Good day. Thank you for standing by. And welcome to the Viavi Solutions' Third Quarter Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentations, 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.

Thank you, Christina. Welcome to Viavi Solutions' third quarter fiscal year 2021 earnings call. My name is Bill Ong, Head of Investor Relations. Joining me on today's call are Oleg Khaykin, President and CEO; and Henk Derksen, CFO. Please note this call will include forward-looking statements about the company's financial performance. These statements are subject to risks and uncertainties that can cause actual results to differ materially from our current expectations and estimations. We encourage you to 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 includes 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 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 a strong quarter with record revenue and non-GAAP profitability, as well as cash flow for a typical March quarter, which is seasonally weaker. Third quarter revenue came in at $303.4 million, exceeding our guidance range of $280 million to $300 million. Revenue grew 18.4% from a year ago, 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 ongoing anti-counterfeiting demand in OSP. The average operating profit margin at 20.2% expanded 540 basis points year-over-year, exceeding 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 jurisdictional mix of income, contributing to a higher effective tax rate of 26% versus our 18% to 20% guidance. Going forward for the fourth quarter, we expect the tax rate to normalize within the range of 19% to 21% and be approximately 20% for the full year. Now moving to our reported Q3 results by business segments, starting with NSE. NSE revenue at $211.2 million increased 12.9% year-over-year and grew 2.2% sequentially, exceeding our guidance range of $189 million to $205 million. Within NSE, NE revenue at $190.9 million increased 16.5% from a year ago and increased 5.5% sequentially, reflecting the recovery from last year's adverse pandemic impact with increases in fiber, cable, and wireless products. The SE revenue decreased 12.1% year-over-year and decreased 21.3% sequentially, reflecting weak demand for our assurance and data center products. We expect the SE business segment to start recovering in the coming quarters. NSE gross profit margin at 64.2% was in line with last year's performance and down 10 basis points year-over-year. Within NSE, NE gross profit margins at 64.5% increased 90 basis points from last year primarily due to higher revenue volumes and favorable product mix. SE gross profit margins at 61.1% decreased 820 basis points year-over-year due to lower revenue. NSE’s operating profit margin at 9.9% increased 250 basis points year-over-year, exceeding the high end of our guidance 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 strong demand for our anti-counterfeiting and 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 16.6% 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 guidance 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 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 opportunistic in our share repurchase. Now on to 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 an 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 an 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 other income and expenses to reflect a net expense of approximately $3.5 million. The estimated fully diluted share count used in our calculation is 243 million shares. This includes an increase of approximately 11 million shares to reflect the estimated dilution impact from the 2023 and 2024 convertible notes. The share count without the convert dilution is approximately 232 million shares. With that, I will turn the call over to Oleg.

Thank you, Henk, and welcome to your first official earnings call at Viavi. I'm pleased with the performance in fiscal Q3 as we have surpassed the pre-COVID levels of business and achieved new historical highs in revenue and non-GAAP profitability for fiscal Q3, driven by both of our business segments. The NE segment benefited from a 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 lab and production equipment continued to see strong demand driven by 400 Gig 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 can return to work. That said, we expect SE revenues and bookings to start rebounding in fiscal Q4. We anticipate SE demand to continue to improve throughout the calendar 2021, returning to and exceeding pre-COVID levels. Additionally, we expect 5G field instrument demand to begin materializing in the second half of calendar 2021, as 5G service providers ramp up their network build-outs. Longer term, we expect several major industry and political trends to set up NSE for a multiyear super cycle. Carriers recently made sizable investments in spectrum and are now aggressively working on 5G wireless field deployment plans. The 5G market presents Viavi with new wireless and fiber growth opportunities. Our wireless products are already off to a strong start with solid bookings and business visibility. We are also seeing attractive growth opportunities in Europe as governments push to help fund the deployment of fiber to the home to replace legacy copper networks. Lastly, U.S. plans for multiyear investment in broadband outside major cities are expected to present Viavi with new markets and opportunities for fiber cable and wireless. Now turning on to OSP, the OSP business segment delivered record revenue and profitability for the March quarter led by strong demand for both anti-counterfeiting and 3D sensing products. Anti-counterfeiting demand is driven by a combination of global central bank fiscal stimulus, inventory replenishment, and banknote redesigns. Fiscal Q3 saw above seasonal demand by major customers, and we expect stronger than normalized demand for anti-counterfeiting products to persist in the foreseeable future. 3D sensing demand for mobile devices remains strong and is up double-digit percentages from a year-ago levels, reflecting 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 segments experiencing rapid recovery and expecting year-on-year revenue growth throughout the remaining calendar year. The OSP business segment anticipates continued robust demand for anti-counterfeiting products driven by global fiscal stimulus programs and currency redesigns. Additionally, 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, supply chain partners, customers, and shareholders continued safety and health as we return to business normalcy. I will now turn the call over to Bill.

Thank you, Oleg. This quarter, we will be participating at the Needham TMT Investor Conference on May 20 and the Stifel Cross Sector Investor Conference on June 8. Christina, let's begin the question-and-answer session. We ask everyone to limit discussion to one question and one follow-up.

Your first question comes from Samik Chatterjee with JPMorgan.

Hi. This is Joe Cardoso on for Samik Chatterjee. My first question is actually around supply constraints that you mentioned for the 3D sensing business? And actually, I'm 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 what are you guys seeing in the NSE 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, great question. 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, they have to reduce their forecast. So that's really where we've seen some reduction in forecasts, because they simply cannot meet all the requirements. Regarding the NSE, sure, lead times are getting longer, and there are supply shortages. But fundamentally, we're not a very big player relatively speaking. We know how to manage our supply chain effectively. We saw shortages looming on the horizon as far back as October and November, and we took proactive measures to stock products in anticipation. While there are shortages of supply and we had to chase it, we were able to meet all our customer demands and not miss any deliveries. In fact, our ability to manage the supply chain well will present us with opportunities to gain some market share from competitors who may struggle due to cash constraints and poor visibility.

I appreciate the color. And then my second question is on the 3D sensing business, specifically around the Android opportunities. I think last quarter, you highlighted incremental excitement around the Android customer base adopting world-facing 3D sensing applications that were going into the second half of this year or maybe into next year. Has there been any progress there versus 90 days ago? Is there anything there to be incrementally more excited about? It seems 3D sensing applications being adopted for automotive are getting a little bit more interesting based on news stories you've been hearing. What’s the potential there? And what's your expectation for it materializing? Thank you.

I would say three months can make a difference based on the information we have. Today, I'm less enthusiastic about Android moving sooner rather than later. It’s a complex technology. People are finding that 3D sensing is not a straightforward adaptation. For various reasons, it's probable that Android may take a bit longer to adopt, likely into next calendar year before we see major acceptance. That said, automotive continues to gain traction, though it's still relatively early in the adoption cycle. Volumetrically, automotive isn't as large a market compared to mobile phones. However, the demand is primarily focused on high-end models, and while automotive faces semiconductor shortages, we are not seeing any degradation in demand for our products.

Thank you. I appreciate the insights and congrats on the results.

Thank you.

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 3D sensing commentary, this 16% growth. My math suggests a 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 expectations on phone sales. Shouldn’t we anticipate some replenishment? Are you saying that despite depleted inventories, they're unable to get components, creating softness in the June quarter? Or am I overestimating the March quarter? Can you give us a little sense? Is the June quarter basically half that of the March quarter?

First of all, I won't comment on the delta between major customers. Remember, what was sold in the March quarter probably was built in the September quarter or early December quarter. So there’s some timing at play. I think the differences here are more linked to what we thought our expectations were, given the traditional seasonality versus the actual forecast. I wouldn’t necessarily interpret it as significant declines in orders; we might have been overly optimistic regarding forecasts as they were on the handset industry.

So if I were to strip out 3D 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 the range we should be anticipating, or could it settle above that historical level? You mentioned five or six quarters of sustained higher levels; should we think of that as the new normal?

Yes. I think $70 million is too aggressive since we started thinking of kind of a base business around $50 million. Take it as the high 50s. There may be quarters where a customer wants a big shipment early, so you could see above $60 million, but on average, I expect to see about mid-50s over the fourth quarter run rate versus low 50s. We expect to continue to see significantly stronger anti-counterfeiting demand in the foreseeable future. Keep in mind, many countries still have printing works shut down due to COVID, creating pent-up demand, and increased cash printing will lift the volume of our products in the future.

Okay. I’ll get back in queue. Thanks.

Thanks.

Your next question comes from the line of Mehdi Hosseini with Susquehanna.

Yes. Thanks for taking my question. Perhaps, Oleg, if I were to rephrase the prior question, how much of your success in 3D sensing is from gaining market share?

Well, we pretty much hold the majority share, so most of the growth in 3D sensing has come from market expansion. We expected Android to be the next adopter of the technology starting at the end of this year into next year, but those plans seem to be pushed out. There's been plenty of online discussions about the complexities involved with world-facing 3D sensing in Android phones.

Sure. So, regarding the increase in content in high-end smartphones by North American OEMs, are you expecting continuous increases or are we at a plateau?

The near-term content increase will have to come from more world-facing cameras penetrating a broader product range. Over the next few years, we hope to gain share in the diffuser space as well. There are still plenty of opportunities to increase our content.

I see. You referred to NSE facing a super cycle looking forward. With NSE revenues being somewhat flat over the past two fiscal years, does that imply two consecutive years of double-digit growth? Were fiscal years '18 and '19 reflective of a super cycle?

I don’t know about that. Clearly, this year's revenue is an easy comparison to the prior year. So yes, you can have double-digit growth, but I'd lean more toward high single-digit growth. The point is, customers that were previously holding back on spending are now looking at significant multi-year spend plans for network performance upgrades and expansion. Remember, 5G cannot happen without significant fiber upgrades, which are synergistically pulling through fiber opportunities as customers gear up for 5G.

Great. Thanks for all the detail.

Sure.

Your next question comes from the line of Tim Savageaux with Northland Capital Markets.

Hi. Good afternoon. I wanted to follow up on the super cycle myself. Oleg, when you referenced things looking much stronger than even two quarters ago, was that regarding fiber, 5G, or both?

That was predominantly about fiber and cable.

Fiber and cable show potential for strong double-digit growth due to favorable comparisons.

In the March quarter, yes, but moving forward, it will be high single-digit growth. A super cycle suggests not just a temporary spike but a higher sustained demand that levels out over several quarters. It's a combination of transitioning technologies leading to sustained and even demand compared to prior periods.

Understood. Are you characterizing that as purely market growth? Given your new entry into wireless field test, could Viavi achieve above-market growth?

Wireless to us would be an icing on the cake. I'm referring to the base drivers of the NSE business, mainly fiber and cable. Wireless is a higher beta business, and if we succeed, it will add incremental growth on top of it.

Thanks very much.

Your last question comes from the line of Meta Marshall with Morgan Stanley.

Hi. This is Erik on behalf of Meta. Thanks for taking our question. Do you anticipate any impact from a potentially weaker India on the OSP or NSE side?

It’s probably too early to tell. India is not a very significant market for us, but it is growing. There may be some delays, but I believe India is strategically focused on implementing infrastructure upgrades and so far, things are proceeding as planned.

Got it, that's helpful. Do you see the U.S. broadband opportunities differing based on funds allocated to alternative providers? Do you view this as neutral, or do you have better positioning with traditional providers?

Clearly, the traditional large providers are very engaged, but Tier 2 and Tier 3 are also upgrading their offerings. We're seeing renewed investment and demand from Tier 2 and Tier 3 service providers looking to significantly enhance their fiber networks and potentially lease their lines to wireless 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.