Viavi Solutions Inc (VIAV) 2025 Q1 法說會逐字稿

Hello, everyone. My name is Tamika and welcome to Viavi Solutions fiscal first quarter, 2025 earnings call.(Operator Instruction)

All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. I will now turn the conference over to Vibhuti Nayar, Viavi Solutions Solutions, Head of Investor relations. Please go ahead.

Thank you, Tamika.

Good afternoon, everyone.

Welcome to Viavi Solutions fiscal first quarter, 2025 earnings call.

My name is Vibhuti Nayar, Head of Investor Relations for Viavi Solutions, with me on the call today is Oleg Khaykin, our President and CEO and Ilan Daskal, our 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 different 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 that we provide during this call are valid only as of today.

The ABI undertakes no obligations to update these statements.

Please also note that unless we state otherwise, all results discussed on this call 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 as well as our supplemental earnings slides, which includes historical financial tables are available on Viavi's website at https://investor.viavisolutions.com.

Finally, we are recording today's call, and we'll make the recording available on our website by 4:30 pm Pacific Time this evening.

With that, I would now like to turn the call over to llan, llan .

Thank you, Vibhuti. Good afternoon, everyone. Now, I would like to review the results of the first quarter of fiscal year. 2025, Net Revenue for the quarter was $238.2 million which is slightly below the midpoint of our guidance range of $235 million to $245 million, revenue was down 5.5% sequentially. And on a year over year basis was down 3.9%.

Operating Margin for the first fiscal quarter was 10% at the low end of our guidance range of 9.9% to 11.7% Operating Margin decreased 90 basis points from the prior quarter. And on a year over year basis was down 240 basis points, EPS at $0.06 at the midpoint of our guidance range of $0.05to $0.07and was down $0.02 sequentially on a year-over-year basis. EPS was down $0.03.

Moving on to our Q1 results by business segment.

NSE Revenue for the first fiscal quarter came in at $159.4 million which is around the low end of our guidance range of $160 million to $168 million.

This was mainly driven by slower order pays from service providers for field instruments on a year over year basis. NSE revenue was down 6.5%.

NE's revenue for the quarter was $141.6 million which is a 5.6% year over year decline as a result of continued conservative spend by service providers and NEMs, SE's revenue was $17.8 million and declined 12.7% from the same period last year, driven mainly by conservative spend by enterprise customers.

NSE's Gross Margin for the quarter was 60.9% which is 270 basis points lower on a year over year basis.

And NE's Gross Margin was 60.9% which is a decrease of 220 basis points from the same period last year due to lower volume and product mix.

SE's Gross Margin was 60.7% which is a decrease of 650 basis points from the same period last year as a result of lower revenue, NSE Operating Margin for the quarter was negative 4.6% which is a 550 basis points decline on a year over year basis.

NSE's operating margin was below our guidance range due to low revenue and gross margin fall through. OSP's revenue for the first fiscal quarter came in at $78.8 million which was above the high end of our guidance range of $75million to $77 million primarily driven by an Anti-Counterfeiting and 3D Sensing.

On a year over year basis, revenue was up 1.7% driven by strength across all products.

OSP gross margin was 55.3% up to 180 basis points from the same period last year and was primarily driven by higher volume.

OSP's operating margin was 39.6% which is an increase of 180 basis points on a year over year basis. As a result of a higher gross margin fall through OSP operating margin exceeded the high end of our guidance range of 33% to 35%.

Moving on to the Balance Sheet and Cash Flow total cash and short-term investments. At the end of Q1 was $497.9 million compared to $496.2 million in the fourth quarter of fiscal 2024, Cash Flow from operating activities for the quarter was $13.5 million versus $50.3 million, in the same period Last year.

During the quarter, we repurchased 2 million shares of our stock for about $16.4 million.

The fully diluted share count for the quarter was 224 million shares down from 224.2 million shares in the prior year and versus 224.2 million shares in our guidance for the first fiscal quarter, Capex for the quarter was $7.3 million versus $6.7 million in the same period last year.

Moving on to our guidance for NCE, we are seeing signs of recovery and normalization of seasonality trend and expect a stronger second fiscal quarter, or OSP we expect a seasonally weaker second fiscal quarter mainly driven by software demand in anti-counterfeiting products.

We expect the near-term demand for anti-counterfeiting products to be on the on the softer side as the end customers work down their inventories. For the second fiscal quarter of 2025 we expect revenue in the range of $255 million and $265 million.

Operating margin is expected to be 12.4% plus or minus 100 basis points and EPS to be between $0.09 and $0.11.

We expect NSE revenue to be approximately $188 million plus or minus $4 million with an operating margin of 4.8% plus or minus 100 basis points.

OSP revenue is expected to be approximately $72 million plus or minus $1 million with an operating margin of 32.3% plus or minus 100 basis points.

Our tax expenses for the second quarter are expected to be around $7 million plus or minus $0.5 million as a result of jurisdictional mix.

We expect other income and expenses to reflect a net expense of approximately $3.5 million and the share count is expected to be around 224 million shares.

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

Thank you. Thank you a lot.

During the September quarter, our revenue came in at the lower end of our guidance range with stronger OSP demand, partially of setting weaker NSE demand.

The EPS was at the midpoint of our guidance range.

On the positive side, we're seeing many of the NSE traditional and markets showing signs of stabilization. We believe it marks the beginning of NSE's recovery and expect it will continue into the second half of fiscal '25.

Now let's look at in more detail at each of our businesses, starting with NSE the NSE revenue in fiscal Q1 declined on a year over year basis driven by software demand for field instruments and wireless products, lower September quarter demand. Notwithstanding, we're seeing positive signs around order stabilization which imply the beginning of recovery in Q2 and continuing into second half of fiscal '25. A bit more color on individual product segments.

A decline in field instruments was driven by lower demand from North American cable and service providers.

At the same time, there are signs of stabilization and improved order momentum leading to demand recovery starting in the December quarter and continuing into the second half of fiscal '25.

In addition, we're also seeing stabilization in our wireless business and expected to start recovering in the second half of fiscal '25 which is earlier than previously anticipated.

Fiber 11 production demand was slightly down. September quarter. Notwithstanding, we expect to see significant growth in this business for the remainder of fiscal '25 driven by high demand for our 800 gig and recently launched 1.6 Terabit fiber and high speed ethernet products.

Our mill aero business continued its robust year on year growth driven by growth in mission critical products including communication, avionics and PNC.

Lastly as he was down year on year, primarily driven by lower enterprise customer spend.

Looking ahead for NSE, we expect a seasonally stronger Q2 across all product segments with continued gradual recovery momentum in the second half of fiscal '25.

Now turning to OSP, during the fiscal first quarter. OSP grew on a year over year basis, driven by higher demand for anti-counterfeiting and 3D Sensing products. Overall OSP results exceeded the higher end of our guidance. Search for OPE, we expect a seasonally weaker second fiscal quarter, mainly driven by software demand for anti-counter fitting products. We expect the near-term demand for anti-coning products to be on the softer side as the end customers work down their inventories.

In summary, Q1 notwithstanding, we expect Q2 rebound to be the beginning of gradual recovery despite the challenging environment over over the last two years, Viavi has continued to invest in advanced products and technologies to maintain our industry leadership. With that in mind, I would like to recognize the Viavi team for achieving two major milestones during the September quarter. The first milestone is the launch of the valor lab in Chandler Arizona which will provide test as a service for Operand ecosystem.

The second milestone is the release of industries 1st 1.6 terabits per second, high speed ethernet testing for AI workloads these two achievements position Viavi well, for the leadership in wireless data center and high-performance computing market segments. Lastly, I would like to thank our customers and shareholders for their continued support. With that. I will now turn it back to the operator for the Q&A.

Thank you, as a reminder to ask a question, press star one on your telephone keypad. If you would like to withdraw your question. Press star one again to ask today that you limit yourself to one question and one follow up, please stand by for your first question.

Your first question is from the line of Ruben Roy with Stifel.

Thank you. Thanks for taking my questions. Hi, Oleg and llan. Thanks for going through some detail on the segments and, and sort of the order momentum wondering if you could just drill into any a little bit further and talk about linearity through the quarter. Were the bookings fairly linear or did that pick up towards the end of the quarter? And then I had two quick follow ups. Thank you.

Sure. Well, I mean, you know, as we start a quarter, we have a backlog and then there is some expected orders that come in within the quarter. And I would say that's largely linearity was pretty pretty much as we expected. But we did have several major service providers indicated they would prefer to start taking product in the second fiscal quarter that some of the revenue in NSE got pushed out.

But what also was very evident is a much bigger engagement and orders looking at Q2 Q3 and a little bit even further into Q4 from not only Nems and semiconductor vendors but also from service providers.

And we've seen a number of very interesting dynamics emerge. You know, I was talking for the last, let's say, a year and a half about this, what I would call a Mexican standoff between all the operators where they are all signaling to each other that they're not really investing, they're not spending.

And what we have seen change during this quarter is a number of big events. I mean, first of all, you saw AT&T became very vocal and very aggressive about their upcoming fiber deployment in calendar 2025. Then we saw Verizon went out and actually reentered the fiber market buying frontier into which they dump, they dumped their fiber assets, what about eight years ago or so. And of course, as the upper telecom players are becoming aggressive in fiber, it actually spurs a lot of the cable providers to accelerate their plans to upgrade or at least make their networks more competitive with all of that.

It's actually all of a sudden everything went from talk and no action to a lot of action and a lot of discussion on orders, placements and things like that, which you know, truly marked a big pivot in the behavior among the operators. And what's also was very interesting is the wireless operators all of a sudden came out of hibernation, I guess when it rains at first and also started talking about accelerating five G densification and deployment.

And you know, actually started placing field equipment or field test equipment orders, which is usually a good indication of them deploying open and expanding the network. So, in that respect, we believe the, we expect the follow up from the wireless names in the second half of the fiscal year, probably to be stronger demand than we initially anticipated. If you may remember last quarter, we kind of thought wireless with the middle of next calendar year for recovery, I think now we are a bit more positive on it and think it's going to be more of a fiscal second half, which is the first calendar half of next year.

So hopefully that gives you a bit more perspective. And by the way, we're seeing the same thing now being mirrored in IIA and other geographic markets. So, I think maybe the interest rate cut in September was one of the critical catalysts that supported a lot of the money being released into the network upgrades and maintenance.

That's great. Thanks for all that detail like, and, and you hit on sort of my follow up.

But I guess, you know, just to make sure I understand on the wireless side and, and, and sort of the sooner than expected, you know, modest recovery. I, I was going to ask if that was you know, sort of project based. Obviously, we're, we're hearing about AT&T and our end. But sounds like it's broader than that.

And, and I guess if we're thinking, you know, through that, you know, earlier than expected recovery as we look ahead to the second half of your fiscal year, you know, would you say? And maybe llan, you could chime in, that we should think about seasonality any differently, you know, as we think about the second half and that's all I have. Thank you.

Well, I mean, the, as you know, generally for our first fiscal quarter and third are the weaker ones clearly to the extent, a lot of these indications materialize in the March quarter. And NSE may be a little bit stronger seasonally than would be otherwise. Because we do see some of the orders, I mean, believe it or not, with this rapid order replacement, as much as there is inventory in the channel, it's never the perfect inventory in the channel. And for some of the more specialized parts, we actually have lead times longer than 8 to 10 weeks. So that kind of puts the these orders more into the March quarter rather than being able to execute them in the December quarter. So, I think it's a bit early to say, but there's definitely an opportunity for NSE to be stronger in the March quarter than normally would be.

And, and Ruben, I would say that we continue obviously to monitor the macro environment I mean, post-election and the kind of interest rates kind of dynamics. I mean, all I mentioned earlier, you know, that the first kind of fed move, I mean, probably was the inflection point, but we have to see kind of how it continues from here and that would be another factor. So generally thinking, generally speaking, you know, we are thinking about, you know, momentum continuing but you know, we have to continue to monitor the macroeconomic.

Understood. Thank you.

Thank you.

Your next question is from the line of Ryan Koontz with Needham.

Hi, thanks for the question. Great to hear carriers coming live here with cable and fiber and as well as even wireless, which is a bit of a surprise. But maybe can you touch on your comments around Europe a little more? And is there, it sounds like there's a little movement there, Number one.

And the second question is about your 1.6 T opportunity with with data centers and, and the AI builds. Can you maybe unpack those a little bit for us? Thank you.

Sure. So, we'll just take it as two questions, Ryan. So, there's no freebies but it's all you can always ask me.

So em, well, em was never as bad as North America but also, we do see, I mean, the, the fiber never really went down because there's a lot of a state sponsored activity to keep rolling out fiber in Europe.

But I would say the wireless was particularly hard hit in Europe. And we do see fiber continues to be doing fairly well in Europe and improve in the north. I mean, in many ways, it looks like European carriers kind of look at North America what North America is doing and then they kind of follow it. So, in that respect, I'd say, you know, we've seen the, this, this couple behavior, right? If yours goes down, Europe goes down, fuels goes up, Europe goes up.

So, I think it's in a way, it's kind of a bit of a herd mentality on the 1.6 terabytes that is, of course, all driven by AI and data centers. An interesting thing, you know, up until 400 gigabit per second, it was all driven by telecom operators. And generally, transition note to note was about, I'd say 4 to 6 years, like, you know, from 100 gig to 400 gig and then, you know, so on and so forth. What we're seeing with the data centers that transition period is more like I would say 3 to 2 to 4 years.

And it's currently ramping very rapidly with 800 gigabits and already a lot of design activity and a lot of pressure start sampling the 1.6 terabits. And that is all being driven by data center. So, where while the telecoms drove 400 gig deployment and then of course, data centers kind of joined in on it or piggyback on it. The 800 gig and 1.6 terabytes I would say is 100% driven by chip vendors by module vendors and system vendors who are all being driven by the A I data center operators. So, in that respect, I think we were, we're already selling this quarter, you know, some of the 1.6 terabyte systems mainly to the leading I won't say which company, but leading player equipment and semiconductor vendors and I expect that will accelerate into the next year by but 800 gig is now really entering the high-volume production.

Are these at the 1.6 are these new customers to you or customers you've always had, they just are taking a bigger slice of the pie.

It's it's a mix. So, it's clearly on the semiconductor and NAMs, these are the same customers. But what we are increasingly seeing is all these, you know, dozens of fiber optic module vendors in Asia.

Is that just for production, then mostly for them with their module makers.

So initially, initially the first 1.6 is of course for development. And as they then, then we will transition into the production. I'll say probably late, late, late next calendar year.

I think most of the 25 will be driven by R&D Capex for 1.6 with maybe initial production orders for 1.6 towards the end of the calendar year.

Got it, super helpful. Thanks, Oleg. And on the you mentioned briefly, the, the enterprise world sounds like that's still fairly soft. Is that more around Wi-Fi testing typically? And, and what, what's that environment been like?

Well, this is mainly our enterprise service assurance. It's the software. And you know, the reality is most of our customers in that space are big financial services, health care, institutions, type customers.

And we've just been seeing a much more conservative enterprise software spending environment, at least for our type of product. So, it's and you know, there are, you know, you can have a million plus orders.

All it takes is one or two of them push out and it actually drives quite a bit of volatility.

Got it. Great. That's really helpful. That's all I have for now. I'll, I'll get back in the queue if I need some. Another question. Thank you.

Sure.

Thank you.

Your next question is from the line of Michael Genovese with Rosenblatt.

Great, thanks. Oh, can you talk at all about cable? How, how big is your exposure to cable now?

And are you seeing a pickup in those orders for the the next quarter and beyond.

Hi Mike. Sure. So, I mean, the cable is proceeding with upgrades. I mean, the clearly they've had some delays due to some architectural and system level and software delays from their network vendors.

But I think it's finally, the train is starting to move in the second quarter, like starting in the second quarter, we have some initial sales in the September quarter. I think more coming up now and later and increasingly, I mean, cable is becoming a bit more muted for us because more and more of the cable orders are fiber orders. So, they're all kind of becoming part of the our fiber customer base. But I think there's probably one more cycle where you're going to see fiber testers and all our copper testers and now hybrid fiber and the copper.

But I would, my expectations is what, what I'm seeing from a lot of cable vendors, they're starting to look more and more as the service providers. They're investing a lot more into the assurance kind of high to ensure higher performance of their networks. They're investing much more into fiber.

And incredibly, they're actually even going further than many of the traditional fiber service providers by deploying things like optical monitoring systems to actually, which gives you a much higher level of availability and reliability of your fiber optic network. So, we're seeing cable going from kind of moving up, moving on in the world in terms of the high-performance networking.

And I wouldn't be surprised if within a year we don't really start, we'll still call them cable because you know, their origin, but they're really becoming very much in line with companies like (inaudible), you know, frontier and other fiber operators.

Great, very helpful.

And I, and I also want to echo that it's great to see service provider in the US, you know, certainly moving in the right direction here. That being said, 3D Sensing these days gets very little attention and, and, and maybe because it's kind of boring, but let me just ask you for any update.

Anything we should be thinking about in 3D sensing, what's, what's going on in the market there?

Thanks a lot.

So, I mean, well, I mean, it's it's still very much our anchor customer. I mean, they're doing pretty well and, but, you know, it's for us, it's a fairly saturated market. So, I mean, we grow if they grow, but we're now seeing and I mentioned it earlier in the year, we're seeing some early adoption by Android players in China in particular, not so much in Korea, but China of 3D Sensing and it's initially on the high end models to the extent that it will move more into mid-range and down. And if that happens, it actually could become a quite exciting market for us, but at this point in time, it's too premature to talk about.

Appreciate it. Thank you.

Yes.

As a reminder to ask a question, press star one on your telephone keypad.

Your next question is from the line of Meta Marshall with Morgan Stanley.

Great. Thanks.

Maybe a couple questions. So, first question just on, is there any changes on how we should think about kind of the run rate of the OSP business? You know, any changes to kind of volume to reprint or how we think about that business?

And on the second question, just on se understand kind of the enterprise commentary, but just kind of what are some of the green sheets you're seeing on the e side of the business?

Thanks.

Okay, sure.

So I would say an OSP in terms of run rate, truly, you know, the way we talk about it is the base business which is in the counterfeiting. I would say it's kind of industrial middle arrow piece kind of base.

And then we talk about 3D sensing. So, I think already provided color and 3D sensing. I think it's very much you know, going with the dynamics of our lead customer for that business and I don't see it really changing going forward.

I think it's usually stronger in the first half of the fiscal year and it's a bit weaker in the second half, although it's no longer as asymmetric as it used to be. So it's more maybe like, let's say 55 45 60 40 split between half and half on the end of counterfeiting. I think there is a several things I would say in the near-term, there may be a bit of the lower demand, and it's coupled with some currency redesigns at major economies, and they want to consume all the inventory of the older products that they have before they place new orders.

Then there's also obviously some sanctions that have hit a number of markets. There were, I'd say we used to make maybe probably around $6 million $7 million $8 million a year. So that kind of goes away. So, I'd say in the near term, we think the anti-counterfeiting to be more on the conservative side of the spend probably at least for the first half of next calendar year.

And then we do see a number of new designs and new products once the old inventory cycle through and then, you know, it's going to production.

If we expect it to rebound more to its traditional run rate is (multiple speakers) so I'd say SCE is a story of two cities. I mean, the enterprise on one hand, it's a very margin rich good product, but we've seen, you know, we saw it initially in the March quarter. They said it again in September. It's taking longer to get customer acceptances. The spend velocity is a lot slower. So, it's a bit on the softer side on the, I'm interestingly wise on telecom size, the operators and what I would say more on the private networks.

There, we're seeing very strong momentum in the business development, final and final and orders which will start converting into revenue in the second half of our fiscal year and then beyond. And I would say AIR is really driving a lot of interest in our products. And we do think we will get next year into comfortably in the 20s in terms of quarterly run rate.

And from there on moving higher as the more and more customers start taking acceptance of the AIR product. And then kind of basically you do the land, and you expand and then you get different. So, the initial acceptances are starting to take place in calendar 25 and from there on there will be a geographic expansion and the breadth of products, domain products that we are selling expansion.

Great. Thanks so much.

Sure.

Your next question is from the line of Timothy Savageaux.

Hey, good afternoon. Hopefully I don't get bounced off again here. Before I say congratulations on the outlook in particular, took a while, but you do seem to be syncing up with this overall positive environment, especially around fiber spend, but more broadly as well.

And as you look at that and what's, you know, setting up to be a strong finish to the year for most of the big carriers, you know, you might want to historically call that a budget flush, although you seem to be characterizing it as more sustained than that, you know, with visibility over multiple quarters, I wonder if you could provide some color on that in terms of what you're seeing in terms of the carriers, you know, finishing the year strong, but also extending that recovery and what kind of visibility you have there.

So, you know, I mean, I think it's probably less of a budget flash where I would probably say it's pent-up demand because they really haven't done anything in two years.

Well, you know, when they start spending a bit, feels like a, feels like a budget flash because all of a sudden everybody says I need it, and I need it now. Well, three months ago, you said you didn't even want to talk, right?

So, there is some of that, but the reality is they also quickly realizing, you know, that there is some lead time. I mean, I would not say that there's a shortage of components. It's just, you know, when you don't order anything for a long time to get every, well, you probably can get 95% of what you need. There's always something that probably has some lead time.

So, I, I, so I think there's, you know, to me that is just fundamental based business, just getting back to what it should have been running as a maintenance, much and to the extent they spend the networks and, do more build outs. It's actually all positive because what it does, it basically lifts the base business of via because then it makes our, I would call them speed boats are much faster growing segments really add to the this whole acceleration, things like our avionics and aerospace business, military business, the 11 fiber, 11 product businesses.

These are all becoming quite interesting and, you know, we're now even starting to see customers approaching six G topic which is for advanced development is very positive.

But also, you know, seeing the five G densification finally starting at least the talk around, it is starting to pick up. That's all-positive things. So, in that respect, we feel pretty good about NSE. Finally turning the the corner.

Got it good to hear. And if I could follow up on lead times, I imagine, you know, they vary across your business. I would imagine that the bigger machines and lab and production test are a little longer.

But if you could, you know, if you want to talk field versus lab or, or what have you talk about, kind of where your lead times are right now? And imagine they're historically pretty short on the fiber field side.

Is, is, is that changing given your reference to lead lead times there or is it really just a matter of logistics and getting the machine cranked back up?

Well, actually, you know, so on the, the more mainstream kind of field product is the lead times are not extensive. I mean, there's a ton of inventory of semiconductor devices and connectors and all that stuff out there. Where we do feel lead time is a big deal is on the leading-edge products like 1.6 terabytes, 800 gigabit there. You need to get things like C right. And as you can imagine, they're all in very high demand and their lead times are, you know, you can sell anywhere within 3 to 6 months and we tell everybody the more of a bleeding edge product you want place orders now or deal with you know, lead times that may be not as comfortable for you.

So, I'd say on a lead note product and note products like three nanometers, you know, and more aggressive than that, you probably have some, I'd say 3 to 6 months lead time on anything 400 gig and below, you can get it turned around pretty quickly.

Great. Thanks very much.

Sure.

At this time, there are no further questions, presenters. I'll hand the call back over to you for any closing remarks.

Thank you, Tamika. This concludes our earnings call for today.

Thank you, everyone. Have a good afternoon.

This concludes today's call. Thank you for joining you.

May now disconnect your lines.