Viavi : Q221 Transcript

Corrected Transcript

02-Feb-2021

Viavi Solutions, Inc. (VIAV)

Q2 2021 Earnings Call

	Total Pages: 17
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Viavi Solutions, Inc. (VIAV)	Corrected Transcript
Q2 2021 Earnings Call	02-Feb-2021

CORPORATE PARTICIPANTS

Bill Ong

Senior Director of Finance, Investor Relations, Viavi Solutions, Inc.

Oleg Khaykin

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

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OTHER PARTICIPANTS

Samik Chatterjee	Richard Cutts Shannon
Analyst, JPMorgan Securities LLC	Analyst, Craig-Hallum Capital Group LLC
Alex Henderson	Tim Savageaux
Analyst, Needham & Co. LLC	Analyst, Northland Securities, Inc.
John Marchetti	Meta A. Marshall
Analyst, Stifel	Analyst, Morgan Stanley & Co. LLC
Mehdi Hosseini	Fahad Najam
Analyst, Susquehanna International Group	Executive Director/Senior Research Analyst, MKM Partners

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MANAGEMENT DISCUSSION SECTION

Operator: Ladies and gentlemen, thank you for standing by and welcome to VIAVI Solutions' Second Quarter 2021 Fiscal Year Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the call over to your speaker today, Mr. Bill Ong, Head of Investor Relations. Please go ahead.

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Bill Ong

Senior Director of Finance, Investor Relations, Viavi Solutions, Inc.

Thank you, Grace. Welcome to VIAVI Solutions' second quarter fiscal year 2021 earnings. My name is Bill Ong, Head of Investor Relations. Joining me on today's call is Oleg Khaykin, President and CEO; and [ph] Pam Avent, Interim CFO (00:00:51).

Please note, this call will include forward-looking statements about the company's financial performance. These statements are subject to risks and uncertainties that can cause actual results to differ materially from current expectations and estimations. We encourage you to view our most recent annual report and SEC filings, particularly the risk factors describing those filings. The forward-looking statements, including guidance we provide during this call, are valid only as of today. We undertake no obligation to update these statements.

Please also note that unless stated 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

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Viavi Solutions, Inc. (VIAV)	Corrected Transcript
Q2 2021 Earnings Call	02-Feb-2021

earnings release. Plus, our supplemental earnings slides which include 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 the call over to Pam.

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Unverified Participant

Thank you, Bill. Fiscal second quarter revenue came in at $299.9 million, at the high end of our guidance range of $280 million to $300 million The Q2 results represent a 4.4% year-on-year decline and a 5.3% quarter-on-quarter growth. The sequential growth was driven by continued recovery in NSE and strong OSP performance. Viavi's record operating margin at 22.3% expanded 70 basis points year-on-year and exceeded the guidance range of 19% to 20%. EPS at $0.23 tied the record EPS from a year ago and exceeded the guidance range of $0.18 to $0.20.

Now moving to our reported results by business segment, starting with NSE. NSE revenue at $206.7 million declined 11.7% year-on-year and grew 12.6% sequentially. Within NSE, NE revenue at $180.9 million declined 10.9% from year-ago, primarily due to pandemic-related declines in field instruments. SE revenue decreased 17.3% due in part to last year's stronger than usual demand in data center products. NSE gross margin at 63.3% declined 310 basis points year-on-year. Within NSE, NE gross margin at 62.6% declined 380 basis points from last year, primarily due to lower volumes.

SE gross margin at 68.2% increased a 150 basis points year-on-year due to favorable product mix. NSE's operating margin at 10.7% decreased 530 basis points year-on-year primarily as a result of lower revenue, partially offset by lower operating expenses.

Now turning to OSP. OSP had a strong quarter with revenue at $93.2 million, up 17.2% year-on-year driven by strong demand in anti-counterfeiting and 3D sensing. Gross margin was at a record 62.7%, up 790 basis points year-on-year driven by higher volume, favorable product mix, and high factory utilization. OSP also delivered a record operating margin of 47.9%, up 970 basis point from last year's levels as a result of higher gross margin and OpEx management.

Now turning to the balance sheet. The ending balance of our total cash and short term investments was $648.8 million, an increase of $53.3 million sequentially. Our operating cash flow, quarter, was a record $68.7 million. In Q2, we repurchased approximately $17.1 million of VIAVI stock at an average cost of $13.26 per share including commissions. Overall, we have repurchased approximately $68.3 million out of the $200 million authorized under the share buyback plan announced in September 2019. At the end of Q2, cumulatively under this plan, the average overall cost was $12.28 per share. We will continue to be opportunistic in our share repurchase.

Now on to guidance. We expect the third quarter revenue to be approximately $290 million, plus or minus $10 million. Operating margin is expected to be between 17.5% to 18.5%, and EPS to be in the range of $0.16 to $0.18. We expect NSE revenue to be approximately $197 million, plus or minus $8 million with operating margin at 6.5% plus or minus 50 basis points. The OSP revenue is expected to be approximately $93 million, plus or minus $2 million with operating margin at 43% plus or minus 100 basis points. Our tax expense rate is expected to be approximately 18% to 20%. We expect other income and expenses to reflect a net expense of approximately $3.5 million.

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Viavi Solutions, Inc. (VIAV)	Corrected Transcript
Q2 2021 Earnings Call	02-Feb-2021

The estimated fully diluted share count used in our calculation is 240 million shares. This includes an increase of approximately 8 million shares in Q2 as an adjustment to reflect the estimated dilution impact from our 2023 and 2024 convertible notes.

With that, I will turn the call over to Oleg.

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Oleg Khaykin

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

Thank you, [ph] Pam (00:07:12). I am pleased with the obvious performance in the second fiscal quarter. Our OSP business segment recorded its second highest revenue quarter and a record profitability. In our NSE business segment, storage revenue and profitability continue to recover. The NE segment revenue recovery was led by increased demand for field instruments as service providers resumed their network maintenance activities and geared up for new deployment projects.

Optical Lab and Production and Wireless continue to enjoy strong customer demand driven by 400GbE in fiber and 5G in Wireless. We are also seeing growing customer interest in 800GbE and ORAN. We see 800GbE and ORAN technology as drivers behind the next growth wave for Lab and Production and Wireless respectively.

The SE business segment had a robust Q2. Looking ahead, we expect Q3 to be weaker driven by a confluence of two trends, the reduced spending by service providers on existing networks as they gear up for 5G and the delays in new projects by the enterprise customers until more staff is able to return to work. That said, we expect SE revenue to start rebounding in fiscal Q4. Overall, we expect NSE demand continue to improve in calendar 2021 with above-seasonal demand outlook in the current fiscal Q3. Additionally, we expect 5G field instruments demand to start picking up in the second half of calendar 2021 as 5G service providers start ramping up their network build-outs.

Now turning to OSP. The OSP business segment finished the first half of fiscal year 2021 with record revenue and profitability driven by strong demand for Anti-Counterfeiting and 3D Sensing product. Anti-Counterfeiting demand is being driven by a combination of global central banks' fiscal stimulus, inventory replenishment and new [indiscernible] (00:09:17) military designs. We expect the secular strength to be sustainable in the foreseeable future. 3D Sensing demand for mobile devices came in stronger than expected, driven by increased adoption and penetration. With facial recognition applications in the marketplace for more than three years now, we now have a large and growing demand from a - the lead customer with more customers and devices planning to launch later in calendar 2021. As a result, we now expect 3D Sensing revenue for fiscal year 2021 to increase to 20% year- on-year, up from the initial guidance of 10% to 20% year-on-year.

Looking back at calendar 2020, I'm pleased with our performance and execution. Despite the unprecedented pandemic-driven setback to our business in early 2020, we managed to recover our revenue and profits throughout the year, finishing it by tying our record quarterly EPS. Our fiscal Q3 is off to a good start and we look forward to driving continued recovery and growth in calendar 2021.

A quick update on the CFO search. We have interviewed many impressive candidates and have narrowed it down to a final few. We expect to announce our new CFO sometime in March. In conclusion,

I'd like to express my appreciation to the Viavi team for its strong execution during these challenging times and wish all our employees, supply chain partners, customers and our shareholders to stay safe and healthy.

I will now turn the call over to Bill.

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