Ladies and gentlemen, thank you for standing by, and welcome to the Viavi Solutions' First Quarter Fiscal Year 2021 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Bill Ong, Head of Investor Relations. Thank you. Please go ahead, sir.

Thank you, Tiffany. Welcome to Viavi Solutions' first 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 Amar Maletira, 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 differ materially from 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'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 Amar.

Thank you, Bill. Fiscal first quarter revenue at $284.7 million declined 5% on a year-on-year basis, but grew 6.8% sequentially, reflecting both seasonal OSP strength and stabilization in NSE revenue. Viavi’s operating margin at 21.3% is a record for a September quarter and presents a 370 basis points increase from a year ago, driven by margin expansion in OSP. EPS at $0.21 was $0.03 both year-on-year and sequentially. Q1 revenue at $284.7 million was above our positive pre-announced results of $282 million to $284 million, as well as our initial guidance of $252 million to $282 million. EPS at $0.21 was also above our positive pre-announced results of $0.18 to $0.19 and our initial guidance range of $0.14 to $0.16. Now moving to our reported Q1 results by business segments starting with NSE. NSE revenue at $183.5 million declined 16.5% year-on-year. Within NSE, NE revenue at $162.1 million declined 18.5% from a year ago, primarily due to the pandemic-related declines in Field Instruments. SE revenue increased modestly, up 2.4% from last year’s levels. NSE gross margins at 64.2% improved 20 basis points year-on-year. Within NSE, NE gross margins at 63.8% declined 60 basis points from a year ago, primarily due to lower volume. SE gross margin at 66.8% increased 650 basis points year-on-year due to favorable product mix. NSE’s operating margins at 7.2% decreased 290 basis points year-on-year due to lower revenue, offset by a reduction in operating expenses reflecting disciplined expense management, ongoing efficiency programs, and lower variable expenses such as travel and entertainment, events, commission, etc., due to the pandemic. Now turning to OSP. OSP had a record quarter with revenue at $101.2 million, up 26.5% from last year, reflecting strong Anti-Counterfeiting and 3D Sensing revenues, as well as solid aerospace and defense product demand. Gross margins at 60.3% were up 620 basis points year-on-year, because of higher volume and better manufacturing absorption. OSP delivered record operating margins at 46.7%, up 870 basis points compared to last year as a result of higher gross margins and tight expense control. Now turning to the balance sheet. Our total cash and short-term investments ending balance was $595.5 million, which was an increase of $51.5 million sequentially. Our operating cash flow for the quarter was a record $63.9 million. In fiscal 2021 year-to-date, we repurchased approximately $13 million of Viavi’s stock at an average cost basis of $12.24 per share. Overall, we have repurchased approximately $57.5 million of the total of $200 million authorized share buyback announced in September 2019 at an average cost basis of $12.05 per share. We continue to be opportunistic in our share repurchase. Now turning to our guidance. We expect fiscal second-quarter 2021 revenue for Viavi to be approximately $290 million, plus or minus $10 million, with an operating margin between 19% and 20%, and EPS to be in the range of $0.18 to $0.20. We expect NSE revenue to be approximately $205 million, plus or minus $8 million with operating margins at 11% plus or minus 50 basis points. We expect OSP revenue to be approximately $85 million, plus or minus $2 million, with operating margins at 40% plus or minus 100 basis points. Our tax expense is expected to be approximately 18% to 20%. We expect other income and expense to reflect a net expense of approximately $3 million. We estimate our share count to be approximately 233 million shares. On October 21, the company announced my resignation as Viavi’s CFO effective on November 20th. It was a difficult decision. It is a privilege to serve at Viavi for more than five years. It has been a real pleasure supporting and partnering with Oleg and the leadership team. We are a stronger company today. I am committed to an orderly transition of my CFO duties. Following my departure and until a successor is identified, our current Global Controller, Pam Avent, will serve as the Interim CFO. Additionally, I’ve entered into a consulting agreement with Viavi for an anticipated period of six months after my departure. With that, I will turn the call over to Oleg.

Thank you, Amar. Before I start, I would like to take this opportunity to thank you for your great contribution to Viavi over the past five years and wish you success in your new role. Now, back to Q1 results. I am pleased with our strong Q1 performance as we saw OSP deliver an all-time record quarterly revenue and profitability, and NSE saw early signs of stabilizing demand environment. The NE business segment was down double-digit percentage year-on-year and sequentially, reflecting weakness in Field Instruments. Despite the challenging environment early in the quarter, we saw the orders for Field Instruments begin to stabilize and recover later in the quarter and continue to improve into Q2 as service providers started to resume their field operations activity. The demand for wireless lab equipment was down modestly after an all-time record quarter in June, and we expect it to be up in the seasonally stronger December quarter. Overall, we expect Q2 revenue for NSE to be up significantly, reflecting continued demand recovery in Field Instruments and seasonal strength in lab and production equipment. Although macroeconomic uncertainty remains, we anticipate 5G wireless and fiber to lead the recovery in early calendar 2021, and 5G Field revenue to become more meaningful in the second half of calendar 2021 as the buildout of 5G network accelerates. As major carriers prepare to build out their 5G networks, we have significantly expanded our RF Field Test Instrumentation portfolio to help them automate and streamline the network buildout and qualification. We have also introduced the industry-leading 5G O-RAN Lab and Test Suite to support open standards and interoperability and network virtualization. On the fiber side, we are seeing the acceleration of 800 GigE adoption by network equipment manufacturers to support the next wave of network and datacenter traffic. We expect RF Field Instruments O-RAN and 800 GigE to drive NSE growth over the next several years. Now turning to OSP. The OSP business segment saw its first $100 million plus quarter, driven by strong demand across all three of its product groups: Anti-Counterfeiting, 3D Sensing, and Aerospace and Defense. We expect OSP strength to continue into Q2 with a modest seasonal pullback in 3D Sensing and Anti-Counterfeiting. Three years ago, our 3D Sensing product consisted of one filter in one device for one application. Today, our 3D Sensing product line consists of filters and optical diffusers going into multiple customers, multiple products, and multiple applications. As a result, we now expect 3D Sensing revenue in fiscal 2021 to increase 10% to 20% year-on-year. We expect our Anti-Counterfeiting product demand to remain robust for the next several quarters driven by fiscal stimulus planning and banknote redesign. Aerospace and Defense-related product demand is expected to remain strong for the remainder of this fiscal year. Overall, our long-term secular growth drivers in 5G Wireless, Fiber, and 3D Sensing remain intact, and we expect to continue to drive higher levels of revenue and profitability. In conclusion, I would like to express my appreciation to the Viavi team for its strong execution during these challenging times, and I 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.

Thank you, Oleg. This quarter, we will be participating at the following investor events virtually: Viavi 2020 Annual Shareholders Meeting on November 11, Stifel 2020 Midwest One-on-One Growth Investor Conference on November 12, and MKM Partners Investor Conference on December 15th. Tiffany, let’s begin the question-and-answer session. I ask everyone to limit discussion to one question and one follow-up.

Your first question comes from the line of John Marchetti with Stifel. Your line is open.

Thanks very much, and Amar, let me be the first of what I am sure will be many people to congratulate you on your new role, although it will be sad to see you go.

Thanks, John.

Alright. I want to follow up on your comments around seeing some improvements in that Field business. And I am curious just to get your take on whether or not it’s a scenario where the service providers themselves have started to maybe adapt to the new environment or if their networks are now at the point where they really need to get out in the field to start doing some of this upgrade work?

Sure. So, I mean, listen, one thing, COVID hit and it would suspend and put everything on hold to figure out what’s going on. Then we saw during the summer people saying, "Hey, you know what? Things actually can work in this environment," and they were adapting their protocols and their procedures, parameters, how they work and how they roll the trucks and however they need to do. And remember, the amount of maintenance works accumulated doesn’t say, things go back all the time with problems developing, right? And you can only suspend that kind of work for so much before your network performance starts to degrade. So we saw throughout the summer things kind of getting back to normalization. They don’t move – they are not the fastest adopting company. It was a big company – companies with big fleets of technicians and trucks. And then we saw like, in the September quarter as the quarter went on, things you know, "Hey, we actually have to do work. We have all these programs that we’ve put on hold," and things started to come back and as we enter the December quarter, we are now seeing major service providers in North America actually moving forward with their network planned upgrades and retrofits and all the maintenance that got delayed. And to be fair, Europe remains in a pretty good state. So, really the big slowdown was very much in North America, compounded by some weakness in South America, but it’s not a big difference. So, now, things kind of coming back to life in North America is what’s really providing some of that pickup.

Got it.

I would like to add a little bit. But we also saw some recovery in Latin America.

It was actually - it’s a very good point. Thank you for the year-on-year, Amar. Clearly, Latin America has seen a big devaluation. But actually, given that the state of their networks is not as good as North America, with everybody going to work from home, it really made the need for upgrades and repairs acute and we are actually seeing, I mean surprisingly, South America getting very aggressive in buying new equipment and upgrading the networks to improve serviceability.

Thanks. And then, if I just shift gears for a moment here, Oleg, into the 3D Sensing business, can you help us with some of the seasonality aspects of that? There has been a lot of talk about how your largest customer delayed the launch by a little bit? And I had certainly thought that we might see actually growth in the 3D Sensing business for you sequentially in December, just given that things seem to be pushed out a little bit. And I just want to get your sense in terms of seasonality and how this year is maybe a little bit different given some of those push outs and maybe what we can expect from that business in the March quarter? Whether you are expecting sort of inline or maybe slightly better seasonality there?

So, I’ll start, and then Amar will provide more color. So, if you look at what’s going on typically with the cycle, the September quarter is the biggest quarter for us, okay? Because, remember, we ship our products literally just in time. So, between the time we ship our filters, and they get integrated and they get put in a phone, it’s probably several weeks, okay? So, in that respect, we don’t have that lead lag or some of the optic components suppliers may see. So, in terms of when really – we probably like better representation of a real-time out-of-the-door shipment. So, September quarter is very strong. The December quarter pulls back a bit, it’s not, but still very strong. Then the March quarter is a drop, and then, June quarter depending on the new models, we may see some uptick or things of that nature starting to pick up, and then again back to the very strong September quarter. Now, what we are seeing now is more and more products are going into production; the level of volatility quarter-to-quarter, first half, second half is becoming smaller and smaller, because now there is staging of different models, not everything gets launched at the same time. So, that’s actually good for us, because it helps us to smooth out factory loading and absorption much better. And to the extent, the android ecosystem starts to pick up, they run on somewhat of a six-month off cycle where a lot of new models come out in the spring, which actually drives the level of leveling even better for us. So, that’s what it is. But I think today, clearly, android is still a much smaller player in the space. Amar?

Yes. I can just add to what Oleg just said. So, first of all, I think, if you recall in the last quarter earnings call, we said that 3D Sensing will be roughly flattish year-on-year. Now we expect 3D Sensing to be sort of mid-teen growth. We are between 10% and 20%. So, that’s point number one, which is more incrementally positive than what we thought entering the fiscal year. Number two is, the growth is going to be both in the first half this year as the first half last year, but more so growth in the second half of fiscal 2021 versus second half of fiscal 2020. So, to Oleg’s point, the seasonality remains the same; still, first half is stronger and in the first half, September is quite strong, then a slight decline in December, a further decline in the March quarter, and then, slight pickup in the June quarter as we get ready for the next model year. So this is, that’s how it’s panning out. But you can see the growth is coming more so in the second half versus the first half when you compare year-on-year.

Thanks very much.

Your next question comes from the line of Samik Chatterjee with JP Morgan. Your line is open.

Thank you. Hi, thanks for taking my question. I just want to start with the NSE and follow-up on the NSE segment on the guidance that you gave. I think what you give in the guidance implies about 12% quarter-on-quarter improvement and kind of what I am trying to get to is, as you talked about the improvement you see from service providers in terms of the intent to get some activity finally rolling. Is it now that we should be expecting, as we go through the year, we might have a better than seasonal kind of trajectory in NSE through the year for the remaining kind of three quarters? Is there, kind of catch-up activity that might result, and we should, as we go through the year, get some better than seasonal trends in that segment? And I have a follow-up. Thank you.

Well, I think, clearly, just the NSE, especially in North America, is coming off a fairly low point. So, there are – things are starting to get back to normal or stabilizing. Now, I don’t think you are really going to – I don’t believe there is going to be any kind of catch-up because remember, our customers can only absorb so much at any given time. So, if they skip the quarter, it does not mean there is going to be a significant catch-up. However, there is some, and we see some of it may carryover on to the March quarter, which will be a little with the fiber buildout that are happening there; we do expect several customers to see seasonally greater demand for Field Instrumentation in the March quarter. So, I think we are seeing things returning back to normal, and everybody is kind of getting back to work in the December quarter, and they are placing orders and some of the orders are getting expedited because there is some year-end budget flush. But not that much. And we are also seeing, more importantly, some visibility into some major customers that they are now looking at a three to six months major upgrade or network buildout for a project. That may result in some orders that will soften the seasonally weak March quarter.

Yes. And just to add some additional color on the seasonality if you compare last year’s March quarter, which is fiscal 2020, it was seasonally – it was actually down close to 20% compared to the December quarter because of the pandemic, and we had a big – because of the shutdown in the month of March. What we expect going forward, typically when you go from December quarter to the March quarter, the revenue in NSE goes down anywhere between 8% to 10%, and that’s how we are looking at modeling NSE in the March quarter, roughly about 8% to 10% decline going from December quarter to March quarter. So, going back to sort of normal seasonality, Samik, although at a lower level, and if there is any uptick and if there is any additional spend, we’ll definitely go capture it. But for modeling purposes, we are assuming normal seasonality going forward, maybe at a lower level, and as the year progresses in calendar 2021, we should start seeing the pickup.

Okay. And, Amar, I just wanted to follow up with you on the margin front. I think, at the Investor Day, when you had issued some long-term targets for fiscal 2022, obviously, the landscape has changed dramatically since kind of you issued those targets, but you are thinking of 19% or 21% operating margin with that level of margin predicated on the higher level of revenue. Are you kind of hitting the high end of that already? So, if you can kind of maybe think about what have you done on the cost side in terms of improvement and kind of why should they be thinking that you exceed the high end of the revenue start to come back to a more normal level that you should be exceeding the high end because of the improvements you’ve done on the cost side?

Yes. So, I think, see, when you think about our operating expenses and you compare them on a year-on-year basis, there are three things that are clearly backing it. One, is the operational efficiency programs that we continue to run and this is what we shared with you during the Analyst Day. The funnel that I showed you and we continue to execute on that. One of the biggest items on the funnel was migrating Viavi to a new ERP system, which we completed at the beginning of this year, and we are starting to see the benefit of that. There are other efficiency programs that we are running within that funnel. So that is one, and that is a continuous process and will continue. The second is, we have definitely planned on expenses and some discretionary expenses, and there are non-discretionary expenses. We had definitely planned on some of the discretionary expenses. And third is the benefit from variable expenses because things like travel and entertainment. And so, people are in a lockdown. There is not much travel happening. We also saw sort of commissions come down because the bookings declined on a year-on-year basis because of the pandemic. We also saw some event expenses coming down because there are no critical physical events happening. So, those are the variable expenses that we expect to bounce back as the revenue kicks in and on the operational efficiency side, we will continue to drive operational efficiency, and that’s part of the long-term plan. So, Samik, I am coming back to saying that the 19% to 21% is the range that we will continue to execute against. You are seeing us have a few quarters where we have already got into the high end of the range. But again, there is also a benefit from the variable expenses coming down. So, yes, when the revenue comes in, you will have a higher operating leverage in the model. So, you should see the benefit out of that. But you would also see the variable expenses also go up. So I would say, I would like to stick to the 19% to 21%. I think that’s a good range to work with.

Okay. Thank you. Excellent.

Thank you very much.

Your next question comes from the line of Mehdi Hosseini with SIG. Your line is open.

Yes. Thanks for taking my questions. Two follow-ups. Just going back to the OSP and specifically on 3D Sensing, one of the key OEM customers has complained about the supply constraints and that has impacted how many phones they could actually build. I understand that you may actually have some higher content in specific products. So, my question to you is, what is the most challenging part of your forecasting? The total phone builds? Is that the content which is, I imagine is a function the mix or is it both? And I have a follow-up.

Sure. So, I mean, I’ll tell you, first of all, it’s not Viavi. We have never shut down our customers, and our supply chain has never suffered. So, that’s not an issue on our side. In terms of forecasting, we are actually in a very good position. See, we have a very short lead time, which means we get real-time forecasts. For example, when you are going to have a certain device, going to have a supply chain problem and you have a long lead time, your forecast is very volatile. It changes all the time, right? Because if there is a problem, the customer will lower the forecast, and meanwhile, it’s too late because your product is moving through the supply chain. So, in that respect, we don’t have to second guess. We get forecasts and literally deliver them within weeks, and by that point, a lot of the long lead times are well known to our customers. So what we actually get to them is something that is very close to the number of phones they are going to ship. In that fact, we don’t suffer much from uncertainty. We have a very high degree of visibility and certainty in our forecast.

In your forecast. So, to the extent that the OEM can catch up and be able to get more allocation from their manufacturing partner, would that drive an upside? Your forecast is always conservative.

Yes. I mean, by the time they give us the forecast, they’ve usually worked out all the things or have already factored all the shortfalls and they just tell us how many units to ship. And by then, the number of units is pretty much finalized. So we never really see a lot of the volatility that may happen, one, two, or three months before the delivery date.

Okay. It’s very helpful. And then, my second follow-up has to do with the mix looking into Q4 – I am sorry, looking into December and the first half of calendar year 2021. How do you see the mix between 5G wireless and fiber evolving?

Well, see, the 5G wireless, which is in the first half, it’s mostly lab and production, right? So, when you start a new calendar year, all the major NANDS get new budgets. So, I would say you are going to see quite a few orders happening in the March and the June quarters, right? So that’s going to be pretty strong. And then it’s kind of slows down maybe into September, maybe whatever remains. And then December is usually the weaker stuff unless they have budgets left over. Now, also given that the amount of buildout is going to accelerate next year, we expect there should be more from NANDS and we expect the wireless 5G lab and production to be particularly strong in the first half. Now, the other thing is, also happening now is the emergence of O-RAN, where you now have a lot of demand for interoperability and field verification, and that’s a whole new product line that we just released. As that starts ramping up and demand for those products starts going up, it will be kind of the icing on the cake. So, 5G is kind of, we feel, really should be pretty strong in the first half of the year at least. Fiber, as I mentioned earlier, we are seeing quite aggressive buildout of fiber taking place in Europe and now for North America. So, we expect fiber to be really pretty strong. And 3D Sensing, as I said earlier, first half of the calendar year is seasonally weaker for us. Now, but to the extent the android ecosystem starts gearing up more on the 3D Sensing with world-facing cameras, we may see some pickup in that area, but it’s nowhere going to be as strong as the second half of this calendar year when it comes to 3D Sensing. And the main demand for 3D Sensing will be in the second half of the calendar year.

And just to add, I think even during this situation, we saw 5G wireless lab and fiber fab in production. It was quite resilient. And so, in addition to the fiber that Oleg mentioned on the field side, that will pick up in the first half as buildouts happen. We also believe that the lab and production will continue to remain strong on the fiber side.

That’s a very good point. I mean, so, clearly, the whole 400 GIG buildout is continuing in the datacenter going through fiber backplane, which is driving a lot of demand for fiber optic modules. Now you may have some mix change between the customers, given some of the challenges with Huawei. That means, some of the other customers are seeing greater demand. So, for us, it just means the demand shifts from one customer to another.

Got it. Thank you. And Amar, good luck with your new endeavor. Thank you.

Thanks, Mehdi. Thank you very much.

Your next question comes from the line of Karan Juvekar with Morgan Stanley. Your line is open.

Hi. Thank you for the question. This is Karan Juvekar on for Meta. So, we understand that most of your NSE customers are renewal or normal course customers. But just want to dig into how COVID has impacted your ability to sell to new customers or sell different products to existing customers? Thank you.

Sure. So, I think, the – so this is – as I’ve been telling everybody, this environment is as bad as it is and as challenging as it is really favors the incumbent. And not only the incumbent but the incumbent with scale and a physical presence in all the different regions. So, in that respect, even though we don’t have a lot of the face-to-face contacts, we do have service and support in all the regions and we are working practically every major telecom order. So, clearly, in terms of the renewal and the placing orders for what has been qualified, we do very well. But remember, also, people just don’t place an order; they also need a lot of support in the field, and actually we continue to provide live support in the field supplemented with virtual webinars for our customers. So that’s going very well. In terms of the new business, we have now found a new way, a new normal of working with customers to discuss their plans six, twelve or eighteen months out. We are engaging in the proposal stage. We are following the ways to ship samples to customers into the labs where they get picked up in a safe manner and get tested or remotely demonstrated, all the way up to live demonstrations in some cases. So, I’d say, if you have a geographic footprint that we have and you are local with all the major customers, I think we have a significant advantage versus some of our customers who are thinly staffed around the world or subscale.

Got it. Thank you. That makes sense. And if I could just have one more follow-up on the OSP currency piece of your business? Is there a way to approximate the upside in the quarter from new designs versus the increase in volume from reprints in the stimulus? Thank you.

So, listen, I think, we don’t break that out for obvious reasons. But needless to say there were three drivers for the Anti-Counterfeiting business' strong performance. So, one is, we mentioned the stimulus package is creating a lot of printing. Number two is replenishing of the inventory because we were not printing during the COVID lockdown, and given that if this lockdown continues, there is an increase in the safety stock. And third, of course, is a redesign that came in for one of the countries. So, these are in line with what we had said in the past. We were expecting a redesign at the end of calendar 2020, and it came in. And so, those were three factors that led to a strong performance in our Anti-Counterfeiting business.

And I would also add that the redesign starts coming in. They are increasingly using our more advanced newer pigments, which obviously has a different ASP, and that also means they have to start replacing some of the old currency, recalling it, and reprinting to replace it. So, it all contributes. And I think as Amar said, the physical stimulus is there; it looks like there is going to be multiple waves of it in the coming quarters across the world because everybody is trying to restimulate and restart their economies in view of the COVID-related slowdown. And a chunk of it is heavily dependent on having physical cash to inject what is necessary.

So, just to add to that, we have made this comment earlier too, and I’ve been here for five years, 20 plus quarters, and the business is very nicely diversified. When you look at it, we haven’t seen this before that when NSE is strong, OSP is sort of flattish. When OSP is strong, NSE is flattish. So, it very well counterbalances both businesses. The key here is the earning potential of the company because of the execution discipline and the market trends that we are seeing given this two diversified businesses that we have. So, our motto has been to continuously drive the profits up and EPS up, and that’s what you are seeing in the last couple of quarters. Even in the COVID situation, we were able to print growth in EPS on a year-on-year basis. We also delivered a very strong cash flow from operations of over $63 million.

Got it. Thank you.

There are no further questions in queue. I will now turn the conference back over to Bill Ong.

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

This concludes today's call. Thank you for your participation. You may now disconnect.