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OFFON

VIAVI SOLUTIONS INC.

(VIAV)
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Q122 Transcript

11/06/2021 EST

Corrected Transcript

04-Nov-2021

Viavi Solutions, Inc. (VIAV)

Q1 2022 Earnings Call

Total Pages: 18

1-877-FACTSET www.callstreet.com

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Viavi Solutions, Inc. (VIAV)

Corrected Transcript

Q1 2022 Earnings Call

04-Nov-2021

CORPORATE PARTICIPANTS

Bill Ong

Oleg Khaykin

Senior Director-Finance & Investor Relations, Viavi Solutions, Inc.

President, Chief Executive Officer & Director, Viavi Solutions, Inc.

Hendrikus Petrus Cornelis Derksen

Chief Financial Officer & Executive Vice President, Viavi Solutions, Inc.

.....................................................................................................................................................................................................................................................................

OTHER PARTICIPANTS

Alex Henderson

Tim Savageaux

Analyst, Needham & Co. LLC

Analyst, Northland Securities, Inc.

Samik Chatterjee

Meta A. Marshall

Analyst, JPMorgan Securities LLC

Analyst, Morgan Stanley & Co. LLC

Mehdi Hosseini

Richard Cutts Shannon

Analyst, Susquehanna Financial Group LLLP

Analyst, Craig-Hallum Capital Group LLC

Michael Genovese

Analyst, WestPark Capital, Inc. (Securities)

.....................................................................................................................................................................................................................................................................

MANAGEMENT DISCUSSION SECTION

Operator: Ladies and gentlemen, thank you so much for standing by and welcome to the VIAVI 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.

.....................................................................................................................................................................................................................................................................

Bill Ong

Senior Director-Finance & Investor Relations, Viavi Solutions, Inc.

Thank you, Paul. Welcome to VIAVI 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 Khaykin, President, CEO; and Henk Derksen, 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. VIAVI 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 our supplemental earnings slide which includes historical financial tables are available on VIAVI's website. Finally, we are recording today's call, and we'll make the recording available by 4:30 PM Pacific Time this evening on our website.

I would now like to turn to call to Henk.

2

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Viavi Solutions, Inc. (VIAV)

Corrected Transcript

Q1 2022 Earnings Call

04-Nov-2021

Hendrikus Petrus Cornelis Derksen

Chief Financial Officer & Executive Vice President, Viavi Solutions, Inc.

Thank you, Bill. Fiscal Q1 2022 reflects a VIAVI 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 million 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%.

EPS, had a quarterly record of $0.24 per share, exceeded the $0.20 to $0.22 guidance range and increased $0.03 or up 14.3% from the year-ago period. The share count of 242.3 million shares includes the dilutive impact of the convertible notes 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 million 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, NEE 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 guided range of 12% to 13%, primarily a result of operating leverage from higher revenue. Operating profit dollars more than doubled, as margins increased 630 basis points from a year ago, reflecting the leverage and 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 OSB second highest revenue quarter. The 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, a slightly higher manufacturing variances compared to last year's records. Operating profit margin of 44.1% is near the high end of our guided range of 42.5% to 44.5%, a decrease of 260 basis points from a year ago, as a result of 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 on the prior quarter and up to $326.2 million compared to the prior fiscal year. In addition to free cash flow 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

3

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Viavi Solutions, Inc. (VIAV)

Corrected Transcript

Q1 2022 Earnings Call

04-Nov-2021

$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 a 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 GAAP only loss included in interest expense and other income. The remaining outstanding balance of a 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 VIAVI common stock. Subsequently, the board authorized the repurchase of up to $190 million of these shares, which commenced at the 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 3, 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 VIAVI 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 $0.18 to $0.20 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.

4

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Viavi Solutions, Inc. (VIAV)

Corrected Transcript

Q1 2022 Earnings Call

04-Nov-2021

Oleg Khaykin

President, Chief Executive Officer & Director, Viavi Solutions, Inc.

Thank you, Henk.

Our fiscal year 2022 is off to a strong start with record revenue and non-GAAP profitability in Q1. I'm pleased with both NSE and OSP performance in delivering strong results despite supply chains 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 O-RAN technology now widely used in the lab, we are now starting to see initial deployment of O-RAN 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 MSOs' bandwidth expansion and 5G deployment. Semis and data center demand for [ph] 400Gb (00:13:36) continues to be very strong, with early [ph] 800Gb (00:13:40) products 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, these 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 these supply constraints to start alleviating by mid calendar 2022.

The SE business segment continues to recover with the revenue and customer business final growing nicely. We expect SE to continue to improve and grow as enterprise customers reevaluate their IT project needs and 5G assurance opportunities start to materialize in late calendar 2022.

Now, turning to OSP. The OSP business segment delivered 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- counterfeiting 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 3D sensing - to continue driving growth and profitability for VIAVI.

In conclusion, I would like to express my appreciation to the VIAVI team for its continued strong execution and 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.

.....................................................................................................................................................................................................................................................................

Bill Ong

Senior Director-Finance & Investor Relations, Viavi Solutions, Inc.

Thank you, Oleg.

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Disclaimer

Viavi Solutions Inc. published this content on 06 November 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 09 November 2021 09:12:01 UTC.


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Sales 2022 1 264 M - -
Net income 2022 -224 M - -
Net cash 2022 416 M - -
P/E ratio 2022 -18,5x
Yield 2022 -
Capitalization 4 036 M 4 036 M -
EV / Sales 2022 2,86x
EV / Sales 2023 2,65x
Nbr of Employees 3 600
Free-Float -
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Number of Analysts 9
Last Close Price 16,98 $
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Managers and Directors
Oleg Khaykin President, Chief Executive Officer & Director
Hendrikus Petrus Cornelis Derksen Chief Financial Officer & Executive Vice President
Richard E. Belluzzo Chairman
Ralph Rondinone Senior Vice President-Global Operations & Services
Masood A. Jabbar Independent Director
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