Hello, everyone. My name is Rob. Welcome to Viavi Solutions Second Quarter Fiscal Year 2024 Earnings Call. I will now turn the line over to Ilan Daskal, Viavi Solutions’ CFO. Please go ahead.

Thank you, operator. Good afternoon, everyone. And welcome to Viavi Solutions' second quarter fiscal year 2024 earnings call. My name is Ilan Daskal, Viavi Solutions’ CFO. And with 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 that 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 discussed on this call 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 as well as 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 on our website by 4:30 p.m. Pacific Time this evening. Now I would like to review the results of the second quarter of fiscal year 2024. Net revenue for the quarter was $254.5 million, which was above the midpoint of our guidance range of $240 million to $260 million. Revenue was up sequentially by 2.7% and on a year-over-year basis was down 10.5%. Operating margin for the second fiscal quarter was 13.2% and exceeded the high end of our guidance range of 9.6% to 12.8%. Operating margin increased 80 basis points from the prior quarter and on a year-over-year basis was down 300 basis points. EPS at $0.11 exceeded the high end of our guidance range of $0.06 to $0.10 and was up $0.02 sequentially, and on a year-over-year basis was down $0.03. Moving on to our Q2 results by business segment. NSC revenue for the second fiscal quarter came in at $179.6 million, which is above the midpoint of our guidance range of $169 million to $185 million. On a year-over-year basis, revenue was down 13.3%, primarily due to lower CapEx spent by NEMs and weaker spend by service providers. NE revenue for the quarter was $155.5 million, which is a 15.2% year-over-year decline. SE revenue was $24.1 million and grew 1.3% from the same period last year. NSC gross margin for the quarter was 63.4%, which is 100 basis points lower on a year-over-year basis. NE gross margin was 62.5%, which is a decrease of 190 basis points from the same period last year, and was primarily due to a combination of product mix and lower volume. SE gross margin was 68.9%, which is an increase of 460 basis points from the same period last year and benefited from higher margin product mix. NSC’s operating margin was 3.6%, which is an increase of 270 basis points sequentially and the decrease of 530 basis points on a year-over-year basis. NSC operating margin was above the midpoint of our guidance range of 0% to 4%. OSP revenue for the second fiscal quarter came in at $74.9 million, which was at the high end of our guidance range of $71 million to $75 million and was down 3.2% on a year-over-year basis. OSP gross margin was 52.1%, which is a decrease of 20 basis points from the same period last year, and was primarily due to lower volume and unfavorable product mix. OSP operating margin was 36.4%, which is 140 basis points lower sequentially and increased 90 basis points on a year-over-year basis. OSP operating margin exceeded the high end of our guidance range of 32.5% to 34.5%. Moving on to the balance sheet and cash flow. Total cash and short-term investments at the end of Q2 was $571.8 million compared to $489.7 million in the same period last year. Cash flow from operating activities for the quarter was $20.4 million versus $46.2 million in the same period last year. We have not purchased any shares of our stock in the second quarter as we plan to retire the outstanding balance of our March 2024 convertible notes in the amount of $96.4 million. The fully diluted share count for the quarter was 223.5 million shares, down from 227.1 million shares in the prior quarter and versus 222 million shares in our guidance for the second quarter. CapEx for the quarter was $5.8 million, which is $12.3 million lower compared with the same period last year when we were completing the construction of our new facility in Chandler. Moving on to our guidance. For the third fiscal quarter of 2024, we expect revenue in the range of $245 million to $253 million. Operating margin is expected to be 10.4% plus or minus 160 basis points and EPS to be between $0.05 and $0.09. We expect NSE revenue to be approximately $176 million plus or minus $3 million with an operating margin of 1.5% plus or minus 150 basis points. OSP revenue is expected to be approximately $73 million plus or minus $1 million with an operating margin of 31.8% plus or minus 200 basis points. Our tax expenses for the third quarter are expected to be around $8 million as a result of jurisdictional mix. We expect other income and expenses to reflect a net expense of approximately $3 million. And the share count is expected to be around 224.7 million shares. With that, I will turn the call over to Oleg.

Thank you, Ilan, and welcome to your first earnings call with Viavi. The fiscal second quarter 2024 came in stronger than expected. Revenue was slightly above the midpoint of our guidance, helped by stronger demand for 400 gig and 800 gig fiber, middle ARO and SE products. EPS came in above the high end of our guidance, driven by a richer margin revenue mix and lower OpEx. In the near term, we expect stronger demand in the above product areas to help offset continued weakness in service provider spend. Starting with NSC, the second fiscal quarter NSC revenue came in above the midpoint of our guidance range. Although, the NSC revenue declined on a year-over-year basis, driven by a slowdown in 5G and fiber build-outs by major service providers, there were a number of bright spots. Fiber 11 production has continued to recover, driven by strong 800 gig demand, offsetting weakness in computing and storage. Aerospace and defense products saw robust growth driven by strong demand for avionics and PNT or positioning navigation and timing products. And the new SE products continue to perform well, resulting in slight year-over-year growth despite the decline in service provider spend. Looking ahead, we expect continued demand recovery and growth in our Fiber 11 production, aerospace and defense, and SE products, compensating for the continued near-term weakness in service provider spend. Now turning to OSP. OSP declined on a year-over-year basis, primarily driven by lower demand for anti-counterfeiting products. This decline was partially offset by strong 3D sensing demand. Overall, OSP results came in at the higher end of our guidance range. In the March quarter, we expect OSP to be slightly down from the December quarter with a stronger demand for anti-counterfeiting products offsetting the seasonal decline in 3D sensing. Looking ahead to calendar 2024, we expect telecom service provider spend to continue to be soft with a notable exception of the North American cable operators. We expect cable spend to ramp in the middle or second half of calendar year 2024. That said, our strategy in the past six years to diversify outside the service providers into 11 production and aerospace and defense makes it easier to ride out the telecom cycle downturn. 11 production spend is seeing a faster recovery versus service providers, driven by the demand for the new technologies such as 800 gig and Open RAN. Recently Viavi was awarded a $21.7 million grant by NTIA to create an advanced test lab to empower and accelerate the development of Open RAN technologies and components. This award reflects Viavi’s technology leadership in 5G, upcoming 6G, and ORAN. Our aerospace and defense products are seeing strong demand and growth, driven by the next-gen avionics and the need to protect critical infrastructure and assets against jamming, spoofing, and cyber warfare. In conclusion, I'd 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 back to the operator for Q&A.

Your first question comes from the line of Michael Genovese from Rosenblatt.

Oleg, first question is just on the service provider market, just to understand, make sure I heard the comments right. It sounds like you're saying all of 2024 calendar expects to be weak there, cable getting better at the end of the year. First of all, did I hear that right? And secondly, did your expectations change in the last three months? Has the carrier stuff, telecom stuff gotten more pushed out or was that consistent with three months ago?

So let me just say, look, the reality is I don't know what the second half is going to look like from service providers. We know the demand will be somewhat stronger in the June quarter. It's always stronger. Beyond that, I just think, I mean, clearly, it's not getting any worse, it's getting a little better. But I would still prefer to think of it as flat to slightly recovering as the kind of modus operandi because I think they're still pretty weak. But the point is we are seeing it's coming in but it's not as dramatic as I would have liked to see. Now the area that is stronger is the cable. In fact, we were expecting cable to start spending and coming in, in the first half of the calendar year. But as you probably know, there were some delays driven by technology readiness in deploying the DAA architecture by some of the vendors, and aside to the ramp is being pushed by one or two quarters. So we know it's coming, we're already seeing some orders. But the spike that we were expecting in the March quarter got pushed out, that's why we are guiding March quarter flat to slightly down. It was going to be slightly up in the absence of that slowdown. I mean, let's put it this way, I feel a lot better about the environment in which we are operating than we were even a quarter or two quarters ago. I just don't want to get ahead of our skis on service provider recovery because when I see it, I'll believe it. I mean, so I think they still got a lot of balance sheet issues they need to address before they really start spending significantly. So just take it as abundance of caution. I mean, do I feel better about what's going on? The answer is yes. Am I seeing big dollars coming in? The answer is no. And now one thing what we did see interesting is we are seeing pretty good traction on our service enablement products with the new architecture AI op, which drive OpEx reduction and capital avoidance. So there we are seeing pretty good traction. But on the instrumentation, particularly with fiber deployment, I think there is a pause that may at least last six months. Maybe towards the second half of the year, things will get better. But at this point, I think my crystal ball is telling me I'm not seeing anything dramatic changing.

Next question. This 800G fiber lab in production sounds very interesting, and I think you've probably had either two or three quarters of sort of measurable revenues there. So I assume that that is increasing, and any color you can give us on that? And not sure whether you would answer this question. But sort of how much of any that represents either now or what it could be in the future would be very helpful?

Our production business is approximately 87% in network enablement. For our overall production, which includes wireless, it's around 40%. Of that, fiber lab and high-performance computing account for about half, so roughly 20%. We noticed a slowdown in storage, which caused a dip in computing and storage that mainly occurred around the June quarter. The recovery in this business is primarily driven by demand for fiber production and fiber lab services, particularly for 400 and 800 gig products. Overall, this business has recovered and is continuing to grow. The same companies that manufacture telecom modules are also purchasing equipment for the new AI data center modules. We're still trying to understand how capital expenditures are linked to this trend, as it’s still early to get a complete picture. However, the equipment used for coherent telecom modules is now also being utilized to build data center modules for AI applications.

Yes, it will be interesting to see how that relationship develops, and I'm looking forward to an update on it. For my last question, I apologize for taking up so much time, but I would like to ask a broader question: can you help me understand why the EPS guidance is lower despite the strong revenues and earnings for the quarter and the positive revenue guidance?

So as you know, the third fiscal quarter from a seasonality perspective is usually kind of slower than the second quarter. So if you think about it on a consecutive basis, then also when you have kind of the beginning of the calendar year, there's some incremental cost associated with employee-related and that kind of drives kind of in terms of the OpEx. But again, as Oleg mentioned earlier, the traditional seasonality, when you think about it, is kind of building up really nicely when you think about the rest of the year, including the fourth quarter.

So there's a lot of statutory cost accrual that happens in the first quarter of the calendar year. And on the OSP, you notice there's a lower margin because it’s cyclicality of 3D sensing. The second half of a fiscal year is a much lower utilization, so there is more under absorption in that respect. Now that said, the anti-counterfeiting is coming back, so it's offset some of it but not all of it. And last quarter, the 3D sensing was quite strong.

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

Oleg, can you remind us of your lead times in service provider fiber test?

Generally, if we receive an order, we can typically process it within two months, so it’s largely within a quarter. However, some products, like fiber scopes, are quicker to produce. For more complex items, such as complete benches with MEMS switches, if we have them in stock, we can fulfill those orders in about two to three months.

And where would you assess your service provider customer inventories to be with your product?

Zero. I mean, it's all just in time.

I ask this because we have seen early signs of increases in project plans for 2024 from some of your larger competitors like Corning and Nokia, as well as from major service providers. I'm trying to reconcile this consistent trend with what you are experiencing. Typically, you lead in these situations, but I wonder if you might be lagging at this point due to lead times. Are you observing similar trends?

No, I don't think so. I don't think we're looking and once they decide. So when they tell these guys they're going to do a project, they may tell it to them before they tell us, because once they're ready to start building, they just place an order and within two months they get their equipment. It's pretty quick.

Your next question comes from a line of Alex Henderson from Needham & Company.

Could you give us a little bit more granularity on the size of the 3D sensing in the quarter and the expectations for the 3D sensing in the March quarter?

So generally, Alex, 3D sensing, half of the annual demand comes in in the September and December quarters; two-thirds comes in in the September and December quarters, and one-third comes in the March and June quarters. So I would say we ran right around $20 million to $25 million in the quarter.

And so in the upcoming quarter, you're looking at what, $10 million or so?

This quarter, it's approximately $10 million, give or take $1.5 million.

And can you give us an update on the plant in Phoenix? It's now fully operational. All of the benefits of the cost improvement are in the mechanics of the counterfeiting business at this point. Is that correct?

We are currently noticing that inventory levels are decreasing, which is causing more unplanned spot orders to emerge, with requests for quick shipping. These orders may not be large, but they indicate that inventory is being used up in the market. For the March quarter, we anticipate stronger demand than we expected three months ago, which will help mitigate some of the decline we're experiencing in 3D sensing on a quarter-to-quarter basis.

Generally, it's fully operational and we still have more capacity for additional growth there. So it's not in terms of full utilization, it's not yet there in terms of the availability that we can get.

Fully operational but not full capacity…

Alex, let me give you a correction. Actually, 3D sensing is going to be closer to about $16 million in this quarter. I was thinking the end of year.

So going back to this split on the 800 gig product, just to be clear. So the ratio of ports to equipment is quite low, right? I mean, we're talking about double-digit port per kind of ratio there. I assume that this is predominantly going into the production side of it. It's not going into the field deployment. And you're talking about how many products can go through a test and measurement process in any given period, but that's a sampling process. So the ratio is very high relative to the total number of ports that go across that equipment, right?

It varies. When you start production, you tend to conduct many more tests, resulting in a lower number of ports per million dollars of equipment. As you gain experience and confidence, you begin to reduce the extent of testing, which means spending less time on each test. The equipment mainly goes into the production line, with factories in China and other locations building these modules. Initially, they typically perform more extensive testing, but as they become more comfortable, they transition to sample testing or less thorough testing per module. This is why it's an ever-changing scenario. For instance, we completed one project and determined that it cost about $0.40 per module of capital expenditure for each module of capacity. If you produce approximately 1.5 million units weekly, that translates to about $300,000 investment for that capacity. However, this is just one data point, and different organizations may approach it differently, with some spending more, so it is still too early to draw definitive conclusions.

So we've already seen very significant ramp in productions of both the NVLink and InfiniBand products going into the AI clusters. And from what I can tell, you really haven't seen any meaningful contribution from that at this point. So should we then think that as we move into the second and third phase of production ramping that the sampling rates actually go up and therefore, we shouldn't be looking at the rate of growth in AI as the primary driver of the overall demand curve as opposed to the sampling percentage?

Well, I wouldn't go that far, because remember what the first thing they did is they redeployed the same lines that were building telecom coherent business that dropped quite significantly. So they redeployed those assets to the AI data centers. And just when you also think about it, if you're just doing alignment on like, say InfiniBand, you're putting photonic integrated circuit aligning with the processor that is really more semiconductor packaging. When you are actually building the actual module with lasers and everything else, that's where you tend to use more of our optical test equipment.

Just going back to the telecom piece for a second. There's obviously a very large inventory glut out there of telecom equipment that has to be absorbed. Has there been any build in inventory in your product areas or is that just something that didn't happen because they weren't constrained as much on those type of products?

We currently have no inventory in the channel. Orders essentially stopped in the December quarter of 2022. Much of the inventory in the field is becoming outdated, and we anticipate a need for replacement due to wear and tear. We are already noticing signs that customers are indicating they will need replacements, asking about terms and lead times. In this context, customers will extend the life of their current assets, swap them out, and eventually require a complete replacement. When I mention a flat outlook for 2024, it's because while they need to make replacements, I'm unsure if they can afford significant expenditures for that. However, there's a possibility that in the second half of the year, we'll see an increase in these replacement needs. Beyond six months, I don't have clear visibility.

Your next question comes from a line of Meta Marshall from Morgan Stanley.

Oleg, you mentioned kind of you were more encouraged about cable spending kind of earlier in the year. Just wanted to get a sense is that DOCSIS 4.0, is that just their networks are running hotter, just given some of the comments you just said to Alex? Just kind of what is the trigger to that investment? And then on the flip side, since you kind of think that wireless may take a little bit longer, just what do you think should be kind of the early signs of wireless resuming?

If I look at cable, we know it's going to happen. We expected some orders to start showing up in the March quarter and then increase in June. However, there has been a delay in some core technology development by major infrastructure providers. This has pushed the timeline back by one to two quarters for getting the software ready and ensuring everything works. But I still believe cable will progress this year. What was your second question? The wireless sector has seen a slowdown, particularly regarding field equipment and sales related to deployment for companies like T-Mobile, Verizon, and AT&T. However, capital expenditure in product development remains consistent, with no significant decline in R&D investments for 5G, and early aspects of 6G are beginning to emerge. Overall, the wireless infrastructure landscape appears to be less aggressive in Europe and North America. In contrast, India is performing well, although the margins there could improve. Currently, India stands out as one of the few positive areas for infrastructure deployment.

Your next question comes from a line of Ruben Roy from Stifel.

Oleg, I have a couple of quick follow-up questions. I think you mentioned some of this in your earlier responses, but I wanted to ask about the service providers. It seems like you are having discussions on that front. Last quarter, you mentioned not seeing any de-commits, which I assume is still true. However, I understand that some service providers are still working on their budgets for this year. Is that giving you some visibility to suggest that we could return to a more typical seasonal pattern, with an increase in June and a slight decline in September as usual? Is that influencing those conversations or is there any other detail you can share?

This year may actually see a stronger September than usual because the cable initiatives might be pushed to that month. Generally, from what we observe with service providers, their insurance business remains robust, even when things don't go as planned, due to replacements and other factors. Typically, an additional 20% increase is driven by network build-outs or upgrades. Currently, however, I don't see significant movement in the insurance sector; orders are being placed and processed without issues. The ongoing business appears to be stable, with customers focused on maintaining their networks. What’s lacking is a major push to expand capacity or upgrade networks. While we know such projects are being planned, it's uncertain when they will commence. In the competitive landscape, as cable companies enhance their networks, some service providers may feel the pressure to also extend their infrastructure. However, I don’t see a rush to invest aggressively in new fiber or deployment. We do see some momentum, but it's much smaller, mainly from tier two and tier three private equity-backed fiber operators laying down fiber in anticipation of data centers or 5G expansions in rural areas. Nonetheless, this activity is significantly less than what larger companies like AT&T, Verizon, British Telecom, or Deutsche Telekom would typically invest within a year.

And then just a quick follow-up for Ilan. I might have missed this on the balance sheet discussion. Are you where you need to be then on leveraging and do you expect to come back into the markets to repurchase in the near term? I might have missed that.

For the next quarter or two, our focus will likely be primarily on retiring the convertible debt. This remains a part of our capital allocation model, and we are not straying from our overall strategy. However, we will likely take a more cautious approach to buybacks in the upcoming one to two quarters.

Just decided to bank some cash, so we can retire the whole convert. In the way it's a synthetic share buyback, because you are avoiding a dilution down the road.

There are no further questions at this time. I will now turn the call back over to Ilan Daskal for some final closing remarks.

Great. Thank you, Operator. Please conclude our earnings call for today. And thank you everyone, for joining today's call.

This concludes today's conference call. Thank you for your participation. You may now disconnect.