Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Viavi Solutions Fiscal Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the conference over to Sagar Hebbar, Head of Investor Relations. Please go ahead.

Thank you, Regina. Welcome to Viavi Solutions second quarter fiscal year 2023 earnings call. My name is Sagar Hebbar, Head of Investor Relations with Viavi Solutions. 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 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 at www.investor.viavisolutions.com. 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 Q2 2023 slightly exceeded our lowered expectations, mainly as a result of anticipated headwinds in service provider spending. Fiscal Q2 revenue came in at $284.5 million, down 9.6% year-over-year and above our guidance range of $261 million to $281 million. Viavi's operating profit margin of 16.2% decreased 560 basis points from last quarter and 710 basis points from prior year, although above our guidance range of 13.9% to 14.9%. EPS at $0.14 per share was down 41.7% from the prior year and 39.1% from the prior quarter results and exceeded the guidance range of $0.10 to $0.12 per share. The current share count was $227.1 million during the quarter, down from 242.3 million shares in the prior year as we continue to improve the quality of the balance sheet. Cash flow from operations was $46.2 million versus $22.2 million in the prior year. And year-to-date, cash flow from operations continues to be strong at $72.8 million compared to $75.6 million last year during the first half. Now moving to our reported Q2 results by business segment, starting with NSE. NSE quarterly revenue was impacted by lower service provider spending at $207.1 million and declined 15.2% year-over-year, slightly ahead of our guidance range of $187 million to $203 million. Although on lower levels compared to prior year and as the quarter progressed, demand patterns stabilized within NSE. NE revenue of $179.7 million declined 16.2% year-over-year, driven by the weakness in service provider spending. SE revenue at $27.4 million decreased 8.1% from last year. NSE gross profit margin at 64.4% decreased 90 basis points year-over-year. Within NSE, NE gross profit margin at 64.1% decreased 30 basis points from the prior year, primarily due to a decline in volume. SE gross profit margin at 66.8% decreased 500 basis points from last year, primarily due to product mix. NSE operating profit margin at 8.9% exceeded our guidance range of 5.5% to 6.5%, albeit down 980 basis points year-over-year. Now turning to OSP. Second quarter revenue at $77.4 million was up 9.6% year-over-year. Revenue was near the high end of our guidance range of $74 million to $78 million. Gross profit margin at 52.3% decreased 390 basis points from the prior year mainly as a result of start-up costs in our new Arizona facility. Operating profit margin at 35.5% was within our guidance range of 35% to 37%, down 70 basis points from a year ago. On February 1, 2023, the company approved a restructuring and workforce reduction plan to improve operational efficiencies and better align the company's workforce with the current business needs and strategic growth opportunities. The company expects approximately 5% of its global workforce to be affected and estimates it will incur charges of approximately $15 million in connection with this plan. The company anticipates the plan to be substantially complete by the end of fiscal 2023. Now turning to the balance sheet. The ending balance of our total cash and short-term investments was $489.7 million, down $27.4 million sequentially as a result of capital deployment towards both acquisitions and stock repurchases. As mentioned earlier, operating cash flow for the quarter was $46.2 million, an increase of $24 million year-over-year. The increase was a result of solid collections. In addition, we invested $18.1 million in capital expenditures during the quarter compared to $14.8 million in the prior quarter, primarily due to completing the build-out of our new Arizona production facility. During fiscal Q2, we repurchased 2.2 million shares of our common stock for $25.2 million under the share repurchase program announced in September, leaving the remaining balance of $274.8 million worth of shares authorized for repurchase. In September, we announced that the Board authorized a new common stock repurchase program for up to $300 million. In addition, we successfully closed the acquisition of Jackson Labs in fiscal Q2 2023. The total purchase consideration comprised of approximately $49.9 million in cash and contingent consideration of up to $117 million in cash based on the achievement of certain operational and revenue targets to be achieved over a three-year period. This transaction provides Viavi with a leadership position in resilient PNT, supporting government and service providers in protecting their key infrastructure and assets. The transaction allows us to leverage our existing go-to-market model and utilizes US federal NOLs. Now on to our guidance. We expect the fiscal third quarter 2022 revenue to be approximately $266 million, plus or minus $10 million. Operating profit margin is expected to be 13.6%, plus or minus 60 basis points, and EPS to be in the range of $0.10 to $0.12 per share. We expect NSE revenue to be approximately $197 million, plus or minus $8 million, with operating profit margin at 7.7% plus or minus 50 basis points. OSP is expected to be approximately $69 million, plus or minus $2 million, with operating profit margins of 13.5% versus minus 100 basis points. Our tax rate is expected to be between 23% and 25% as a result of jurisdictional mix. We expect other income and expenses to reflect a net expense of approximately $4.5 million. Share count is expected to be around 226 million shares based on current stock price levels. With that, I will turn the call over to Oleg.

Thank you, Henk. Fiscal second quarter of 2023 came in above our guidance range driven by better-than-expected NSE performance helped by stabilization in service providers' demand and spending. Our OSP business grew year-over-year and came in within the guidance range. Starting with NSE, NSE declined on a year-over-year and sequential basis. During the December quarter, we continued to see a general pullback in service providers' OpEx and CapEx spending that started during the last two weeks of September. In addition, we also did not see any meaningful year-end budget flush. Decline in NE was primarily driven by weaker demand in our fiber and wireless lab products by Tier 1 service providers and wireless labs responding to reduced business outlook. This was partially offset by stronger demand for our wireless field instruments, driven by the 5G C-band infrastructure deployment. In addition, we saw strong traction for the recently acquired Jackson Labs resilient PNT product. I'm pleased with the market momentum for resilient PNT technology as it increasingly becomes a must-have by the government and service providers as they adapt to resilient PNT technology to protect their strategic infrastructure and assets. Looking at the current quarter, we expect the demand softness to persist as many of our customers are continuing to pare back their CapEx and OpEx in the face of weakening end market conditions. That said, we are encouraged with the service provider spend stabilization and are starting to see early signs of near-term recovery. We expect field instruments demand to start picking up by mid-calendar 2023 as our service providers retrench and rebalance their CapEx and OpEx plans and resume their fiber network build-outs and 5G C-band expansion. This is expected to drive the recovery in demand for our fiber and field products. In addition, we also expect several major cable operators to start upgrading their networks during 2023, which is expected to drive the demand for our cable field instruments. Our SE business segment grew 14.2% sequentially, in line with our expectations. We expect SE revenue to remain steady at the current levels for the remainder of fiscal 2023. Now turning to OSP, OSP increased 9.6% year-over-year, driven by growth in both anti-counterfeiting as well as 3D sensing products, and performed in line with our expectations. Looking ahead, we expect the second half of fiscal 2023 to be weaker with quarterly core OSP revenue moderating to about $55 million per quarter, driven by weaker anti-counterfeiting product demand as some of our major end customers pulled back on fiscal stimulus. We also expect weaker year-on-year demand for 3D sensing products in the second half of fiscal 2023, driven by lower end customer demand. In view of the weaker near-term demand environment, we're implementing a limited restructuring plan for our NSE and OSP businesses intended to align our operating expenses with the expected lower near-term customer demand and to redeploy investment to strategic growth areas in order to position Viavi for accelerated revenue and profitability growth as end markets recover. In conclusion, I'd like to thank my Viavi team for managing in this challenging environment and express my appreciation to our employees, customers, supply chain partners, and shareholders for their support. I will now turn the call over to Sagar.

Thank you, Oleg. This quarter, we will be participating at Morgan Stanley's TMT conference in San Francisco on March 6. We will also be attending the MWC in Barcelona and OFC in San Diego. Regina, let us begin the Q&A session. We ask everyone to limit the discussion to one question and one follow-up.

Our first question comes from the line of Mehdi Hosseini with Susquehanna. Please go ahead.

Yes. Thanks for taking my question. Just in terms of what you just described for NSE and OSP in the near term, should I expect a flat to down quarterly trend into the last quarter of the fiscal year and then a more meaningful pickup into next fiscal year?

So I would say, seasonally, the March quarter is one of our weaker quarters. And I think even though in the last two years, because of the constrained supply, seasonality was not as pronounced, I think this time around, we are seeing seasonality returning. So, I would actually expect our fourth quarter to be stronger than the third quarter. As it goes to September, it's a little bit too far outside of our outlook, but I would expect it also to be coming in stronger, especially for OSP.

Okay. And then specific to OSP, as we look into the next couple of quarters, how do you see the mix evolving – the NSE benefits from a pickup, lower base, especially as the service providers have become more cautious that could actually play to your favor since the compares are easier, but I'm not so sure if the compares are relevant. As I think about OSP into next fiscal year? Any color would be appreciated.

Well, let me just start and see if I'm addressing your question. So when we think about OSP, you got to think of it in two ways. There're fundamentally two major segments. There is Anti-Counterfeiting and then there's a 3D sensing. When the demand for smartphones is very strong, both Anti-Counterfeiting and 3D sensing are running strong, we're in a $90 million quarterly run rate. When both of them are running weak, as we see this quarter, 3D sensing demand is lower, and the Anti-Counterfeiting is closer to about $70 million quarterly run rate. When either one of them is strong and the other one is weak, you're in about the $80 million range. We think in the next two quarters, there's headwinds for both 3D sensing, with a lower outlook for smartphone demand. And we're also seeing a number of major economies pulling back on fiscal stimulus. So it may take longer to work through the inventories of products they already have. For March quarter, we see clearer demand and we believe to be in the neighborhood of like high $60s to about $70 million. I think Q4, if Anti-Counterfeiting comes back stronger or smartphone demand comes in stronger, it may be better. But we are, for the sake of caution, saying the first half will be in the $70 million range per quarter for OSP. So I'm not sure if I answered your question.

That's helpful. I’ll go back into the queue. Thank you.

Okay.

Thank you.

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

Thank you. I would like to clarify that the IP is expected to be completed by the June quarter. You mentioned the cost size, but I didn't see any information about the potential benefits to the results. What do you anticipate those benefits will be, and how do you plan to utilize them? Will they be reinvested into other areas, or will they contribute directly to the bottom line? Could you provide some insight into the expected cost reductions, scalability, and benefits, as well as your plan for them?

Sure. So 5% of our workforce will be impacted. The majority will be focused in the NSE business, a little bit in the OSP business, and we'll be targeting operating expenditures, most notably. So about $5 million of OpEx, 5% of the workforce, yielding a $25 million annualized benefit of which we'll see the impact in the September quarter on a full basis.

Okay. And then going back to the OSP business for a second. So in the December quarter, we're talking about $24 million, $25 million worth of 3D sensing. And I assume when you're talking about the March quarter that the $55 million number was just the Anti-Counterfeiting. Could you give us some sense of what you think we're looking at that?

That’s correct.

It seems to be falling into the $15 million to $18 million range for both the June and March quarters. Is that right?

That's exactly right. It's about $55 million for core Anti-Counterfeiting and then another $14 million to $15 million or so for 3D sensing products.

If I could just ask about Jackson Labs, can you give us some sense of what it contributed in the December quarter, and what it might contribute in the forward quarters?

A couple of billion dollars in revenues and maybe rounded to $0.5 billion in EPS.

Your next question comes from the line of Michael Genovese with Rosenblatt Securities. Please go ahead.

Great. Thanks. Hi, everyone. Oleg, I'm trying to clarify the details regarding carrier CapEx and OpEx because it seems to have exceeded your guidance in the quarter. You mentioned the macro environment, yet it appears that spending for calendar year 2023 is expected to be stable, and you also indicated that conditions later in the year are promising. AT&T's guidance looks positive, and while the wireless sector appears strong, the wireline side may not be performing as well, particularly with the C-band. Could you summarize this and explain what we should understand about CapEx, OpEx, and the NSE business operating at an elevated level as a result of these factors?

Sure. I think it's almost like when we had our earnings call in early November, we said, okay, it feels like it's a replay of the March quarter of 2020 when the COVID hit. First, there's a panic, and I think a lot of them kind of panicked in September and calmed down. Then they step back and assessed their plans. They re-evaluated spending and said they still have the business to run, so they needed tools for that. This is why I'm saying we're feeling good that we are starting to see stabilization in the right signals from the demand for field equipment. You've seen the AT&T announcement with BlackRock. They now have extra money to extend fiber to states where they previously were not competitive. This brings the competitive element back into play, and I feel very good that we're going to see recovery and growth in fiber and cable spending this year.

Well, I appreciate all that color. And I had a couple of follow-ups in there, so I'm going to pass it on here. And again, thanks for the helpful answer.

We'll get back to you.

Your next question comes from Karan Juvekar from Morgan Stanley. Thank you for the question, or for Meta Marshall. Thank you for the question. Have you observed any changes in behavior from European customers? There have been discussions around caution regarding overbuilding or possible rationalization in that region. Are there any geographic trends you would like to highlight?

I'll start and then I'll turn it over to Henk. In the last quarter, there has been significant volatility with the exchange rate. There has been some slowdown in deployment in Europe, but the issue is largely due to them spending the same budget while receiving less equipment. Overall, we actually see EMEA performing quite well. Despite various structural challenges, Europe is holding up relatively well, considering everything.

Okay. That makes sense. And I guess just a quick follow-up just on the strategic activity in the space. Does that change how you think about M&A opportunities? Even though, generally, National Instruments is in a general category, their business model is very different. They're very much focused on lab and some of the industrial deployments. It's nice to see that our sector is getting the respect that, for the longest time, it was not getting.

Got it. Okay. Thank you. That's helpful. I'll pass on to the next.

Thank you.

I will now hand the conference back over for any closing remarks.

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

Thank you all for joining today's meeting. You may now disconnect.