Viavi Solutions Inc (VIAV) 2021 Q3 法說會逐字稿

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 speaker's presentation, there will be a question and answer session. (Operator Instructions). I would now like to hand the conference over to your super today, Bill Ong, Head of Investor Relations. Thank you, please go ahead.

Thank you, Christina. Welcome to VIAVI Solutions' third quarter fiscal year 2021 earnings call. My name is Bill Ong, Head of Investor Relations. Joining on today's call, Oleg Khaykin, President/CEO, and Henk Derksen, CFO. Please note this call will include forward-looking statements about the company's financial performance. These things 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 filing, particularly the risk factors described in those followings. 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 say otherwise, all results except revenue are non-GAAP. We reconcile these non-GAAP results through our preliminary GAAP financials and discuss their usefulness and limitations in today's earnings release. The release, plus our supplemental earning slide which includes historical financial tables, are available on VIAVI's website. Finally, we are recording today's call and will make the recording available by 4:30 PM Pacific Time this evening on the website. I would now like to turn the call over to Henk.

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 VIAVI's results. Fiscal Q3, 2021 reflects 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 guidance 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 20.2% expanded 540 basis points year-over-year, and exceeded the guidance range of 17.5% 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 geospatial 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 deep audit 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 and E 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 guidance range of $91 million to $95 million. 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 level 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 VIAVI stock at an average cost of $15.93 per 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 optimistic 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 NSE 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 points. Our tax expense rate is expected to be approximately 19% to 21%. We expect our income expenses to reflect a net expense of approximately $3.5 million.

Estimated fully diluted share account used in our calculation is 243 million shares. This includes an increase of approximately 11 million shares, to reflect an estimated dilution impact from the 2023 and 2024 convertible notes. The share count without the convert dilution is approximately 232 million shares, but that I will turn the call over to Oleg.

Thank you, Hank, and welcome to your first official earnings call at Viavi. I'm pleased with the obvious performance in fiscal Q3, as we have surpassed the pre COVID levels of business and achieve the new historical highs in revenue and non-GAAP profitability for fiscal Q3 driven by both of our business segments. The [inaudible] segments benefited from continued business recovery led by increased demand for fiber and cable field 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 Giggy and wireless infrastructure customers. The SE business segment, as expected, came in weaker in Q3 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 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 demands to continue to improve throughout the calendar 2021 returning to and exceeding pre COVID levels. Additionally, we expect 5G field instruments demand to start materializing in the second half of calendar 2021 as 5G service providers starts ramping up their network build-outs. Longer term, we expect several major industry and political trends to set up NSE for a multi-year supercycle. The carriers recently made sizeable 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, they're pushed to help fund the deployment of fiber to the home to replace their legacy copper networks.

And lastly, the U.S. plans for multi-year 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 the 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 bank [note] 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 to remain 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 rapid recovery and expecting year on year revenue growth throughout the rest of the calendar year.

The OTT business segment is expecting to see continued robust demand for the anti-counterfeiting products driven by 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 a business normalcy. I will now turn the call over to Bill.

Thank you Oleg. [This call that] we will be participating at the Needham TMT investor conference on May 20th and the [inaudible] investor conference on June 8th. Christina, let's begin the question answer session. We ask that everyone is limited to one question and one follow-up.

(Operator Instructions). And your first question comes from Linus, Nick [Chatterty] with JP Morgan.

Hi. Yes, this is Ricardo [Still] on for [Chatterty]. My first question is actually on the supply constraints that you mentioned for the 3D sensing business. And actually I'm kind of surprised to hear just given the commentary that we've heard through earnings season thus far that you're not necessarily feeling any of those implications on the NSE business. I'm just curious, is that correct? And then b, what are you guys seeing in the NFC business in terms of supply constraints and whether you're factoring any into your forward guidance, and then I have a follow up. Thank you.

Sure. Good, great question. So, I mean, we don't have an issue with our supply of 3D sensing products. The issue here is more on the customer side, if they cannot get all their chips, so to say, as a necessary they have to reduce their forecast. So that's really where we've seen some reduction in forecast because they just simply cannot meet all the requirements, right? So it's one thing. Regarding the NSE. I mean, sure. There is lead times are getting longer and there is shortages of supply, but I mean, fundamentally, we are not a very big player, relatively speaking, and we know how to manage our supply chain, frankly speaking. I mean, we saw shortages looming on the horizon as far back as October, November, and we took some cash and put a lot of products on the shelf in anticipation of these shortages materializing.

And while there were shortages of supply and we obviously chased it and you just basically put more money on the table and you get the necessary products you need. We were able to meet all our customer demands and not miss any of our deliveries. And in fact, we think our ability to really manage the supply chain well, it will present us with opportunities to pick up some share, while many of our competitors who are cash poor and don't have a good visibility or ability to execute on the products requirements. We think we'll have an opportunity to pick up some share and grab a market share for many of our competitors.

I appreciate the color. And then my second question's on the 3D sensing business, specifically around the Android opportunities there. I think last quarter, you highlighted incremental excitement around the Android customer base adopting at least [world] facing 3D sensing applications that we'd going into the second half of this year, or maybe even into next year. I guess has there been any progress there versus 90 days ago, is there anything there to be incrementally more excited about? And then on the side of that, it seems that 3D sensing applications being adopted into automotive seems to be getting a little bit more exciting, at least on news stories that you're hearing in the press. I guess what's the opportunity around there and what's your expectations around it materializing?

Well, so I think I would say three months can make a big -- so we got more information. So I would say today I'm less enthusiastic about Android moving sooner rather than later. I think I'm not going to go into the details, but needless to say, it's a very complex technology and people are finding the 3D sensing is not a slam dunk. It's not easy to be a fast follower. So for various reasons, I think Android may take a bit longer and it probably be into next calendar year before we see Android making any kind of a major adoption. So I think for now it's very much going to be more of our traditional customer base. That's said, automotive continues to progress and we are getting very good traction there, but volumetrically speaking automotive is not a very big market. You're selling today, it's a lot of it in cabin coverage, but even if you win a hundred percent of it, you're talking about millions of units, whereas in a mobile phones, you're talking about tens of millions of units, on weekly basis. So, automotive is an interesting market, but it's still in very early stages of adoption. It's mainly limited to the high-end packages on various cars.

And packages on various cars. And of course, automotive has its own problem and they are facing also semiconductor shortages. But it's not really an issue for us, because when you have a semiconductor part shortage, generally automotive customers prioritize their high-end models with all the bells and whistles, like 3-D sensing. So in that respect, we're not seeing any degradation in demand there, but it still remains several orders of magnitude smaller market in unit basis versus the mobile handsets.

Thank you. Appreciate the color, and congrats on the result.

Your next question comes from the line of Alex Henderson with Needham.

Thanks and welcome to the Viavi call as the new CFO. Congratulations.

Thank you.

Not that Belden wasn't a great place to work, too. I wanted to ask a question on the 3-D sensing commentary. This 16% growth, by my math would suggest a pretty significant decline in the June quarter yet, as we listen to the commentary of the prime customer, their results over the March quarter, were well ahead of anybody's expectations on phone sales, and I would think that the inventory would be pretty lean as a result of that and then hence some building. So are you saying that basically despite depleted inventories they're unable to get components and therefore that's what's creating some softness in the June quarter, or am I overestimating the March quarter? Can you give us a little bit of a sense? Is the June quarter basically half that of the March quarter?

Well, first of all, I'm not going to comment on or explain the delta between major customers. So, I remember whatever was sold in the March quarter probably was built in the September quarter or even early December quarter. So there is some timing and I think the differences here is more explained by what we thought our expectations were given the traditional seasonality versus the actual forecast. So I think, I wouldn't say necessarily you should read into it that we had significant declines in orders from our customers. I just think we might've been a bit more optimistic in terms of the forecast that we were expecting to see in the March quarter. March quarter was a bit weaker than we thought it would be in of course, and of course June quarter is weaker as well. So I think for once we had higher expectations on the mobile handset industry than the headset industry has actually given us.

So if I were to strip out 3-D sensing from the OSP business and just looked at the OSP anti-counterfeiting piece, it looks like that was pretty close to 70 million. Is that kind of the range that we should be anticipating to stay in? That's well above the historical, and I think what you said in the past was, five or six quarters of that sustained a higher level. Is that the level that we should be thinking or is that too aggressive in a more normalized number?

Yeah, I think 70 is too aggressive, because I remember we said, we've started thinking of base business around 50 million, think of it as a high 50s. I think that's probably still, for an abundance of caution, I would take as a number because maybe there's a quarter where a customer wants a big shipment or at least you may get north of 60 million and then maybe quarters where they digest, you'll be below 60 million, but I'd say on average, over a four quarter run rate, I expect to see about high 50's average versus the 50's or high 40's, low 50 average. So I think I would just leave it at that.

The number is slightly below 70 in the March quarter, is that correct?

Yes, it's a slightly below 70. So, it was very strong quarter and it also led to some atypical, cyclical tax rates because of which jurisdiction you accrue the profit. I mean, generally we get a lot of these orders in the second half of the year or middle of the year. So as a result, we have shown a higher tax rate in the March quarter because of where the profits accrued. So, we do expect to continue to see significantly stronger anti-counterfeiting demand in the foreseeable future. And remember there are still many countries where Print works are still shut down because of COVID and there's going to be significant demand and those are big cash countries. And then the second element, remember as everybody's printing more and more cash to stimulate their economies, remember that cash quantity is going to be out there. That means the replacement volume, if you kinda stretch it a couple of years out is not going to be at a higher level as well. So, that leads to a bigger market for our products, even down the road, as their initial, medium-term, higher demand for printing decline.

Your next question comes from Mehdi Hosseini with Susquehanna.

Yes. Thanks for taking my question. Perhaps, only if I were to rephrase the prior question, to what extent your success in 3-D sensing is from share gain?

Well, we pretty much have majority share as is, so, most of the growth there has to come from a market growth, the greater adoption. So I think, we were expecting Android to be the next adopter of the technology, starting the end of this year into next year. And it looks like these plans are going to be pushed out a bit. I'm not going to go into it, but there's been plenty of write-ups about world facing 3-D sensing for Android phones in the press, which all those rumors are true.

Sure. So the content increase in a given high-end smartphone made by North America based OEM, is that behind us or are you going to continue to have increased content?

Well, I think as you get more on that -- most of the near term content increase will have to come from a more world facing cameras, penetrating into broader product range. So that's one, but I think also, a couple of years out of this new generation, we are also hoping to win some share in the diffuser space as well. So there's still plenty of opportunities to win more content performance for us. Especially as [inaudible].

Yes. Actually, that's what I was trying to get at.

But that's not a next 12 month horizon. That's more of a further out.

I see. Okay. You made an interesting reference to NSE. You characterize it as facing a super cycle as you look forward. And this actually makes sense over the past two fiscal years and I see revenues have been kind of flattish in fiscal year 19 NSE was up 28%. When you say super cycle, does that imply where getting into a two consecutive year of double digit growth? Is a 20 fiscal year, 18 and 19, reflective of a super cycle?

I don't know about that. Clearly do you remember, this year is an easy compare on the prior CA can have a double digit. I think I would maybe say more of like a high single digit growth. But the point is you have periodically these big dips and cyclicality, I think we're going to see more even sustainable strength and the reason I'm saying it is the customers that were really poor spenders or like really been neglecting are now coming back and looking at significant multi-year spend profiles to upgrade the performance of their network and expand their networks. Also, you remember, 5G by itself cannot happen without significant upgrade to the fiber. So in a way we are seeing more and more, almost a synergistic pull through on a lot of fiber opportunities as customers gearing up to 5G and it's much stronger than we were even estimating as far back as two quarters ago. As a result of that, we see in Europe, it's very big because they have a predominantly twisted pair DSL. As you can imagine, DSL is really, really incapable now to deliver the type of content and bandwidth that even cable can deliver. So in that respect, to get consumer broadband you really need fiber. And fiber is also the essential element prerequisite for you to deploy 5G down the road. So, we are seeing that strong over there and in the US, we do expect that rural broadband to result in significant investment in fiber and cable and wireless in a lot of these Tier 2 and Tier 3 cities and the broader communities. And remember there it's the mileage that drives the purchases rather than the density.

And once again, in order to ask any questions that is star one. And your next question comes from the line of Tim Savageaux with Northland Capital Markets.

Hi, good afternoon. I wanted to follow up on the Supercycle myself, and first a clarification on what you just said with regard to things looking much stronger than even two quarters ago, was that a reference to fiber, 5G, or both?

That was really, at this point in time, predominantly fiber and cable, actually.

Fiber and cable. And you mentioned you do have some easy compares, so it looks like very strong double digit growth is achievable...

By March quarter, yeah. So I mean, near term is double digit, single digits down the road. And when I say Supercycle, I mean, let's put it this way. Whenever you have a technology node transition, it usually has a two to three quarter bump. When we talk about Supercycle, you're looking really more like four to six to eight quarters, a higher level of demand, more evenly spaced. Maybe lumpy here and there, but it's fundamentally higher level of spend than you've seen before.

Understood. And would you to characterize that as a market growth rate? And I ask because you're obviously layering in your new entry into the wireless field test arena. Theoretically, that might enable Viavi to deliver above market growth. [inaudible].

Yeah. So wireless to me would be an icing on the cake. I'm talking about the mainstream NSE business. It's like fiber, cable, things like that. And that's the base driver. The wireless to us is a higher beta business, because we are a newcomer in the market. So if we succeed, it will be an incremental growth on top of it.

Got it. And last question from me. I mean, if you comment on what you saw of the carriers in the March quarter, it looks like not only these budgets increasing, but they may have gotten an earlier start in terms of order activity than normal. Have you seen that, and have you seen that kind of continue here through the calendar second quarter?

Well, I don't know if it's normal. I mean, let's put it this way. Throughout the shutdown, remember when they did a hard shut down in March last year, then everybody kind of set really staring at their navel in the June quarter. Then in the September quarter, they started looking, maybe we should be doing something, let's start planning. Then more of it was taking place in December quarter. And now this year, I think a lot of them have fully baked well-founded plans for clearly understanding, because what needs to be done to the network. I mean, one thing these work from home and shut downs have demonstrated is the really poor quality of the consumer broadband, right? And I think we're going to continue to see quite a bit different mix of traffic going forward.

There's going to be more working from home. I do believe people will come back to work, but the mix will not be the same as prior to it. So I think there is a lot of good understanding of the network upgrades and rebalancing that needs to take place. And if you overlay on top of it the 5g, it all goes hand in hand, because you cannot have 5g without a robust broadband fiber network. And you cannot really keep your customer satisfied and try to upsell them new services if you don't have a very strong broadband offering. And with the convergence of 5g, I mean, with things like cable and other and consumer broadband, you now have potential new entries and competitors coming into the wireless space, namely cable companies and others. So I mean, the increased competition is driving some of the more conservative traditional service providers to really take a deeper look at their networks and spend some real money. And maybe get out of some of those media acquisitions that we've heard about in many years.

And your last question in the line of Meta Marshall with Morgan Stanley.

Hi, this is Eric on for Meta, thanks for taking our question. Maybe just a quick one on regional development. Are you expecting any impact from potentially a weaker India on the OSP or NSE side?

Well I mean, it's probably too early to tell. I mean, India is not a very big market for us, but it is a growing market for us. And I think there may be some delays, but if anything, I think India will continue to -- the programs that we are doing India over long term in fiber, and some of the other applications are, at this point, still looking pretty good. I mean, obviously a lot can change in the next month or so, but at this point in time, India, it's more strategic in nature for them to implement these infrastructure upgrades. And so far we see things proceeding as planned.

Got it, that's helpful. And then maybe if we could just double click on some of the comments you made around the rural broadband opportunities. Trying to understand, do those opportunities for you differ based on potentially those funds being allocated to newer alternative providers? Do you kind of view it as neutral regardless of where funds go, or do you have better positioning in maybe some of the more traditional providers?

So are you talking about China or?

Within the US, the rural broadband.

Within the US. Well, I mean, clearly the traditional, the big ones are very much into it, but also I'd say Tier 2, Tier 3 are getting -- I mean, people with whom we've done the relatively limited business with this whole rural broadband, they're now looking at significantly upgrading their offering. And in many cases, many of them are looking to upgrade their fiber networks in hope of leasing their lines to various wireless service providers. So we are seeing a renewed level of investment and demand from what I would call Tier 2 and Tier 3 service providers.

And there are no further questions at this time. Now I'll turn it back over to Bill Ong.

Thank you, Christina. This concludes our earnings call for today. Thank you, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.