and EPS to be between 5 cents and 7 cents. We expect NSE revenue to be approximately $164 million plus or minus $4 million with a break-even operating margin plus or minus 100 basis points. OSP revenue is expected to be approximately $76 million plus or minus $1 million with an operating margin of 34% plus or minus 100 basis points. Our tax expenses for the first fiscal quarter are expected to be about $8 million, plus or minus $500,000 as a result of jurisdictional mix. We expect other income and expenses to reflect a net expense of approximately $3.5 million. And the share count is expected to be about 224.2 million shares. With that, I will turn the call over to Oleg. Oleg?

Thank you, Ilan. The IV and market spend environment continues to be conservative, particularly the North American service providers. Despite these headwinds, our revenue came in at the midpoint of our guidance, with stronger OSP revenue partially offsetting weaker NSE demand. Our EPS was at the higher end of our guidance range. Starting with NSE, the fiscal fourth quarter NSE revenue came in at the lower end of our guidance range. NSC revenue declined 8% on year-over-year basis, driven by the softer demand from service providers and wireless NAMs. We believe that decline in NSC demand is bottoming out, and we should start to see a recovery in the second half of the fiscal year. A bit more color on that. The first is field instruments demand remain largely at the maintenance levels. due to the absence of major network build-outs and upgrades by Tier 1 service providers, particularly in North America. That said, the investment in data center fiber internetworking by Tier 2 operators, together with recent comments by major service providers regarding their fiber plans, leads us to expect a pickup in field instruments demand in the second half of fiscal 2025. Our wireless demand continues to be impacted by sharply reduced R&D and production capex spend by major wireless NAMs, who have reduced investment in response to significant cutbacks in 5G deployment by wireless operators. One positive recent trend we are seeing is the emergence of many new customers pursuing ORAN development. However, their cumulative spend is still relatively small. Other parts of NSC are faring much better. Fiber lab and production demand was slightly up. We expect the upcoming transition to 1.6 terabits and ramp of PCI Express 6.0 to drive recovery and growth during the fiscal 25 for fiber lab and production. Mill Aero business continues to be a bright spot, seeing year-over-year growth in revenue driven by strong customer demand for communication, avionics, and positioning, navigation, and timing products. We expect this business segment to enjoy strong demand throughout fiscal 25. SE segment grew year-on-year, helped by enterprise orders that were pushed out from Q3. We are seeing a lot of interest in our AIOps products, and expected to be a growth driver for fiscal 25 and beyond. As we look at Q1 fiscal 25, we expect a seasonally weaker demand driven by similar dynamics as in Q4. Continued demand weakness from the service providers in wireless and wireless NEMs leading to overall weaker NE and seasonally weaker SE revenue offset by continued strength and fiber level production and mail error business. Looking ahead at fiscal 25 for NSE, we expect the conservative spend environment to persist for the remainder of calendar 24 and a gradual demand recovery in the first half of calendar 25. Now turning to OSP. The fiscal fourth quarter OSP grew on a year-over-year basis, mainly driven by higher demand for anti-counterfeiting and 3D sensing products. Overall, OSP results exceeded the higher end of our guidance range. Looking ahead, we expect OSP to be sequentially up in the September quarter, mostly driven by seasonally stronger demand for 3D sensing products. Overall, we expect fiscal 25 OSP demand to be similar to fiscal 24. To summarize, the fiscal 24 was a challenging year for VIAVE and the industry. While we expect the soft market environment to persist for the remainder of calendar 24. We anticipate the start of gradual recovery in first half of calendar 25. I would like to thank my VIAVE team for managing through this challenging environment and express my appreciation to our employees, customers, and shareholders for their support. With that, I'll turn it over to Vibhuti.