Hello. My name is John Louis. Welcome to the Viavi Solutions third quarter 2023 earnings conference call. All lines have been muted to avoid 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 at Viavi Solutions. Please go ahead.

Thank you, John Louis. Welcome to Viavi Solutions’ third 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 Q3 2023 was a challenging quarter. Also, the pullback in service providers' demand earlier in the year, and with more muted revenue patterns for OSP, we are now experiencing weaker spending for lab products within our network enablement segment. As a result, fiscal Q3 revenue came in at $247.8 million, down 21.5% year-over-year, albeit at the high end of our recently updated guidance range of $246 million to $248 million. Viavi's operating profit margin of 11.4% decreased by 4.8% from the prior quarter and 10.1% from the prior year, coming in at the high end of the updated guidance range of 10.5% to 11.5%. EPS at $0.08 was down from $0.14 in the prior quarter and $0.22 from the prior year, and fell below the initial guidance range for the quarter of $0.10 to $0.12. The current share count was 225.3 million during the quarter, down from 236.8 million shares in the prior year. The tax rate was 24%, as well as other income expense of $4.7 billion for the quarter arriving at levels consistent with our expectations. Cash flow from operations was $17.8 million for the third quarter versus $28.9 million in the prior year period. As a result of lower revenue levels, year-to-date cash flow from operations was $90.6 million, compared to $104.5 million in the prior year. On February 1, 2023, the company undertook a growth 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 will be affected, and estimates it will incur charges of between $10 million and $50 million in connection with this plan, resulting in approximately $25 million in annual savings. We anticipate substantial completion of this plan by June of 2023. Now moving on to our reported Q3 results by business segments. Starting with NSE. NSE continues to be impacted by current macroeconomic headwinds with quarterly revenues of $177.8 million declining 23.2% year-over-year. Any revenue of $149.6 million declined 26.8% year-over-year, driven by the weakness in both service provider and network equipment manufacturing spending. SE revenue at $27.7 million increased 4.5% from last year. NSE gross profit margin at 63.3% decreased by 110 basis points year-over-year. Within NSE, NE gross profit margin at 62% decreased 180 basis points from the prior year primarily due to lower volume. SE gross profit margin at 17.4% increased 130 basis points from last year, primarily due to an improved product mix. NSE operating profit margin at 1.4% was below our initial guidance range of 7.2% to 8.2%. According to speak, first quarter revenue at $70.5 million was down 16.8% year-over-year, revenue was near the high end of our initial guidance range of $67 million to $71 million gross profit margin at 50.6% decreased 490 basis points from the prior year result due to lower volume in combination with startup costs related to a new facility. Additionally, the operating profit margin of 36.6% benefited from a year-to-date reversal of variable incentive compensation and as a result exceeded our initial dynamic range of 29.5% to 31.5%. Now turning to the balance sheet, the ending balance of our total cash and short-term investments was $586.6 million, up $96.9 million sequentially. During the third quarter, we were successful in exchanging 57% of our 2024 convertible notes into a new $250 million face value convertible note maturing in 2026, generating $113.8 million in proceeds net of debt issuance costs. The $30 million repurchase of our common stock added net $84 million in cash to the balance sheet, the latter in anticipation of retiring the remaining maturity of $68 million in face value of our 2023 convertible notes in the fourth quarter. As mentioned earlier, operating cash flow for the quarter was $17.8 million, a decrease of $11.1 million year-over-year, driven by lower revenues. In addition, we invested $10.8 million in capital expenditures during the quarter, compared to $18.1 million in the prior quarter. During fiscal Q3, we repurchased 2.8 million shares of our common stock, utilizing $30 million under the share repurchase plan announced in September, leaving a remaining balance of approximately $244.8 million for further purchases. You may recall in September, we announced that the board authorized a new common stock purchase plan for up to $300 million. At the end of fiscal Q3, with a plan balance of up to $274.8 million for share repurchases. Now on to our guidance, we expect the fiscal fourth quarter 2023 revenue to be approximately $252 million plus or minus $10 million. Operating profit margin is expected to be 11.2% plus or minus 120 basis points, and EPS to be $0.07 to $0.09. We expect NSE revenue to be approximately $187 million plus or minus $8 million with an operating profit margin of 4.5% plus or minus 150 basis points. Always fee revenue is expected to be approximately $65 million plus or minus $2 million, with an operating profit margin of 30.5% plus or minus 50 basis points. The FX rate is expected to be around 25% as a result of jurisdictional rates, and we expect our income and expenses to reflect a net expense of approximately $4.5 million. The share count is expected to be around 222 million shares. With that I'll turn the call over to Oleg.

Thank you, Henk. Fiscal third quarter 2023 was a challenging quarter for Viavi. The rapid slowdown that we saw in service providers' spending at the end of the fiscal first quarter has spread to our systems and semiconductor customers. The Viavi revenue and non-GAAP operating margins came in below the lower end of our initial guidance range driven by weakness in our NSE segment. NSE declined year-on-year as well as on a sequential basis primarily driven by our NE business segment. NE was down double-digit percentage year-on-year and sequentially, reflecting weakness in our lab and field products. The pullback in R&D spending at network equipment manufacturers was much higher than anticipated, leading NSE revenue and non-GAAP operating profit margins to come in below the lower end of our initial guidance. This was partially offset by stronger demand for our optical lab products driven by the development of high-speed optical infrastructure, including 800 GigE. Our SE business segment grew 4.5% year-on-year in line with our expectations. Looking ahead, we believe our NSE business bottomed out in Q3, and we're starting to see some early signs of recovery. Specifically, during this quarter, we are seeing initial signs of recovery for field instruments and stabilization and gradual recovery for some lab and production equipment. We expect this gradual recovery momentum to continue into the second half of calendar 2023. One bright spot is our avionics and resilient PNC businesses, which continue to see healthy demand from major customers. Now turning to OSP, OSP decreased year-on-year and sequentially consistent with our guidance. While core OSP came in slightly ahead of our expectations, the 3D sensing demand was slightly lower. We expect fiscal year fourth quarter to be slightly down quarter-on-quarter, driven by lower demand for anti-counterfeiting products due to post-COVID fiscal tightening. The 3D sensing business is also expected to be somewhat weaker than seasonal due to lower demand for smartphones and supply chain transition to new form factor designs. That said, we expect a stronger second half of calendar year 2023 during the recovery in anti-counterfeiting demand and seasonal trends in 3D sensing. In conclusion, I would like to thank the Viavi team for managing this challenging environment and express my appreciation to our employees, customers, and shareholders for their support. I will now turn the call over to Sagar.

Thank you, Oleg. This quarter we will be participating at the Rosenblatt virtual Tech Summit on June 8th. John Louis, that has begun the question-and-answer session. We ask everyone to limit their questions to one question and one follow-up.

Thank you very much. Oleg, I'm trying to figure out what kind of implication we should draw from this sudden and significant slowdown in lab tests? Essentially, what does it mean for the OEMs? Because, as you said, the field test seems fairly solid going forward. I'm trying to understand if it's more on the semiconductor side that you saw it or what do you think that it tells us when they slow down spending about their own businesses, both for NAMs and semiconductor manufacturers?

Well, if I look at it, think of it this way, right? Initially, the service providers kind of slammed on the brakes in September quarter, which took maybe one to two quarters to percolate to the NAMs and then to the semiconductor players. Because in September, they still delivered, because they had a backlog, some of them had backlog in December, but by March, they clearly saw significant orders decline. I think what often happens is there is a knee-jerk reaction to slam on the brakes on spending. We expected the lab equipment to be pulled back somewhat because of the lagging effect that would get to the NAMs and semiconductor companies. What surprised me was the size of the slowdown. I expected maybe a 15% pullback, but we saw in some cases 30% to 40%. So, it's been quite significant. It's broad-based; it's the wireless NIMs, it's networking NIMs, and somewhat broad range, broad base, including semiconductor companies in storage, processing, and communication. The only area that was a bright spot is the high-performance optical gear, and that part of the business continues to perform well. A lot of it is likely due to a significant backlog of business that they're still building, probably to some extent related to the sanctions on Huawei. U.S. and European carriers are picking up some share, and that may be driving some of that demand. But on a broad-based communication, I see cuts in storage, processing, and telecom, data comm, and wireless networking gear manufacturers.

Just a clarification and my follow-up. I assume that in lab tests, that's not an area where inventory is ever really an issue. So, we're not seeing an inventory correction; we're seeing sort of a demand drop there?

No, there is no inventory issue. It's very much driven by programs. So, I think the way I look at it, it was a knee-jerk reaction to hit the brakes on spending. We are seeing that, well let’s say on field instruments, we saw the December quarter as a kind of bottoming out quarter and we are starting to see things gradually starting to recover in the March quarter. I would say the lab instruments had a very hard drop in the March quarter. And in this quarter, we think stabilization was maybe a little bit of the uptake on lab instruments. So, things are starting to come off because I think there was a general shock and now an overreaction, which was kind of surprising because we told everybody in October, hey, it's coming. It's just a matter of how quickly it percolates into the supply chain. And I think March was a very tough quarter.

Hi, good afternoon. That was a great differentiation. Speaking of bright spots, when you noted the field witness back toward the end of last year, could you give us an update on what you've seen out of the cable market in the March quarter recently and what your expectations are for the balance of the year?

So, in the March quarter, we saw cable players finalize their CapEx decisions. They started releasing orders in March and finalized orders early this quarter. We expect to see some revenue this quarter being shipped and in the fiscal Q1. Generally, cable players tend to use up whatever they are going to spend. They typically spend it in the June and September quarters with maybe a little spent in December. So, clearly, they are trying to close the gap with fiber and also address some of the 5G risk for consumer access. That's been a positive trend, and it's mostly a North American story.

Okay. Thanks for that. Switching over to the March quarter results. To the extent you saw what looks to be about a $30 million sequential decline in any way to break that down, I guess between greater than expected lab weakness or, I'd imagine you'd normally see some seasonality on the field side. But as you said, you might have seen some sequential growth on the field side. So, between those couple of moving parts, what were the real drivers?

I would say on the field side we saw stabilization. The June quarter is the beginning of recovery. Predominantly, the drop was from lab production, which is very painful because this is revenue at much higher gross margins than average. So, it also puts pressure on the mix. Therefore, predominantly, I would say the lion's share of the quarter-on-quarter drop was due to the drop in lab production. We believe this quarter will largely stabilize, and maybe even start recovering. So, I'd say, this quarter, it's flat to slightly up, with further growth expected in production and a beginning of recovery for the instruments.

Great, thanks. Perhaps if we could get a rough mix of any business between lab production and field instrumentation, if there's any kind of rough buckets just to help us contextualize when we are seeing recovery in one element of the business versus the other. If there's any directional guidance that we could have there?

I'll start, then I'll turn it over to Henk. We've been working very hard over the last six years or so to reduce our dependency on service provider field instruments. One of our very bright stars was really significant growth in lab and production. It actually reached the point where it's a meaningful share of our revenue. The sharp pullback during the March quarter had a great impact. I'll turn it to Henk to provide some general guidance.

Typically, the mix within NE is more than 50% field and 45% lab products. In the March quarter, the mix was slightly different, closer to 60% for field and 40% for lab products. That speaks to the significance of the decline that we saw in the lab business, as we discussed.

Okay, perfect. On the 3D sensing die, you noted just some headwinds in fiscal Q4 when it comes to new phone model designs. Is there a change in content that we should be mindful of or is it just that they aren't holding as much inventory of any filters?

Well, there are going to be obviously new model launches as well as the older models, but even in both new and old models, some of the modules are being redesigned. They are going to use newer, more advanced, higher-performance filters even though they are the same size. All the contract manufacturers and OEMs are trying to work down their existing inventory, which is not that big, but they are also transitioning to the new model year. Of course, as phone sales are down year-on-year, it affects demand, and the consumption of whatever inventory exists on hand mutes some of the volume.

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

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