Good afternoon. My name is David and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Viavi Solutions 4Q 2022 Earnings Call. Today's conference is being recorded. Sagar Hebbar, Head of Investor Relations, you may begin your conference.

Thank you, David. Welcome to Viavi Solutions fourth quarter and fiscal year 2022 earnings call. My name is Sagar Hebbar, Head of Investor Relations and Corporate FP&A. 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 could cause actual results to differ materially from our current expectations and estimations. We encourage you to review our most recent annual report and SEC filings, particularly the risk factors described in those filings. The forward-looking statements, including guidance we provide during this call are valid only as of today. Viavi undertakes no obligation to update these statements. Please also note that unless we state otherwise, all results except revenue are non-GAAP. We reconcile these non-GAAP results into our GAAP preliminary 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 will make the recording available by 4:30 P.M. Pacific Time this evening on our website. I would now like to turn the call over to Henk.

Thank you, Sagar. Fiscal Q4 2022 set an all-time record for Viavi revenue and a fourth quarter record for non-GAAP profitability. Fourth quarter revenue came in at $335.3 million, up 7.8% year-over-year, exceeding our guidance range of $315 million to $329 million. Growth was primarily driven by improved demand for our core OSP and 3D sensing products. Viavi's operating profit margin at 21.3% was within our guidance range of 21% to 22%, improving 50 basis points year-over-year. EPS at $0.24 met the high end of our $0.22 to $0.24 guidance range and increased 9.1% from $0.22 in the prior year, a combination of strong operating performance and the impact of an improving capital structure. The fully dilutive shares outstanding at the end of fiscal Q4 2022 of 231.3 million shares decreased from 241.9 million shares in the year-ago period, substantially a result of refinancing our convertible debt while continuing to execute on our share repurchase program during fiscal 2022. The outstanding dilution resulting from the remaining convertible notes was 1.6 million shares during the fourth quarter, compared to 10.4 million shares a year ago. Moving on to our reported Q4 results by business segment, starting with NSE. NSE quarterly revenue at $246.2 million, up 4.1% year-over-year was within our guided range of $240 million to $250 million, a new quarterly record in this business segment. Within NSE, NE increased 4.5% from a year ago to $222.2 million reflecting continued strong demand for our wireless and optical lab and production products. SE revenue at $24 million was flat year-over-year albeit at an improved product mix. NSE gross profit margin at 64.9% increased 150 basis points year-over-year. Within NSE, NE gross profit margin at 64.2% increased 110 basis points from last year, primarily a result of leverage on growth and favorable product mix. SE gross profit margin at 71.3% increased 580 basis points year-over-year. NSE's operating profit margin at 15.1% was slightly below our guidance range, albeit flat year-over-year. Higher variable sales commission costs on strong bookings performance during the quarter were offset by gross profit margin expansion. Now turning to OSP. Fourth quarter revenue at $89.1 million was up 19.8% from a year ago and improved sequentially by 5.2%. Revenue exceeded the guidance range of $75 million to $79 million due to better-than-expected demand for anti-counterfeiting products during the quarter. Gross profit margin at 55.9% decreased 160 basis points year-over-year driven primarily by raw material costs and start-up costs in our new Arizona facility. Operating profit margin at 38.6% was within our guidance range of 38.5% to 39.5%, although down 20 basis points year-over-year, a result of the aforementioned gross margin factors offset by disciplined OpEx management. Moving to our fiscal 2022 full year performance. Despite the COVID-19 pandemic-related supply chain issues and inflationary pressures, Viavi was able to mitigate much of the impact, resulting in a strong finish to a record of $1.3 billion, up 7.8% from fiscal 2021. NSE reached a record revenue of $949.1 million, up 13.3% year-over-year, well within the range of our long-term goal. OSP at $343.3 million saw a modest decline of 4.9% in revenue compared to record levels in 2021 but still exceeded the high end of our 2022 goal provided in 2019. Viavi's full year 2022 operating profit margin at 22.2%, expanded 110 basis points and exceeded the high end of our goal of 21% by 120 basis points. Within our NSE segment, operating profit margins expanded 460 basis points from 11% in 2021 to 15.6% in 2022 due to leverage on revenue growth, combined with disciplined OpEx management. Within our OSP segment, operating profit margins reduced from a record level of 44.7% in 2021 to 40.5% in 2022, a result of lower revenues in combination with higher raw material costs. Full year 2022 EPS at $0.95 increased 14.5% or $0.12 from $0.83 in 2021 and is ahead of the high end of our goal of $0.90 for 2022, a result of operating performance and an improved tax rate. Now turning to the balance sheet. At the end of fiscal Q4 2022, the ending balance of our total cash and short-term investments was $565 million, down $139 million compared to a year ago, mainly a result of refinancing 57% of our convertible debt with longer notes at a favorable rate. During 2022, we generated $178 million in operating cash flow and deployed $73 million or 5.6% of revenues towards capital expenditures, resulting in $106 million in free cash flow generation. We were able to buy back $45.5 million in common shares under the 2019 repurchase program and invested $8.3 million in M&A activity. Looking at just the fourth quarter, operating cash flow was strong at $73.6 million, an increase of $11 million compared to $62.6 million in the year-ago period. The increase was a result of higher operating income, coupled with benefits from supply chain investments made earlier in the year. In addition, we invested $19.1 million in capital expenditures during the quarter, compared to $25.4 million in the prior year as we progress towards completion of our Arizona production facility. As you may recall, we had targeted the reduction of our 2023 and 2024 outstanding convertible notes to continue to improve our capital structure. During the first three quarters of 2022, we redeemed approximately $370.6 million of these notes on the original $685 million in principal value. In the fourth quarter, we completed transactions to extinguish an additional $22.4 million in principal value of convertible loans at a total reacquisition cost of $27.2 million, bringing the principal value of our combined convertible notes outstanding to $292 million at the end of fiscal 2022, or 43% of the original principal value. During fiscal Q4, we repurchased 2.1 million shares of common stock for $28.9 million, under the 2019 repurchase plan. The remaining authorization under the 2019 repurchase plan is $67.3 million. Now on to our guidance. We expect the fiscal first quarter 2023 revenue to be approximately $324 million, plus or minus $7 million. Operating profit margin is expected to be 21.4%, plus or minus 70 basis points and EPS to be in the range of $0.22 to $0.24. We expect NSE revenue to be approximately $236 million, plus or minus $5 million, with operating profit margin at 14.5%, plus or minus 50 basis points. OSP revenue is expected to be approximately $88 million, plus or minus $2 million, with operating profit margin at 40%, plus or minus 100 basis points. Our tax rate is expected to be approximately 16% to 17% and we expect other income and expenses to reflect a net expense of approximately $6 million. Share count is approximately 232 million shares based on current stock price levels and includes the dilutive impact of approximately $2.5 million of the remaining convertible notes.

Thank you, Henk. I am satisfied with Viavi's performance in fiscal Q4 2022, which resulted in record quarterly revenue and profitability. We've also achieved an all-time high in revenue and non-GAAP profitability for the entire fiscal year 2022. Additionally, we have surpassed our 2022 profitability target established during the 2019 Analyst Day, despite facing considerable challenges from COVID and inflation. The NE segment reached a new revenue peak in fiscal 2022, with both fiber and wireless segments growing by double digits compared to the previous year, fueled by strong investments from service providers and hyperscalers upgrading their networks. Despite the challenges in the supply chain and inflation, we executed our strategy effectively, increasing revenue, profitability, and market share. In fiscal Q4, fiber revenue growth was driven by fiber-to-the-home deployment, 400 GigE network and data center upgrades, and the rapid adoption of 800 GigE and PCI Express Gen 5 technologies. The demand for 5G wireless remained robust, supported by investments in ORAN and the expansion of front-haul wireline networks. Fiscal Q4 also experienced strong NE bookings, leading to a seasonally robust Q1 backlog and improved demand visibility. The SE business revenue was stable year-over-year for fiscal Q4 2022. However, the annual SE revenue grew by 13% year-on-year, bolstering our confidence in the renewed data center and assurance strategy and products. We anticipate continued strong growth in our SE business during fiscal 2023. Turning to OSP, the segment performed better than expected, with revenues surpassing our guidance range. The revenue from our anti-counterfeiting products in fiscal Q4 rose by 27% year-on-year, driven by global fiscal stimulus and inventory restocking. Looking forward, we expect Q1 2023 revenue to be approximately flat compared to Q4, with decreased anti-counterfeiting demand balanced by stronger 3D sensing. To summarize, in fiscal year 2022, we effectively implemented Viavi's growth strategy outlined during the September 2019 Analyst Day, exceeding our non-GAAP profitability and EPS targets. Key highlights include the NSE business segment achieving 13% revenue growth and a 60% increase in non-GAAP operating margins for fiscal year 2022. We are proud of our accomplishments amid the challenges posed by the global pandemic, supply chain issues, and inflation. The OSP business has exceeded our three-year strategic goals for both revenue and profitability. Furthermore, we successfully revamped our product portfolio to capitalize on secular trends and expand our total addressable market, positioning Viavi for ongoing revenue growth, increased scale and profitability, as well as market share gains. As we embark on our next three-year strategic plan, we invite you to join us at the Analyst Day event in Boston on September 13, where we will outline our strategy and goals for the upcoming cycle. We hope to see you there, and we will also provide a live webcast of our presentation. Additional details regarding the event will be shared in the next 30 days. Finally, I would like to thank my Viavi team for another quarter and fiscal year of strong performance and express my gratitude to our supply chain partners, customers, and shareholders for their support.

Thank you, Oleg. David, let us begin the question-and-answer session.

We'll take our first question from Alex Henderson with Needham & Company.

I was hoping if you could talk a little bit about the split between 3D sensing and the counterfeiting products in the quarter. My assumption is that 3D sensing is around $15 million or so in the quarter and that the upside was heavily skewed to that 20% kind of jump in the security products. I’m assuming when you look out to the ‘22 to ‘23 window that we revert back to that standardized $60 million a quarter baseline in OSPs. First of all, is that correct? And the second question is really around the currency exposure and the mix of business internationally, can you talk about what’s going on in your EMEA business which was down substantially. And obviously, you made that up with very strong domestic growth.

Okay. You asked three questions in one. Okay. So let's... Your first question was the mix between 3D sensing and what we call core OSP. I think your numbers are pretty close, actually slightly better on 3D sensing than $15 million for the fourth quarter. So you’re pretty close. And then I think your follow-on question was on the outlook…

So your first question was the mix between 3D sensing and core OSP. I think your numbers are pretty close, actually slightly better on 3D sensing than $15 million for the fourth quarter.

The outlook for OSP indicates that we will see a slight decrease in anti-counterfeiting demand, but there is a stronger demand for 3D sensing. Overall, this balances out, and the rest of the business is expected to remain steady from one quarter to the next. Regarding our business in Europe, it has been somewhat weaker during the summer due to seasonal vacations; however, we still observe healthy demand. A challenge we face is the devaluation of the Euro against the dollar, which has made our products more expensive in relative terms. Despite this, we continue to see strong demand from European network access manufacturers and service providers engaged in long-term fiber deployment projects to homes. Our European businesses are currently quite robust, driven by these ongoing multi-year investment cycles rather than one-time purchases.

We're reading the numbers correctly on your slide deck, it was down 22%. Is that mostly currency related?

It really depends on where we ship the anti-counterfeiting pigments, whether it's to Europe or other regions. I believe there isn't much variability on the NSE side.

So there's a little bit more project-related, Alex, on the NSE side, in our wireless and lab business, not so much an OSP issue and there was a little bit of FX translation that drove the year-over-year down, the number was about $5 million for the quarter, purely FX translation on a weaker euro or stronger U.S. dollar.

Yes, I apologize for that, it came a bit faster than I anticipated. I have a question regarding network enablement. I will ask both parts at the same time instead of following up later. You mentioned strong bookings and backlog, possibly even unusually strong, which aligns with everything we’ve been observing in the fiber ecosystem and possibly in 5G as well. However, you are projecting sequential revenue declines. Can you explain that? Additionally, for fiscal year '22, you reported a 13% growth in NE revenue. With some very favorable comparisons in the first half, there was only mid-single-digit growth of around 6% in the second half. What would be a reasonable growth expectation for the NE segment for fiscal '23?

We typically don't provide annual guidance. Despite concerns about a recession, I believe this year should be relatively strong, perhaps with growth in the mid-single digits. However, it's important not to speculate too much. Currently, we aren't seeing the impact, but if a recession occurs, we might experience a slight decline or potentially flat performance year-over-year based on the product line. At this stage, it's probably too early to discuss fiscal '23 or even calendar '23 until we assess how we finish this calendar year and whether the current positive momentum in Europe, North America, and Asia will continue or if customers will reduce their R&D budgets and deployment rates.

And on the booking strength contrasted with the sequential revenue decline. Anything to talk about there?

The bookings for the quarter reflect a lot of business booked within it. Typically, our September quarter tends to be weaker seasonally in North America. However, due to exceptionally strong bookings, it is turning out to be comparable to our June quarter. If we take into account last year's significant order shipped to a North American customer, excluding that makes this quarter appear robust based on our run rate business. Generally, our strongest quarters for SE business are June and December, while September and March are usually weaker.

This is Angela Jin speaking on behalf of Samik Chatterjee. I understand you stated there hasn't been any noticeable demand weakness due to the recession. However, are you observing that any of your customers, aside from service providers and hyperscalers, are delaying projects or reconsidering their investments in other 5G technologies, such as industrial or automotive applications or enterprise spending on private 5G? I also have a follow-up question.

Yes, we don't focus much on the automotive sector. Most of our customers, besides service providers, are in the wireless and fiber optic telecommunications industry. To answer your question, we haven't experienced a decline; demand remains strong. However, I think the slowdown hasn't affected the engineering groups yet. They have their budgets for the year and are spending them. Even during a mild recession, companies may see a slight reduction in production testing orders, but they typically do not cut back on R&D orders. In fact, they often accelerate product development during downturns. If there is a pullback recession lasting a couple of quarters, that part of the business might level off or decrease slightly in production. As for service providers, their programs are mostly set. The real question is whether they will take delivery this quarter or spread it over several quarters, possibly deferring some deliveries. Despite this, there is significant pent-up demand, and they have many projects in progress. We believe order momentum will remain relatively strong compared to past recessions.

Got it. And then for my follow-up, on the OpEx line, generally, you’ve been very disciplined about OpEx. But there was a small bump up in this quarter. And so I was wondering if that was a reflection of the current inflationary environment and if this could be sort of the new norm of OpEx level in the next few quarters, just given the current environment that we’re in.

I'll begin and then hand it over to Henk. Our operating expenses remain disciplined. The increase we saw was primarily due to commissions and bonuses, which are paid out on a semiannual basis. This relates to the first half, where bookings and performance exceeded our annual operating plan. We are making salary adjustments, but they're not aligned with inflation levels. We are looking at around a 4% pay adjustment, mostly affecting North American operating expenses. In other regions, some of the higher salary adjustments we are making have been offset by currency devaluations compared to the dollar. Nonetheless, the main driver of the increase in operating expenses is in North America, where we anticipate about a 4% rise this year.

Yes. There may be a little bit of additional T&E that sort of hold into OpEx.

Yes. So it’s coming back with travel…

Travel is coming back a little bit, inflationary impacts, that I like spoke about but think of OpEx going forward, not quite at the 41.2% that you saw in the fourth quarter but below that 41%, between 40.5% and 41%. I think that's the way to think about it going forward.

Yes. And I promise to limit my follow-ups to two. Oleg, it seems like based on your commentary on OSP, the 3D sensing should see a meaningful year-over-year growth, September ‘22 versus September ‘21. Is that a fair assumption?

Actually, no, because last year we had a significant demand for 3D sensing, but our customer realized they didn't have enough chipsets to produce the units as many suppliers fell short. Consequently, there was a major inventory adjustment in the December quarter, and we observed our orders surge in December before recovering in the March quarter. This year appears to be more stable. Overall, we expect the year-on-year demand to be roughly similar. In fact, we might even see a slight increase in volume due to a deeper integration of our 3D sensing into various platforms like handheld devices and laptops, which may counterbalance some of the erosion in average selling prices. We anticipate a fairly solid year-on-year performance, slightly stronger than the June quarter, but the September results will likely be quite similar to last year. One area of decline is in anti-counterfeiting, which has decreased from last year's levels, where we were close to $100 million. We're seeing about a $10 million decline in anti-counterfeiting primarily, while everything else remains relatively stable.

And just to continue with 3D sensing, it seems like we’re off to another smartphone cycle for the high-end application. Last year, your overall OSP revenues were down 5%. But given the strength of the high-end smartphone another upgrade cycle is coming, could you actually be able to have the OSP revenue in this fiscal year flat to up? Or should we assume that it’s going to trend more like flat to down?

I think it's more accurate to say it's flat. I've had different people asking me if R&D mobile phone sales will be down this year. While we’re not seeing a reduction in volume, we can't comment on the number of phones because there’s now a greater level of penetration. Instead of just one filter, you may have two filters applied due to the increased presence of higher-end phones with features like world-facing cameras. I'm really assessing this based on the mix. We believe that adjusted for ASP erosions, revenues will be roughly flat this quarter. The new product launch has been very strong, and there is significant demand, which we are likely to see in the December quarter. It’s important to remember that our lead time is two weeks, so if a customer wants to increase their volume demand, we can accommodate that in a very short period.

Okay. And speaking of lead time, I'm under assumption that there's no more supply chain disruption, components are available for your NSE business unit. Is that a fair assumption?

I would say that it is a reasonable assumption for probably 98% of the devices. The area where challenges still exist is with FPGA, which is the only thing you need to monitor closely if you want to get additional spot market deliveries. Overall, as I have mentioned over the past year, by summer we were not seeing much in terms of supply issues, and now as we enter this quarter, lead times are improving significantly. What used to be an 18-month lead time has shortened to 12 months, then 6 months, and now there are even options available on the spot market.

Okay. And just if I may, just a quick follow-up to this. A few quarters ago, you actually left some millions of dollars of revenue on the table because of the component shortages. You have been able to have a pretty robust revenue so far, beating your own guide. Should we assume that you were able to recapture those revenues that you left on the table? Or is that coming in the second half of the year?

Well, we have mostly recaptured those revenues. However, it's important to note that the revenue lost was only for a few weeks. We expect to recover that at the start of the first month, and it was generally below $10 million, around $5 million. At this stage, I believe we are not leaving any revenue on the table.

I have a couple of questions. On the anti-counterfeiting strength, even though it has decreased from last year, it seems to be stronger than you anticipated. I understand it's difficult to have complete visibility, but I'm curious if that is due to inventory building, reprints, or ongoing international stimulus programs that we should consider. I am trying to understand what you believe the baseline run rate level of that business is at this moment. Additionally, I have a follow-up question.

Yes, I believe the baseline for that business is now around $58 million to $60 million. We are likely two to three quarters away from everyone returning to their typical inventory levels. Some countries are further away from normalizing their inventories, while others are closer. Comparing year-on-year, we had an uneven delivery for a major customer last year, with more shipments occurring in March instead of June. This year has returned to more traditional demand patterns in March and June. The June quarter performed well, as we anticipated seasonally. The September quarter tends to see a slight decline, but it’s not significantly lower, and the increase in 3D sensing largely offsets that. I see the anti-counterfeiting sector moving into a more stable state now. Many of the disruptions caused by COVID and stimulus have diminished, and we're returning to traditional reprints and the release of new notes, driven more by business needs than by stimulus. The reason we're observing a higher level now is that there are significantly more notes circulating in the economy. If a recession does occur, we've noticed various countries developing plans to boost liquidity in their economies, but nothing extreme like distributing trillions of dollars. The outlook appears to reflect a more standard demand profile.

Got it. That’s helpful. And then maybe you spoke to the NSE strength this quarter kind of being more wireless driven. Just any commentary about cable or just what you’re seeing from them, particularly after a pretty strong last couple of years?

I would say the two main factors driving our business are fiber and wireless infrastructure. We have several major customers who typically take their large deliveries in March, June, and September. In addition to our key customers, which include a few large clients, I find it encouraging that we are seeing a broadening of our customer base. This includes service providers establishing compliance labs to promote more ORAN adoption and expanding their front-haul build-out. New participants in the open early-access network, such as Mavenir, Altiostar, Rakuten, and DISH Network, along with cable companies entering the wireless sector, are purchasing wireless equipment to develop their products. While these new customers may not spend tens of millions, they are investing millions in equipment, which is enhancing our wireless segment. On the fiber side, significant drivers include the initial stages of building out fiber to homes. Multiple countries are launching multiyear initiatives to connect many households to fiber, with the U.K. leading the charge, followed by Italy, Germany, and ongoing activities in the U.S., along with similar initiatives in other European nations and Asia. This growing demand for fiber to the home is fueling our fiber field instrumentation and network upgrades, with deeper fiber penetration driving demand for our modules and test equipment for production and development. Additionally, the shift toward 400 and 800 gig is pushing the demand for high-end fiber equipment. Overall, the momentum from both fiber and wireless has been tremendous.

That concludes today's question-and-answer session. I'll now turn the call back to Sagar for any additional or closing remarks.

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

This concludes today's conference call. You may now disconnect.