Viavi Solutions Inc. (NASDAQ:VIAV) Q1 2024 Earnings Call Transcript

Viavi Solutions Inc. (NASDAQ:VIAV) Q1 2024 Earnings Call Transcript November 2, 2023

Viavi Solutions Inc. misses on earnings expectations. Reported EPS is $0.04371 EPS, expectations were $0.1.

Operator: Hello, everyone. My name is Alexis. Welcome to the Viavi Solutions First Quarter Full Year 2024 Earnings Call. [Operator Instructions]. I will now turn the line over to Pam Avent, Viavi Solutions Interim CFO. Please go ahead.

Pam Avent: Thank you, Alexis. Welcome to Viavi Solutions’ First Quarter fiscal year 2024 earnings call. My name is Pam Avent, Viavi Solutions Interim CFO. Also joining me on today’s call is Oleg Khaykin, our President and CEO. 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 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 Solutions’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 Q1 revenue came in at $247.9 million, slightly below the midpoint of our guidance range $240 million to $260 million. Revenue was down sequentially 6% and down 20.1% on a year-over-year basis.

Operating profit margin of 12.4% was slightly below our guidance range of 12.7% to 14.2%, up by 70 basis points from the prior quarter, and down 930 basis points from the prior year. EPS at $0.09 met the low end of our guidance range of $0.09 to $0.11, down $0.01 sequentially and down $0.14 year over year. The current fully diluted share count was 224.2 million shares during the quarter, down from 230.4 million shares in the prior year. Cash flow from operations for our first quarter was $50.3 million versus $26.6 million a year ago. Now moving to our quarterly results, by business segment for Q1. Starting with NSE. NSE revenue came in at $170.4 million, above the low end of our guidance range of $167 million to $183 million, and down 22.2% year-over-year, primarily as a result of weaker spend in the service provider market.

NE revenue at $150 million declined 23.7% year-over-year. SE revenue at $20.4 million declined 8.9% from last year. NSE gross profit margin at 63.6% increased a 150 basis points sequentially, and decreased by 110 basis points year-over-year. Within NSE, NE gross profit margin at 63.1% decreased 140 basis points from the prior year, primarily due to a combination of lower volume and product mix. SE gross profit margin at 67.2% increased 110 basis points from last year, driven by richer product mix. NSE’s operating profit margin at 0.9% came in below our guidance range of 3% to 5%, as a result of lower volumes and less favorable product mix. Now turning to OSP. Driven by higher demand for the anti-counterfeiting and 3D sensing products, first quarter revenue came in at $77.5 million, slightly above the high end of our guidance range of $73 million to $77 million, and was down 15.1% year-over-year.

Gross profit margin at 52.5% decline 420 basis points year-over-year. Operating margin at 37.8% also exceeded the high-end of our guidance range and declined 450 basis points year-over-year. Now turning to the balance sheet. The ending balance of our total cash and short-term investments was $544.5 million, up $27.4 million compared to the prior year. As previously mentioned, operating cash flows for the quarter was $50.3 million an increase of $26.8 million from the prior quarter and an increase of $23.7 million year-over-year. In addition, capital expenditures during the quarter of $6.7 million were down from the $14.8 million in the prior year when we were completing construction of our new facility in Chandler. In addition, during fiscal Q1, we repurchased 1 million shares of our common stock for $10 million.

As you may recall, in September of last year, we announced a new common stock repurchase program for up to $300 billion. At the end of fiscal Q1 2024, we had $224.8 million available into this program. Now onto guidance, we expect our fiscal second quarter 2024 revenue to be in the range of $240 million to $260 million. Operating profit margin is expected to be 11.2%, plus or minus 160 basis points, and EPS to be $0.06 to $0.10. We expect NSC revenue to be approximately $177 million, plus or minus $8 million. With an operating profit margin of 2% plus or minus 200 basis points. OSP revenue is expected to be approximately $73 million plus or minus $2 million. With an operating profit margin of 33.5% plus or minus a hundred basis points, our tax expense is expected to be around $8 million, plus or minus half $1 million for the second quarter as a result of jurisdictional mix.

We expect other income and expenses to be a net expense of approximately $3 million, and the share count is expected to be around 222 million shares. With that, I will turn the call over to Oleg.

Oleg Khaykin: Thank you, Pam. During the September quarter, our end-market spend environment continued to be challenging, particularly with the service providers in North America. In view of these continued headwinds, our revenue came in slightly below the midpoint of our guidance with stronger OSP demand helping to offset weaker telecom service provider revenues. Our EPS came in at the low end of our guidance range, driven by lower volume and higher taxes due to less favorable geographic revenue mix. With NSC, we saw a mixed performance. The demand for our field fiber, cable, service enablement and wireless lab products came in weaker than expected due to tight span and CapEx environment at tier-1 service providers. The demand for lab fiber avionics and op coms products was robust and continue to see good momentum.

The net result was NSC revenue coming in slightly below the midpoint of our guide. Now turning to OSP. OSP business segment results came in slightly better than expected, but both revenue and profitability exceeding our expectations. The results were driven by stronger than expected demand for both counterfeiting and 3D sensing products. Looking ahead, at the December quarter, we expect revenue to be seasonally down, primarily due to lower anti-counterfeiting demand as our customers work to adjust their year-end inventories. We also seeing slightly softer 3D sensing demand after strong Q1 orders. Looking into early calendar 2024, we expect the following demand dynamics for our major product areas. First is continued slow recovery in service provider spend impacting our field instruments business.

The second continued weaker demand for our anti-contributing products. A tight fiscal policy slowed down the inventory consumption by major customers. Third, beginning of recovery of wireless lab products as major wireless NEMs continue 5G product development and increase 6G investment. The fourth accelerated the recovery in our fiber lab and production product demand driven by strong optical demand by data center, optical NEMs, optical module, and semiconductor customers. Fifth, growing service enablement product demand as our new architecture against instruction and acceptance with major customers. And last but not the least, growing demand for our avionics, Mil/Aero and resilient P&T products. Despite the near-term macroeconomic headwinds, our long-term growth strategy thesis built around 5G and 6G wireless fiber, new service enablement, product portfolio 3G sensing and emerging resilient P&T technology remains intact.

In conclusion, I would like to thank my Viavi team for managing in this challenging environment and express my appreciation to our employees, customers, and shareholders for their support. With that, I will now turn it over to operator for Q&A.

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Q&A Session

Operator: [Operator Instructions]. The first question comes from the line of Mehdi Hosseini with SIG. You may proceed.

Mehdi Hosseini: Thanks for taking my question. Oleg, do you have any plans to take additional costs out of OpEx? And if not, how do you see near term would last time — last earning call was under the impression that your customers, at least on a wire line may be bothering, but it seems like demand has weakened. And just want to get a feel for how you are looking at the end market demand outside of the smartphone.

Oleg Khaykin: Sure, thanks. We have taken out, I’m not a believer of depth by a thousand cuts, taking out a little bit at a time. We have taken a major step earlier in the year. We’ve taken out about $30 million in OpEx, and we have just completed, I would say there’s maybe a little bit left, but most of it has already been factored in. And in terms of the outlook, we actually see, while the service provider still continues to be a bit anemic, we actually seeing it stabilizing. And our lab and production test business is actually starting to recover. So, I think, with that, I think we are good for now with any further OpEx reductions. The area where we have a bit of a challenge is clearly, our OSP business unit. That’s the area where we have factories with a lot of fixed assets.

So clearly lower loadings lead to a bit more underutilization and as a result, a bit lower margins, which puts the pressure on of the overall margins. But as the — we are working diligently to bring the inventories under control as our customers and ourselves try to adjust inventories to the new equilibrium. We think we are in pretty good position in managing soft lending, so to say, and to start the recovery. So, the short answer, we are not planning any further OpEx reductions. I think we have implemented all the changes we need to implement. We have a little bit more remaining to be implemented from the original plan, but that’s about it for now.

Operator: The next question comes from the line of Michael Genovese with Rosenblatt Securities. You may proceed.

Michael Genovese: Thank you. Oleg, can you talk about, linearity sort of from service provider orders in the quarter and particularly how things look late in the quarter and anything you need to talk about early October?

Oleg Khaykin: Sure. I think the — if anything, the linearity isn’t pretty good. Nobody has been decommissioning. I mean, I would say, converting orders into bookings is taking a bit longer, but that’s the result of lower demand, before you could get things within a quarter, and it takes you a bit more than a quarter. But, with that said, I think nobody has been canceling. Nobody been pulling back. I mean, they are still — once they place the orders, they take the orders. And we are seeing actually — we are not expecting usually in the December quarter, you always have some budget flush. I don’t think we are seeing any of it this year. But on the positive side, we are seeing a probably stronger than seasonal demand into the March quarter.

Things are being up a lot more linear than kind a strong June kind of December quarter weak September, March quarter. So, I think, there is less, I would say kind of budget flushing or trying to use it or lose it going on. People ordering equipment just as they needed to kind of real time, just in time. And I think the initial shock and the restructuring has been kind of worked out and everybody is getting back to within the new operating environment, deciding what they need and placing orders as necessary. I think I will say the first two-quarters of fiscal, I mean, if I look at the, December and kind of March quarter of this fiscal year, a year ago, there was a lot of order cancellation as many service providers were trying to get their CapEx under control.

Now that they were able to cancel and push out big ticket items with various NEMs, they are getting back to operational optimization and, we are actually seeing more willingness to spend money on getting more out of what they have got versus just coming down completely.

Michael Genovese: Great. I appreciate that color. I guess, the second question is, you talked about the lab business already starting to recover. Could you give more color on what’s driving that? And is the newer or higher speed like, very high-speed data center business, part of that lab that you are talking about?

Oleg Khaykin: So, I would say, it is a story of two different labs. So, if you look at the wireless space, clearly, we are seeing the results of major wireless NEMs. I would say, there is still a very tight environment, but we do expect the demand to start coming back early next calendar year. Because in the end everybody’s still got a lot of 5G and 6G products that they’re working on, and they are will be placing orders. So, in that area, we’ve seen weakness. The second area of weakness has been in I’d say in the last two quarters is anything related to storage, also a storage both semiconductor and this drive providers kind of pulled back on some of the investment, but we expect that to be coming back as well as in next generation products needs to be launched.

The area that’s been pretty strong and actually has been up year on year is the very high speed. So, about a quarter ago people asked me about do I see any demand with related to the hyperscale data center for AI? And at that point we didn’t really see it. We actually starting to see that coming now. That’s why I said between the time people talk about it and the time they start placing orders, there’s always some lag. So that piece of business for us is actually doing very well and we are seeing robust demand from the system providers the data center operators and the semiconductor companies that play in that space. So, I mean, so if I say about 11 production, it’s much stronger on high speed optical transport and a bit weaker in storage and wireless.

But if we think storage and wireless will be coming back in the March quarter.

Michael Genovese: And I look forward to following up on more on that offline. I guess my last question for here though would be about you already mentioned the March quarter maybe being a lit little bit more linear and less seasonal with December. But can you just talk about the second half of the year? Because you’re pretty bullish on the second half of the year and made some comparisons to early ‘23, sort of exiting ‘24. And just how do you feel about that now? Because it seems like things are a little bit weaker on the telecom side.

Oleg Khaykin: Well, I mean, remember, telecom’s side weakness is relative. We were the first ones to see everything go tight, which was in September and December of last year. A lot of the NAMS didn’t see it happening until June, and let’s say September quarter because they have non-cancelable, non-refundable orders. So, and while the service providers were working to cancel or push out a lot of the equipment spend, the first thing they did is they really tightened up on operating expenses. Now that the big-ticket items being canceled or pushed out, it’s kind of going, getting back to business and trying to get more with what they’ve got. So, in that respect, the dialogue we are seeing is much more constructive in that area.