Hello, everyone. My name is Alexis. Welcome to the Viavi Solutions First Quarter Full Year 2024 Earnings Call. I will now turn the line over to Pam Avent, Viavi Solutions Interim CFO. Please go ahead.

Thank you, Alexis. Welcome to Viavi Solutions' First Quarter fiscal year 2024 earnings call. My name is Pam Avent, Viavi Solutions Interim CFO. Also joining me on today's call is Oleg Khaykin, our President and CEO. 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 Solutions' 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. Let's start with our quarterly financial results. Fiscal Q1 revenue came in at $247.9 million, slightly below the midpoint of our guidance range of $240 million to $260 million. Revenue was down sequentially by 6% and down 20.1% on a year-over-year basis. Operating profit margin of 12.4% was slightly below our guidance range of 12.7% to 14.2%, up by 70 basis points from the prior quarter, and down 930 basis points from the prior year. EPS at $0.09 met the low end of our guidance range of $0.09 to $0.11, down $0.01 sequentially and down $0.14 year-over-year. The current fully diluted share count was 224.2 million shares during the quarter, down from 230.4 million shares in the prior year. Cash flow from operations for our first quarter was $50.3 million versus $26.6 million a year ago. Now moving to our quarterly results by business segment for Q1. Starting with NSE. NSE revenue came in at $170.4 million, above the low end of our guidance range of $167 million to $183 million, and down 22.2% year-over-year, primarily as a result of weaker spend in the service provider market. NE revenue at $150 million declined 23.7% year-over-year. SE revenue at $20.4 million declined 8.9% from last year. NSE gross profit margin at 63.6% increased by 150 basis points sequentially, and decreased by 110 basis points year-over-year. Within NSE, NE gross profit margin at 63.1% decreased by 140 basis points from the prior year, primarily due to a combination of lower volume and product mix. SE gross profit margin at 67.2% increased by 110 basis points from last year, driven by a richer product mix. NSE's operating profit margin at 0.9% came in below our guidance range of 3% to 5%, as a result of lower volumes and less favorable product mix. Now turning to OSP. Driven by higher demand for anti-counterfeiting and 3D sensing products, first quarter revenue came in at $77.5 million, slightly above the high end of our guidance range of $73 million to $77 million, and was down 15.1% year-over-year. Gross profit margin at 52.5% declined by 420 basis points year-over-year. Operating margin at 37.8% also exceeded the high end of our guidance range and declined by 450 basis points year-over-year. Now turning to the balance sheet. The ending balance of our total cash and short-term investments was $544.5 million, up by $27.4 million compared to the prior year. As previously mentioned, operating cash flows for the quarter were $50.3 million, an increase of $26.8 million from the prior quarter and an increase of $23.7 million year-over-year. In addition, capital expenditures during the quarter of $6.7 million were down from the $14.8 million in the prior year when we were completing construction of our new facility in Chandler. In addition, during fiscal Q1, we repurchased 1 million shares of our common stock for $10 million. As you may recall, in September of last year, we announced a new common stock repurchase program for up to $300 million. At the end of fiscal Q1 2024, we had $224.8 million available under this program. Now onto guidance, we expect our fiscal second quarter 2024 revenue to be in the range of $240 million to $260 million. Operating profit margin is expected to be 11.2%, plus or minus 160 basis points, and EPS to be $0.06 to $0.10. We expect NSC revenue to be approximately $177 million, plus or minus $8 million, with an operating profit margin of 2%, plus or minus 200 basis points. OSP revenue is expected to be approximately $73 million, plus or minus $2 million, with an operating profit margin of 33.5%, plus or minus a hundred basis points. Our tax expense is expected to be around $8 million, plus or minus half a million for the second quarter as a result of jurisdictional mix. We expect other income and expenses to be a net expense of approximately $3 million, and the share count is expected to be around 222 million shares. With that, I will turn the call over to Oleg.

Thank you, Pam. During the September quarter, our end-market spending environment continued to be challenging, particularly with the service providers in North America. In view of these continued headwinds, our revenue came in slightly below the midpoint of our guidance with stronger OSP demand helping to offset weaker telecom service provider revenues. Our EPS came in at the low end of our guidance range, driven by lower volume and higher taxes due to less favorable geographic revenue mix. With NSC, we saw a mixed performance. The demand for our field fiber, cable, service enablement, and wireless lab products came in weaker than expected due to the tight spending and capital expenditure environment at tier-1 service providers. The demand for lab fiber avionics and optical communications products was robust and continues to see good momentum. The net result was NSC revenue coming in slightly below the midpoint of our guidance. Now turning to OSP. OSP business segment results came in slightly better than expected, with both revenue and profitability exceeding our expectations. The results were driven by stronger than expected demand for both counterfeiting and 3D sensing products. Looking ahead, in the December quarter, we expect revenue to be seasonally down, primarily due to lower anti-counterfeiting demand as our customers work to adjust their year-end inventories. We are also seeing slightly softer 3D sensing demand after strong Q1 orders. Looking into early calendar 2024, we expect the following demand dynamics for our major product areas. First is continued slow recovery in service provider spend impacting our field instruments business. Second, continued weaker demand for our anti-counterfeiting products. A tight fiscal policy slowed down inventory consumption by major customers. Third, a beginning of recovery of wireless lab products as major wireless network equipment manufacturers continue 5G product development and increase 6G investment. Fourth, an accelerated recovery in our fiber lab and production product demand driven by strong optical demand by data centers, optical network equipment manufacturers, optical modules, and semiconductor customers. Fifth, growing service enablement product demand as our new architecture gains traction and acceptance with major customers. And last but not least, growing demand for our avionics, military/aerospace, and resilient P&T products. Despite the near-term macroeconomic headwinds, our long-term growth strategy thesis built around 5G and 6G wireless, fiber, new service enablement product portfolio, 3D sensing, and emerging resilient P&T technology remains intact. In conclusion, I would like to thank my Viavi team for managing in this challenging environment and express my appreciation to our employees, customers, and shareholders for their support. With that, I will now turn it over to the operator for Q&A.

The first question comes from Mehdi Hosseini with SIG. You may proceed.

Thanks for taking my question. Oleg, do you have any plans to reduce operating expenses further? If not, how do you view near-term demand? In the last earnings call, you mentioned that your customers in the wireline sector might be recovering, but it appears that demand has weakened. I would like to understand your perspective on the end market demand outside of smartphones.

Sure, thanks. We have taken steps to reduce costs, but I'm not a believer in shallow cuts. We implemented a major step earlier in the year, reducing about $30 million from operating expenses. We've just completed this process, and while there may be a bit more to implement, most of it has already been taken care of. In terms of the outlook, while the service provider sector still continues to show some weakness, we are actually beginning to see stabilization. Our lab and production test business is starting to recover. So, for now, we are not planning any further reductions in operating expenses. We believe we've implemented all necessary changes, and while some challenges remain with our OSP business unit due to fixed asset underutilization, we are managing inventories effectively as both our customers and we try to adjust to a new equilibrium. I think we are in a good position to navigate this downturn and start the recovery.

The next question comes from the line of Michael Genovese with Rosenblatt Securities. You may proceed.

Thank you. Oleg, can you talk about the linearity of service provider orders in the quarter and particularly how things looked late in the quarter and what you need to discuss regarding early October?

Sure. The linearity has been pretty good. Nobody has been decommissioning. I would say that converting orders into bookings is taking a bit longer due to lower demand; previously we were able to convert them within the quarter, but now it takes a bit longer. That said, I think nobody has been canceling or pulling back. They are still receiving orders once placed. We are actually not expecting the typical budget flush in the December quarter this year. On the positive side, we may see stronger than seasonal demand in the March quarter. Things have been more linear than the typical strong June to weak September or December pattern. Customers are placing orders as they need them rather than just using year-end budgets, and I think that the initial shock and restructuring has been worked out, leading to more real-time decisions.

Great. I appreciate that insight. I guess my second question is, you mentioned the lab business is already starting to recover. What’s driving that demand? Is the higher speed, particularly related to very high-speed data centers part of that lab category?

I would say, it is indeed a story of two different labs. In the wireless space, we are witnessing results from major wireless network equipment manufacturers. There is still a tight environment, but we expect demand to start coming back early next calendar year. Everybody is focused on 5G and 6G products but saw some weakness recently. The second area that has experienced weakness is anything related to storage, including semiconductor and drive providers who have pulled back on some investments, but we expect that demand to recover as new generation products need to be launched. The area that's been quite strong and actually up year on year is the very high-speed segment. Approximately a quarter ago, there were questions around demand from hyperscale data centers particularly for AI. Although we didn't see it then, we begin to see that demand now. While it takes time for order placements, the high-speed optical transport business is doing well, with robust demand from system providers, data center operators, and semiconductor companies active in that space. Overall, the production category is much stronger on high-speed optical transport and somewhat weaker in storage and wireless. However, we expect storage and wireless to rebound in the March quarter.

I look forward to following up more on that offline. My last question would be about your earlier mention that the March quarter could potentially be less seasonal, and if you could discuss the outlook for the second half of the year given your previous bullish projections compared to the current environment, especially with telecom trends showing some weakness.

Well, I would like to note that the weakness in telecom is relative. We were among the first to notice the tightening conditions around September and December of the previous year, while many network equipment manufacturers did not realize it until June or subsequently during the September quarter due to their non-cancelable, non-refundable orders. While service providers were attempting to cancel or delay their equipment spend, they initially focused on cutting operating expenses. Now that big-ticket items have largely been either canceled or postponed, they are returning to operations, trying to maximize their existing resources. In that light, the discussions we are having have become much more constructive. We expect to see reasonable spending in cable deployment and network upgrades in the coming months. The initial revenues should begin flowing in the March quarter. The major service providers in North America are still struggling, but we are seeing a better environment in Europe and Asia. Overall, metrics do not match the figures from a year or a year and a half ago, but the situation is improving when compared to the preceding year and a half, which was primarily stagnant. We see that dialogue is opening up again and actions are being taken. I believe that the initial shock for many companies in production and semiconductors has subsided as they reassess budgets and capital expenditures, and we expect to see more willingness to spend. Demand for high-speed optical and Ethernet solutions should be strong in the first half of the calendar year. We expect wireless to start recovering as well. We are seeing good traction on our software business related to service enablement, with a very impressive design win in some of the most demanding areas against key players in the market. Overall, from what I see, on the NSC side, I believe the worst is behind us now, and we just need to determine how recovery will unfold—gradually or more strongly in certain areas while remaining weaker in others.

The next question comes from the line of Tim Savageaux with Northland Capital Market. You may proceed.

Quick question on the outlook; you mentioned something about March possibly being less seasonal. Given the order volumes and magnitude of growth in some lab businesses, it appears you may face headwinds seasonally on 3D sensing and potentially on currency. At this point, could you clarify if you anticipate March to potentially be up given the dynamics at play?

It's a bit early to make a firm call at this point, but in the NSC sector, March could be flat to up. As mentioned, we expect strong cable demand to come in the March quarter and anticipate recovery in our production business. That said, I think it is a premature conclusion, but under current conditions, NSC has a chance of being flat or slightly up. For the OSP side, I expect it will likely be slightly down due to typical seasonality with 3D sensing paired with anemic anti-counterfeiting demand. Historically, I've been surprised before, and we don't have much visibility into central bank activities globally. However, we can operate under the assumption that OSP could be slightly down from December, while NSE may conversely be slightly up. As a result, my early expectation is a roughly flat March quarter, but it is genuinely too soon to make any definitive claims.

Understood. I appreciate the insight. Following up on the network enablement side, considering some of the trends you've noted in service provider spending, would you say that your current mix is more lab-heavy due to the field challenges? Can you give us a current estimate of where that breakdown stands? How substantial is your 800-gig high-speed optical segment compared to the total lab business?

Overall, we've grown our lab business significantly in the last six years; while we still have a larger presence in the service provider sector, the split is roughly 60-40, with field instruments slightly larger. This represents a substantial shift from about 70-30 previously. Furthermore, our EPS range for this quarter reflects a higher commission expectation due to our current booking velocity, meaning we anticipate stronger bookings this quarter. As a result, the commissions estimated will impact upcoming revenue carrying over as backlog, which gives us added reassurance about the March quarter.

The next question comes from the line of Alexander Henderson with Needham. You may proceed.

I was hoping to get a little insight into the breakdown between 3D and non-3D OSP. I'm assuming that it's somewhere around $20 million to $21 million in the September quarter for 3D; is that in the ballpark?

It's a little closer to $24 million.

Normally, that category declines sequentially. Given that it’s a little stronger, what gives you the confidence that it won't decline more significantly this quarter?

We do expect some decline this quarter, but forecasts indicate a decrease of only around $3 million to $4 million for total OSP. The decline will be from both the anti-counterfeiting side and some areas of 3D sensing, but there are other segments of the 3D sensing market that are likely to offset these decreases. If we could move on to the income statement, you discussed the $30 million cost savings implemented earlier this year. As we consider the $118 million in operating expenses this quarter, is that a reasonable figure for the December quarter, or will we see an increase due to commissions? And if we don’t see a seasonal decline in March, will that level hold for that quarter? The $118 million figure is on the lower end. For the December quarter, we expect an increase, as a significant portion of that $4 million increased guidance is connected to commissions on bookings from revenue that will likely occur in the March quarter. In the March quarter, we anticipate it will be approximately the same level as December, but for different reasons; we did experience statutory accruals earlier in the year, and by the June quarter, we expect it to decrease slightly. You can expect operating expenses to range between $118 million to $122 million overall, depending on the specific quarter.

The next question comes from the line of Meta Marshall with Morgan Stanley. You may proceed.

This is Karan on behalf of Meta Marshall. On the telecom and service provider side, regionally, you mentioned that North America is weaker while Europe is performing better. Are there any specific trends you'd like to point out this quarter? Additionally, do you anticipate Europe will revert to North America's trends, or will it likely continue to outperform?

Globally, telecom is weaker; however, the level of impact varies. Comparatively, Europe seems to be performing the best, with Latin America remaining resilient and Asia observing moderately good conditions. North America is facing the most struggles, which are largely attributed to the heavier debt loads that North American service providers carry. Overall, while we have seen a pullback globally, Europe is the least affected, followed closely by Asia and Latin America, making North America the hardest hit.

Thank you for that explanation. Moving on to currency and its impact, given the headwinds you've noted, has there been any updates on your outlook for your business run rate? Has that altered at all, or do you expect it to normalize as demand recovers?

We expect the core business to remain on the lower end of the $50 million range per quarter.

There are currently no further questions in the queue, so I will now turn the line back to the team for any closing or additional remarks.

Thank you. I think with that, we can end the call.

That concludes the conference call. Thank you for your participation. You may now disconnect your line.