Hello, everyone. My name is Jericho. Welcome to Viavi Solutions' Third Quarter FY '24 Earnings Call. I will now turn the conference over to Ilan Daskal, Viavi Solutions' CFO. Please, go ahead.

Thank you, Jericho. Good afternoon, everyone, and welcome to Viavi Solutions' Third 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 third quarter of fiscal year 2024. Net revenue for the quarter was $246 million, which was above the low end of our guidance range of $245 million to $253 million. Revenue was down sequentially by 3.3%, and on a year-over-year basis was down 0.7%. Operating margin for the third fiscal quarter was 9.3%, which is slightly above the low end of our guidance range of 8.8% to 12%. Operating margin decreased 390 basis points from the prior quarter, and on a year-over-year basis, was down 210 basis points. EPS at $0.06, within our guidance range of $0.05 to $0.09 and was down $0.05 sequentially, and on a year-over-year basis, was down $0.02. Moving on to our Q3 results by business segment. NSE revenue for the third fiscal quarter came in at $169.8 million, which is below our guidance range of $173 million to $179 million. This was mainly driven by a more conservative spend environment at enterprise customers. On a year-over-year basis, NSE revenue was down 4.2%. NE revenue for the quarter was $151.7 million, which is a 0.1% year-over-year decline. SE revenue was $18.1 million, and declined 28.7% from the same period last year, driven by a slowdown in enterprise customer spend. NSE gross margin for the quarter was 61.4%, which is 190 basis points lower on a year-over-year basis. NE gross margin was 61.5%, which is a decrease of 70 basis points from the same period last year as a result of lower volume as well as product mix. SE gross margin was 60.8%, which is a decrease of 930 basis points from the same period last year as a result of lower volume. NSE's operating margin was negative 1.8%, which is a 540 basis points decline sequentially and a 320 basis points decline on a year-over-year basis. NSE operating margin was below our guidance range of 0% to 3%. OSP revenue for the third fiscal quarter came in at $76.2 million, which was above the high end of our guidance range of $72 million to $74 million and was up 8.1% on a year-over-year basis. OSP gross margin was 50.1%, which is a decrease of 50 basis points from the same period last year and was primarily due to a reversal of variable incentive compensation that benefited Q3 last year. OSP's operating margin was 34.3%, which is 210 basis points lower sequentially and decreased 230 basis points on a year-over-year basis as a result of a reversal of variable incentive compensation that benefited Q3 last year. OSP operating margin exceeded the high end of our guidance range of 29.8% to 33.8%. Moving on to the balance sheet and cash flow. Total cash and short-term investments at the end of Q3 was $486.1 million compared to $571.8 million in the second quarter of fiscal 2024. Cash flow from operating activities for the quarter was $19.5 million versus $17.8 million in the same period last year. We have not purchased any shares of our stock in the third quarter. During the quarter, we repaid our outstanding balance of our 2024 convertible notes in the amount of $96.4 million. The fully diluted share count for the quarter was 224.6 million shares, down from 225.3 million shares in the prior year and versus 224.7 million shares in our guidance for the third quarter. CapEx for the quarter was $3.2 million, which is $7.6 million lower versus the same period last year when we were completing the construction of our new facility in Chandler. Moving on to our guidance. For the fourth fiscal quarter of 2024, we expect revenue in the range of $246 million and $258 million. Operating margin is expected to be 10.6%, plus or minus 120 basis points, and EPS to be between $0.06 and $0.08. We expect NSE revenue to be approximately $184 million, plus or minus $5 million, with an operating margin of 2.5% plus or minus 110 basis points. OSP revenue is expected to be approximately $68 million, plus or minus $1 million with an operating margin of 32.5%, plus or minus 150 basis points. Our tax expenses for the fourth quarter are expected to be about $8 million, plus or minus $500,000, 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 225.5 million shares. With that, I will turn the call over to Oleg. Oleg?

Thank you, Ilan. Viavi end market spend environment continues to be challenging, particularly the service providers and enterprise customer segments. In view of these continued headwinds, our revenue came in at the lower end of our guidance, with stronger OSP demand partially offsetting weaker-than-expected NSE demand. Our EPS was in the lower half of our guidance range, driven by lower NSE volume and less favorable product mix. Starting with NSE. For the third quarter, NSE revenue came in below the lower end of our guidance. NSE revenue declined on a year-over-year basis, driven by softer North American service provider and enterprise customer demand. The decline in field instruments was driven by reduced demand for field fiber and cable instruments. Revenue decline in SE was primarily due to the push-out of several major projects by our enterprise customers. Fiber lab and production demand was relatively flat, with stronger 800-gig demand offsetting weaker computing and storage. AvComm remained a bright spot, seeing year-over-year increase in revenue driven by growth of customer orders for our PNT business. Looking ahead, although we expect a seasonally stronger Q4 across all product segments, we expect the conservative spend environment to persist for the remainder of calendar '24. Now turning to OSP. In fiscal third quarter, OSP grew on a year-over-year basis, driven by higher demand for anti-counterfeiting and 3D sensing products. Overall, OSP results exceeded the higher end of our guidance range. Looking ahead, we expect OSP to be seasonally down in the June quarter, mostly driven by seasonally weaker demand for 3D sensing products. We expect the demand for 3D sensing to rebound in the first half of fiscal '25, together with the continued recovery in demand for the anti-counterfeiting products. 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 back over to the operator for Q&A.

Our first question comes from the line of Ruben Roy with Stifel.

Oleg, I was wondering if you could maybe provide a little more detail on how the quarter progressed? It sounds like enterprise might have worsened relative to how you were thinking about things 90 days ago. And an update on service provider, sort of the same, I guess, as we've been seeing. So maybe not a surprise there. But any additional detail on how the quarter progressed, linearity, et cetera, across those two end markets would be interesting.

Yes. With the service providers, we usually get quite a bit of in-quarter book-ship. What we saw, especially in North America, was very anemic spend. If anything, I would say gradually decreasing interest. Even for some of the projects that were announced, they're just being delayed or ramping slower with the service provider customers. On the enterprise side, we are winning some very big deals. On the negative side, when any one of these deals slips—and we had deals that were committed for the quarter and literally, at the end of the day, a major deal slipped to the next Monday after the quarter closed. Customers are trying to manage their spend. It was ironic because since the very beginning of the quarter they said they wanted to take this product, and at the end they decided to book it on Monday after the end of the quarter. Had we gotten this deal when we were supposed to get it, it would have put us right in the middle of our guidance. In that respect, I still view it as decreasing or more conservative customer spend. Customers are not canceling orders, but they are pushing and trying to manage their individual quarter CapEx. That's the general pattern we are seeing. What used to take on the enterprise side three months to convert a deal, and on the carrier side six months, is now taking a few months longer. Deals are not going away. Customers are still interested in the product, but they are spreading it out over more quarters or pushing it down the line. Truly, in the last two weeks, some of the major projects which should have come through in SE got pushed to the next quarter and beyond.

Okay. That's really helpful. I guess a follow-up would be, obviously, there's not a lot of visibility here, but in terms of how you think second half versus first half or typical seasonality across the quarters, would you expect seasonal trends to persist as you think about September? Typically, that's a lower quarter. So just wondering how you're thinking about that.

Yes. September is generally a lower quarter driven by service providers because for some it's the beginning of their fiscal year, and for others it's the beginning of the second half. They see how much money they have left, then decide either in December or June to place orders. One major change I see for the second half is I don't see service provider spending getting any better. For the remainder of calendar '24, it's likely to be more of the same—very tactical approach. We were expecting in the second half a significant uptick in cable, but a number of cable players are pulling back on their more aggressive plans they had early in the year. They're still proceeding with upgrades, but spreading them over two to three quarters rather than doing it all at once over three to six months. As a result, some of the uptick we expected to negate September seasonality may not show up. I would expect field instruments for service providers to remain fairly anemic and for them to continue to 'sweat the assets.' On the positive side, we see the lab business—particularly fiber computing and storage—getting better in the second half as more projects move forward with the next technology nodes being introduced. We expect the beginning of migration and development for 1.6 terabit speeds. In that respect, we expect a somewhat better outlook. I also expect SE to have a better second half. With projects pushed out this quarter, our design-win and booking funnel continues to perform well, and as those things are adopted by customers, we expect that business to recover gradually. Lastly, AvComm—avionics, communications, PNT—will continue to do well and see good momentum. On wireless, the current state of 5G deployment has weakened end-market demand. Major customers have seen significant drops in sales. They continue development and purchase products, but at a lower rate and intensity than prior years. On OSP, generally the second half is stronger; we are awaiting a major mobile phone announcement. Volumes are lower, but the second half of the calendar year is generally a stronger seasonal quarter, and we expect other parts of OSP to continue to recover.

Our next question comes from the line of Ryan Koontz with Needham.

With regards to the NSE business, a couple of questions there. You've done a good job unpacking most of the clarification here. But the miss on SE, can you give us any color there? And then with regard to the broader wireline telco business for fiber builds, et cetera, do you have any idea what you're thinking of rebound for field might look like in terms of time frame?

On SE, we have two parts: carrier software and enterprise. In enterprise, we mainly play in health care, financial services and large-scale manufacturing. We had about a $3 million to $4 million order that booked on Monday; we were expecting it early in the quarter. It got delayed and booked on Monday of the June quarter. That business is very high margin. So not only did we have a $3 million to $4 million shortfall, it was a significant hit to gross margin and operating income—roughly a $3 million impact to the bottom line, about $0.015 per share. It's positive that we're winning big deals rather than many small deals, but when they don't materialize on schedule, it indicates a tighter environment among major customers. For the rest of NSE, service providers are generally anemic in spend, but it's not universal. In parts of Europe and especially Latin America our business is doing pretty well. North America is the weakest link. The word we're hearing from customers is they're going to sweat the assets until they see the market turn around or until a competitor gets aggressive. Right now, the environment is one of conserving cash and paying down debt, which we're seeing across major service providers.

Super helpful, Oleg. And on the gross margin line, any changes there in terms of pricing or structure that we should think of that might be an ongoing setback to gross margins? Or is it purely just volume based from your perspective?

That's actually good news. We are not seeing much ASP pressure. Occasionally you give discounts for big deals, but overall ASPs are holding very well. Standard margins are holding. However, when volume drops, even with a significant chunk of manufacturing via contract manufacturers, operations become less absorbed and that puts pressure on margins. The big impact this past quarter was a significant software order that slipped into the next quarter, which was a pure margin hit on the mix for the March quarter.

The next question comes from the line of Michael Genovese with Rosenblatt.

Great. Oleg, how do you think that service provider telcos' spending will be different in '25? Like what's going to happen as we get into calendar '25 that's different from '24?

In '25, a lot of field instruments sold in '22—which was a very strong year—will be turning three years old. Instruments sold in '21 and '20 will be turning four and five. Around four years of age, customers typically need to start replacing equipment. As things become obsolete or damaged and teams have been sharing equipment, replacement needs become more significant. We saw a similar pattern in '17 and '18 where little was purchased for a period, followed by significant spend in '21 and '22. If customers delay too long, the eventual replacement becomes larger and more intensive. Weather events and wear-and-tear also drive replacement. The longer you delay, the more you'll have to spend to catch up.

Yes, that all makes sense. I guess in some of the work that we've done, we've heard about Tier 1 U.S. service providers that have basically said like '24 is just not a year of network expansion or growth capital, but were sort of planning for 2025. I was wondering if you hear any of that type of commentary from your customers?

I believe it when I see it. Money talks and words mean little without action. We've seen cable players talk about major upgrades and then pull back when they consider interest rates and other priorities. Right now, most players are being very prudent and kicking the can down the road. Unless someone gets aggressive to grab market share, things remain in a stalemate. If they do decide to expand networks, you'll create a double whammy of demand—both replacements for installed base and new tools for the build-out. If '25 becomes a year of expansion and upgrade, the pressure to upgrade and replace field equipment will be even greater.

Right. So we need a shootout. That makes sense. So...

Someone needs to get aggressive and pursue market share. If competitors hold steady and everyone remains disciplined, they generate cash, reduce debt, and avoid spending. The moment the first player tries to get ahead, spending resumes and it's off to the races.

Our next question comes from the line of Meta Marshall with Morgan Stanley.

This is Karan Juvekar on for Meta Marshall. Just a quick question on the NSE operating margin side. I understand that you're sort of seeing headwinds, given volumes and the guide for next quarter. Is there anything outside of volume coming back that could help maybe get you back to mid-single-digit operating margins? Or how should we think about recovery on that side?

I'll start and Ilan can continue. Clearly, volume is the single biggest driver. You can squeeze OpEx, but when incremental variable margin is north of 70% on lab or software products and north of 60% on field instruments, it drops to the bottom line because fixed costs are largely covered. Recovery in volume is the primary driver, and recovery in the SE business would also significantly help because it's very high contribution margin. Every dollar of software revenue contributes strongly to the bottom line.

Exactly that. The fall-through from top-line growth depends on the top line. The pricing environment continues to be stable, so it's really about volume.

Okay. I appreciate that. And then a quick follow-up. I know you mentioned that the PNT business is doing better than some of the other businesses. Any detail on where you're seeing the strength on the position, navigation and timing side, and where you expect an inflection or continued strength going forward on the PNT side? Any detail there would be helpful.

It's mostly in aerospace and defense. There have been significant issues with GPS signals in Europe and the Middle East, which has made positioning and navigation a hot topic for aircraft manufacturers and defense contractors. Everything related to communications or positioning is now seen as vulnerable, which generates a lot of interest in our products. Avionics demand is strong with the recovery in commercial aviation. Traditional public safety, military and defense communications testing are healthy. For some of our more advanced products introduced in the past several years and the Jackson Labs acquisition about 1.5 years ago, we are seeing robust interest and growth in that area.

There are no further questions at this time. So I'll now turn the call back over to Ilan Daskal.

Thank you, Jericho. This concludes our earnings call for today. Thank you, everyone, for joining us.

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