Viavi : Q321 Transcript

Corrected Transcript

04-May-2021

Viavi Solutions, Inc. (VIAV)

Q3 2021 Earnings Call

	Total Pages: 14
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Viavi Solutions, Inc. (VIAV)	Corrected Transcript
Q3 2021 Earnings Call	04-May-2021

CORPORATE PARTICIPANTS

Bill Ong	Oleg Khaykin
Senior Director of Finance, Investor Relations, VIAVI Solutions, Inc.	President, Chief Executive Officer & Director, Viavi Solutions, Inc.
Henk Derksen
Executive Vice President & Chief Financial Officer, VIAVI Solutions, Inc.

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OTHER PARTICIPANTS

Joseph Cardoso	Mehdi Hosseini
Analyst, JPMorgan Securities LLC	Analyst, Susquehanna Financial Group LLLP
Alex Henderson	Tim Savageaux
Analyst, Needham & Co. LLC	Analyst, Northland Securities, Inc.

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MANAGEMENT DISCUSSION SECTION

Operator: Good day. Thank you for standing by and welcome to the VIAVI Solutions' Third Quarter Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

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

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Bill Ong

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

Thank you, Christina. Welcome to VIAVI Solutions' third quarter fiscal year 2021 earnings call. My name is Bill Ong, Head of Investor Relations. Joining me on today's call are Oleg Khaykin, President and 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 can cause actual results to differ materially from our current expectations and estimations. We encourage you to view 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.

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Viavi Solutions, Inc. (VIAV)	Corrected Transcript
Q3 2021 Earnings Call	04-May-2021

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 Henk.

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Henk Derksen

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

Thank you, Bill. And welcome everyone and thank you for joining today's call. My name is Henk Derksen, and I'm extremely pleased to have joined VIAVI. I joined from Belden where I spent more than 20 years in various finance and operating roles, and served as the CFO during the last 10 years prior to coming here. I'm very excited to have the opportunity to work with Oleg and the rest of the VIAVI team. I look forward to speaking and meeting with many of you in the coming months.

Now, on to the VIAVI'S results. Fiscal Q3 2021 reflects a strong quarter with VIAVI record revenue and non-GAAP profitability, as well as cash flow for a given March quarter, which is typically a seasonally weaker quarter. Third quarter revenue came in at $303.4 million, which exceeded our guided range of $280 million to $300 million. Revenue grew 18.4% from a year-ago level, exceeding pre-pandemic levels and setting an all-time VIAVI Q3 record. The year-over-year performance reflects the robust recovery from last year's pandemic impact, continued strength in Wireless and Fiber, as well as very strong continued Anti-Counterfeiting demand in OSP.

VIAVI'S operating profit margin at 22.2% expanded 540 basis points year-over-year, and exceeded the guidance range of 18.5% to 18.5%. EPS at $0.18 reached the high end of the $0.16 to $0.18 guidance range, and increased $0.04 from a year ago. Stronger-than-expected volume in our Asia Pacific region resulted in a shift in the jurisdictional mix of income contributing to a higher effective tax rate of 26% versus our 18% to 20% guidance. Going forward, for the fourth quarter, we expect the tax rate to normalize within the range of 19% to 21% and be approximately 20% for the full year.

Now moving to our reported Q3 results by business segment, starting with NSE. NSE revenue at $211.2 million increased 12.9% year-over-year and grew 2.2% sequentially, exceeding our guided range of $189 million to $205 million.

Within NSE, NE revenue at $190.9 million increased 16.5% from a year ago, and increased 5.5% sequentially, reflecting the recovery from last year's adverse pandemic impact with increases in Fiber, Cable and Wireless products. The SE revenue decreased 12.1% year-over-year, and decreased 21.3% sequentially, reflecting weak demand for our Assurance and Data Center products. We expect the SE business segment to start recovering in the coming quarters.

NSE gross profit margin at 64.2% was in line with last year's performance and down 10 basis points year-over- year. Within NSE, NE gross profit margins at 64.5% increased 90 basis points from last year, primarily due to higher revenue volumes and favorable product mix. SE gross profit margins at 61.1% decreased 820 basis points year-over-year due to lower revenue.

NSE's operating profit margin at 9.9% increased 250 basis points year-over-year, exceeding the high end of our guided range of 6% to 7%, primarily as a result of operating leverage on higher revenue.

Now turning to OSP. OSP had a strong quarter, with revenue at $92.2 million, up 33.2% year-over-year, driven by very robust demand for our Anti-Counterfeiting as well as 3D Sensing products. Third quarter revenue at $92.2 million was within our guided range of $91 million to $95 million.

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Viavi Solutions, Inc. (VIAV)	Corrected Transcript
Q3 2021 Earnings Call	04-May-2021

Gross profit margin at 60.6% increased 800 basis points year-over-year, driven by higher volume, favorable product mix, and high factory utilization.

Operating profit margin of 43.9%, at the high end of our guided range of 42% to 44%, increased 890 basis points from last year's levels as a result of the aforementioned.

Now turning to the balance sheet. The ending balance of our total cash and short-term investments was $678.1 million, an increase of $29.3 million sequentially. Our operating cash flow for the quarter was $48.1 million. A record third quarter for VIAVI, and an increase of $9 million compared to $39.1 million in the year-ago period.

We invested $8.2 million in capital expenditures during the quarter, compared to $10.3 million in the prior year. In Q3, we repurchased $7.9 million of ERV stock at an average cost of $15.93 share including commissions. In total, as of the end of the third quarter, we repurchased $76.2 million out of the $200 million authorized under the share buyback plan announced in September 2019 at an average price of $12.57 per share. We will continue to be opportunistic in our share repurchase.

Now onto our guidance. We expect the fiscal fourth quarter revenue to be approximately $300 million plus or minus $10 million. Operating profit margin is expected to be between 19.5% and 20.5% and EPS in the range of $0.18 to $0.20. We expect NSC revenue to be approximately $227 million plus or minus $8 million with operating profit margin at 14% plus or minus 50 basis points. OSP revenue is expected to be approximately $73 million plus or minus $2 million with operating profit margin at 39% plus or minus 100 basis funds. Our tax expense rate is expected to be approximately 19% to 21%. We expect other income and expenses to reflect a net expense of approximately $3.5 million.

The estimated fully diluted share count used in our calculation is 243 million shares. This includes an increase of approximately 11 million shares to reflect estimated dilution impact from the 2023 and 2024 convertible notes. The share count without the convert dilution is approximately 232 million shares.

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, Henk, and welcome to our first official earnings at VIAVI. I'm pleased with VIAVI's performance in fiscal Q3 as we have surpassed the pre-COVID levels of business and achieved the new historical highs in revenue and non-GAAP profitability for fiscal Q3 driven by both of our business segments.

The NE segment benefited from continued business recovery led by increased demand for fiber and cable-filled instruments as MSOs and telco service providers resumed their maintenance and network upgrade activities. The recovery was particularly strong in the Americas and Europe. Our 11 production equipment continued to see strong demand driven by 400 GigE and wireless infrastructure customers.

The SE business segments, as expected, came in weaker in Q3 driven by a confluence of two trends: the reduced spending by service providers and existing networks as they gear up for 5G; and the delays in new projects by enterprise customers until more staff is able to return to work. That said, we expect SE revenues and bookings to start rebounding in fiscal Q4. We expect the SE demand to continue to improve throughout the calendar 2021 returning to and exceeding throughout the calendar 2021 returning to and exceeding pre-COVID levels.

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Viavi Solutions, Inc. (VIAV)	Corrected Transcript
Q3 2021 Earnings Call	04-May-2021

Additionally, we expect 5G field instruments demand to start materializing in the second half of calendar 2021 as 5G service providers start ramping up their network build-outs. Longer term, we expect several major industry and political trends to set up NSC for a multiyear super cycle. The carriers recently made sizable investments in spectrum and are now aggressively working on 5G wireless field deployment plans. The 5G market presents VIAVI with new wireless and fiber growth opportunities. Our wireless products are already off to a strong start with solid bookings and business visibility. We are also seeing attractive growth opportunities in Europe as governments there push to help fund the deployment of Fiber-to-the-Home to replace their legacy copper networks. And lastly, the US plans for multiyear investment in broadband outside major cities is expected to present VIAVI with new markets and opportunities for Fiber, Cable, and Wireless.

Now, turning onto OSP. The OSP business segment delivered record revenue and profitability for March quarter led by strong demand for both Anti-Counterfeiting and 3D Sensing products. Anti-Counterfeiting demand is being driven by a combination of global central bank fiscal stimulus, inventory replenishment, and banknote redesigns. Fiscal Q3 saw above seasonal demand by major customers and we expect stronger than normalized demand for anti-counterfeiting products to persist in the foreseeable future. 3D Sensing demands from mobile devices remains strong and is up double-digit percentage from a year ago levels, reflecting the increased adoption and penetration. We expect 3D Sensing revenue in fiscal year 2021 to be up 16% year-on-year. This is a slight decrease from our prior quarter expectations of being up 20% year-on-year driven by industry semiconductor supply chain constraints.

To summarize, calendar 2021 is off to a strong start with both NSE business segment experiencing a rapid recovery and expecting year-on-year revenue growth throughout the rest of the calendar year. The OSP Business segment is expecting to see continued robust demand for the Anti-Counterfeiting products driven by a global fiscal stimulus programs and currency redesigns. And 3D sensing is expected to continue to see further adoption and penetration opportunities.

Overall, we expect our principal growth drivers, 5G, Fiber, and 3D Sensing to continue driving growth for VIAVI in calendar 2021. In conclusion, I would like to express my appreciation to the VIAVI team for its continued strong execution in delivering another record quarter and wish all our employees and supply chain partners, customers, and our shareholders to remain safe and healthy as we return to business normalcy.

I will now turn the call over to Bill.

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Bill Ong

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

Thank you, Oleg. This quarter we'll be participating at the Needham TMT Investor Conference on May 20th and the Stifel Cross Sector Investor Conference on June 8th.

Christina, let's begin the question-and-answer session. We ask everyone to limit discussion to one question and one follow-up.

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