Earnings Call Transcript - VIAV Q1 2022

Operator, Operator

Ladies and gentlemen, thank you so much for standing by, and welcome to the Viavi Solutions First Quarter 2022 Earnings Conference Call. Just a quick reminder, today's call is being recorded. And at this time, I'll turn things over to the Head of Investor Relations Mr. Bill Ong. Please go ahead, sir.

William Ong, Head of Investor Relations

Thank you, Bob. Welcome to Viavi Solutions First Quarter Fiscal Year 2022 Earnings Call. My name is Bill Ong, Head of Investor Relations. 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 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 the 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. Finally, we are recording today's call, and we'll 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.

Hendrikus P. Derksen, CFO

Thank you, Bill. Fiscal Q1 2022 reflects a Viavi record in revenue, non-GAAP profitability and earnings per share. First quarter revenue came in at $326.8 million, up 14.8% year-over-year exceeding our guidance range of $303 million to $317 million, mainly as a result of better-than-anticipated supply chain management within our NSE business, as well as favorable timing of shipments in our OSP business segment. Since the outbreak of the pandemic, quarterly revenues have consistently improved sequentially, exceeding a prior record of $313.7 million in revenue in the December quarter 2019 by $13.1 million. Viavi's record operating profit margin at 22.7%, expanded 140 basis points year-over-year and 190 basis points sequentially, and exceeded the guidance range of 21.5% to 22.5%. EPS had a quarterly record of $0.24 per share, exceeded the $0.20 to $0.22 guidance range and increased $0.03 or up 14.3% from the year ago period. The share count of 242.3 million shares includes the dilutive impact of the convertible notes of approximately 8 million shares. Now moving to our reported Q1 results by business segment, starting with NSE. NSE revenue at $227.9 million increased 24.2% year-over-year, exceeded our guided range of $210 million to $220 million. Within NSE, NE revenues increased 26.4% from a year ago to $204.9 million, reflecting strength for our fiber, wireless and cable products. SE revenue at $23 million, increased 7.5% year-over-year, a result of recovery from our assurance and data center products. NSE gross profit margin at 64.7% increased 50 basis points year-over-year. Within NSE, NE gross profit margin at 64.8% increased 100 basis points from last year, primarily a result of leverage on higher revenue volume. SE gross profit margin at 63.9% decreased 290 basis points year-over-year due to product mix. NSE's operating profit margin at 13.5% exceeded our guided range of 12% to 13% primarily a result of operating leverage on higher revenue. Operating profit dollars more than doubled as margins increased 630 basis points from a year ago, reflecting the leverage and growth in combination with the aforementioned higher gross margins and disciplined OpEx control. Now turning to OSP. First quarter revenue at $98.9 million is down 2.3% from last year's revenue record of $101.2 million and reflects OSP's second highest revenue quarter. Revenue exceeded our guided range of $93 million to $97 million, mainly a result of strong customer demand and timing of shipments. Gross profit margin at 57.7% decreased 260 basis points year-over-year and reflects the impact of product mix and slightly higher manufacturing variances compared to last year's records. Operating profit margin of 44.1% is near the high end of our guided range of 42.5% to 44.5%, a decrease of 260 basis points from a year ago as a result of the aforementioned reduction in gross profit margin. Now turning to the balance sheet. The ending balance of our total cash and short-term investments was $921.7 million, an increase of $218 million sequentially on the prior quarter and up $326.2 million compared to the prior fiscal year. In addition to free cash flow generation, the increased cash position reflects the recent $400 million high-yield bond offering we completed at the end of September, offset by the partial impact of redeeming $275 million in principal value of convertible notes in early September. Operating cash flow for the quarter was $53.4 million, a decrease of $10.5 million compared to $63.9 million in the year ago period, reflecting increased investments in inventory to ensure we continue to meet our on-time commitment to our customer. We invested $15.7 million in capital expenditures during the quarter compared to $8 million in the prior year. The increased capital expenditures reflect a new production facility in support of increased future demand built in Arizona. In early September, we entered into a separate privately negotiated exchange agreement with certain holders of the 1.75% senior convertible 2023 notes and the 1% senior convertible 2024 notes. This transaction reduced the principal value of our 2023 convertible notes from $225 million to $131.2 million and our 2024 convertible note from $460 million to $278.8 million, resulting in a $85.9 million GAAP-only loss included in interest expense and other income. The remaining outstanding balance of our combined convertible note is $410 million in principal value at the end of the quarter, a reduction of $275 million compared to the prior quarter and prior year. We settled the combined retirement of $275 million in principal value of convertible notes in part in cash for a total of $197 million as well as by issuing 10.6 million shares of Viavi common stock. Subsequently, the Board authorized the repurchase of up to $190 million of these shares, which commenced at the start of the second quarter and is expected to be completed no later than by the end of the third quarter. As of yesterday, November 3, we repurchased 2.4 million shares under this program at an average price of $15.48 per share, including commissions. In addition, and under the already existing stock buyback program, we repurchased $8.5 million of Viavi stock at an average cost of $16.52 per share including commissions during the first quarter. In total, as of the end of the first quarter, we repurchased $95.5 million out of the $200 million authorized share buyback plan. This program is now extended until the end of September 2022. In late September, we completed a $400 million high-yield note offering at an attractive rate of 3.75% interest due in 2029 with net proceeds of approximately $393 million. The proceeds will be used for general corporate purposes, including replenishing the funds used to retire indebtedness. Please see our earnings supplemental deck posted on the Viavi website for more details. We are pleased with the successful issuance of our first high-yield notes as well as the retirement of approximately 40% of our convertible notes. This completes an important step in optimizing our capital structure, and we expect will create the financial flexibility to allow us to execute our growth objectives. Now on to our guidance. The current macroeconomic environment remains uncertain with significant supply chain challenges as well as the ongoing pandemic. As a result, we expect the fiscal second quarter 2022 revenue to be approximately $303 million, plus or minus $7 million. Operating profit margin is expected to be 20.5%, plus or minus 50 basis points, and EPS to be in the range of $0.18 to $0.20 per share. We expect NSE revenue to be approximately $235 million, plus or minus $5 million, with operating profit margin at 16.2%, plus or minus 50 basis points. OSP revenue is expected to be approximately $68 million, plus or minus $2 million, with operating profit margins at 35.5%, plus or minus 100 basis points. Tax rate is expected to be approximately 17%. We expect other income and expense to reflect a net expense of approximately $6 million, which includes the full impact of the change in interest expense as a result of the high-yield note issuance, net of the convertible notes retirement. Absent of any changes to the principal notes, we can expect the net expense of approximately $6 million also for fiscal Q3 and Q4. At current stock price levels, and as we complete the aforementioned share repurchase program, the estimated fully diluted share count used in our calculation is 243 million shares for the second quarter. We also expect the fully diluted share count to reduce to approximately 239 million shares, starting at the end of the third quarter and to approximately 237 million shares at the end of the fourth quarter. With that, I will turn the call over to Oleg.

Oleg Khaykin, President and CEO

Thank you, Henk. Our fiscal year 2022 is off to a strong start with record revenue and non-GAAP profitability in Q1. I'm pleased with both NSE and OSP performance in delivering strong results despite supply chain challenges. The NE segment demand strength was driven by fiber, wireless and cable. Service providers continue to upgrade and expand their networks with fiber, resulting in a record revenue quarter for our fiber field instruments. The wireless demand continues to be strong, up double-digit percentage from a year ago levels. 5G field deployment is accelerating with 5G networks being overlaid on top of existing 4G infrastructure. With 5G ORAN technology now widely used in our lab, we are now starting to see initial deployment of ORAN in the field as well. Cable was also strong and was up from a year ago levels. Much of the recent cable demand was in support of MSO's bandwidth expansion and 5G deployment. Semis and data center demand for 400 gig continues to be very strong, with early 800 gig product adoption expected sometime in late calendar 2022. While continued shortages of high-performance semis have challenged our industry, we have been able to successfully mitigate, for the most part, the supply constraints in Q1 and exceeded our revenue guidance. We continue to see supply challenges persisting into Q2 and Q3 and reflect them in our guidance accordingly. Lastly, we expect to see the supply constraints to start alleviating by mid-calendar 2022. The SE business segment continues to recover with the revenue and customer business funnel growing nicely. We expect SE to continue to improve and grow as enterprise customers reevaluate their IT project needs and 5G assurance opportunities start to materialize in late calendar 2022. Now turning to OSP. The OSP business segment delivered strong revenue and profitability led by robust demand for anti-counterfeiting products. During the past 5 quarters, we have seen significantly stronger demand for anti-counterfeiting products. As we look ahead to 2022, we expect the demand to moderate down from the current run rate as central banks digest their inventories and adjust monetary policies. That said, we expect the anti-counterfeiting revenue run rate during calendar 2022 to remain above the pre-COVID levels. 3D sensing revenue was up slightly from a year ago levels, with higher unit volumes due to broader adoption of world-facing applications. In the coming quarter, however, we expect the demand to be moderated downward due to supply chain constraints not related to Viavi. We expect the demand to partially recover in calendar 2022 as component bottlenecks are resolved. Longer term, we expect our principal growth drivers, 5G, fiber and 3D sensing to continue driving growth and profitability for Viavi. In conclusion, I'd like to express my appreciation to the Viavi team for its continued strong execution in delivering another record quarter. I wish all our employees, supply chain partners, customers and our shareholders a safe and healthy time. I will now turn the call over to Bill.

William Ong, Head of Investor Relations

Thank you, Oleg. We will be holding our 2021 annual shareholder and proxy meeting next week on November 10. We will also be participating at the JPMorgan CES Tech forum on January 5, 2022, and the Needham Growth Conference on January 10, 2022. Bob, let's begin the question-and-answer session. We ask everyone to limit discussion to one question and one follow-up.

Operator, Operator

And we'll take our first question today from Alex Henderson at Needham & Company.

Alex Henderson, Analyst

Nice quarter, and I think you guys are doing the right thing with the bond offering. So I'm glad to see that. In terms of my question, I was hoping you could talk a little bit about the outlook in 5G and to what extent broadly, you've been seeing supply constraints. If you could give us some quantification on how much the supply constraints impacted the overall business, but in particular, the 5G side of it, whether that was a factor or not?

Oleg Khaykin, President and CEO

5G is one of our newer products, and it incorporates more advanced chips. Since the volumes are just beginning, we have some prebuilt inventory. However, we are currently facing significant shortages in this area, at least in the short term. We still haven't managed to secure all the necessary components, but it's early in the ramp-up phase, so the situation isn't dire. In the first quarter, we had enough materials for initial shipments. For the second quarter, we are experiencing more constraints, and we're actively addressing this challenge. When we provide guidance, it reflects the available chipsets and materials we have on hand. In the first quarter, we offered lower guidance due to the uncertainty of component availability, but fortunately, our team has successfully secured the supply, allowing us to exceed our expectations. This quarter is similar; there's high demand that we can't fully meet with our current resources. We are working with the assumption that we have the necessary materials either in stock or on the way, which informs our revenue predictions. The positive aspect is that the products we can't fulfill are generally being pushed to the next quarter, and most customers are not canceling their orders; they are simply rescheduling for future periods.

Alex Henderson, Analyst

So the question was about the impact on revenues in the current quarter and your forecast. Is there $10 million or $15 million worth of product that you couldn't ship? And what are your assumptions for the fourth quarter? The information provided is good, but that wasn't really the question.

Oleg Khaykin, President and CEO

In the September quarter, we largely closed the gap and had an upside of about $12 million to $13 million. There was no impact on the September quarter from what we needed to ship. However, for this quarter, there is probably an outstanding gap of around $5 million to $10 million. It's also too early to speculate about Q3 because we don't know what the delivery totals will be.

Alex Henderson, Analyst

And then one last question, just a follow-up question. So you cited the return to pre-COVID levels. Just so that everybody is on the same page, what kind of revenue streams for OSP does that represent? I mean, I know what's in my model, but I'm not sure which period you're specifically referring to.

Oleg Khaykin, President and CEO

Before the COVID pandemic, our base rate for anti-counterfeiting was around $50 million, possibly a bit more. Over the last five quarters, we've been closer to $60 million or even in the low 60s. Looking ahead, I anticipate that the new levels will settle above $50 million but likely below $60 million. Therefore, I would estimate that mid-50s is a reasonable figure.

Operator, Operator

And gentlemen, your next question will come from Samik Chatterjee of JPMorgan.

Samik Chatterjee, Analyst

I guess just a couple. Oleg, you mentioned in the press release and you talked about it, the $400 million note offering gives you a lot of flexibility in terms of investments, both in the business organically and inorganically. So just wanted to get your thoughts about first, organically how you're thinking about areas of investment and what capabilities you need to add? And then how does the M&A pipeline look? And I have a follow-up after that.

Oleg Khaykin, President and CEO

We are making several investments and have not yet discussed some of our product lines, which are now starting to take shape. Our wireless division has significantly benefited from our new internal research and development efforts. With a range of new products being released and the positive feedback they are receiving, we feel confident about their market success. Additionally, we have various other programs that are still in early stages and represent new revenue streams for Viavi that are not part of our current offerings. We are allocating about 10% to 15% of our R&D budget to this area and plan to provide more updates in the upcoming calendar year as these products reach prime time. Regarding our Service Enablement business, we have been cautious in our outlook, but we are becoming more optimistic as it has been restructured, and we are gaining traction in the 5G market as well as with enterprise and service provider applications. We believe our SE business is beginning to grow again, and with each passing quarter, our confidence strengthens.

Samik Chatterjee, Analyst

Oleg, any comments on the M&A pipeline, sorry, before I ask my follow-up.

Oleg Khaykin, President and CEO

So, regarding M&A, we have a clear pipeline. We always look for opportunities in private companies, and there are also public opportunities that we are continuing to investigate. The $400 million provides us with considerable flexibility to pursue deals, particularly in terms of carve-outs and private company acquisitions.

Samik Chatterjee, Analyst

Okay. And for my follow-up, and this is more a layman's question here, which is, I mean you're mentioning the supply constraints that you're seeing. You're seeing strong demand, but you're not able to ship to your customers. And if your customers be the cable provider or telco, if they are looking to deploy equipment, how are they responding to that shortage? Are they still pushing ahead with the deployments? And then once in a couple of quarters, the supply eases, is that demand for test equipment permanently lost? Or do they necessarily just slow down the deployment activity and we just catch up to this pent-up demand in a couple of quarters once supply eases?

Oleg Khaykin, President and CEO

So I would say less than 10% of the demand gets lost. It doesn't get lost, what it does is they go spend money on the next thing. And it's usually when they have some budget flush and they need to spend. By and large, customers are placing orders and it's a best effort. We deliver whatever we can in this quarter, and then we fulfill the rest of the demand down the line. So I think in that respect, I'd say the majority, I'd say about 90% of the demand is not perishable. And what's actually the nice thing about also here is the customers now appreciate the shortages of semiconductor supply. So even before there was a wait and try to place order only as close to the time they need it as they want. Now they are actually engaging with us much earlier and discussing the needs in the next 6 to 9 months and providing us advanced visibility and placing orders. And many of them are entering into material responsibility agreements where they will guarantee taking the product, because we have to go and source the material and buy all the components. So if they later change their requirements, they have to compensate us for that. So it just shows you the robustness and strength of their conviction, and the demand is real.

Operator, Operator

And next we'll move to Mehdi Hosseini of SIG.

Mehdi Hosseini, Analyst

When I look at your reported September revenue and your guide for December on aggregate, it's pretty much in line with what I was expecting. And if I were to take your comment that there's a $5 million to $10 million gap in supply and demand. To me, that's rather upside. So perhaps in that context, you can tell us what are the key end market segments that are driving this upside?

Oleg Khaykin, President and CEO

Mehdi, I appreciate your kind words, but I believe we're actually about $10 million short of where I expected us to be. You've pointed out our model accurately, and we were surprised by the component shortages experienced by a major mobile phone supplier serving one of our key customers. We managed to deliver our share, but this means we must pause our shipments in December to allow the customer to catch up on their inventory. Due to the component shortages, they can't use the product at the expected pace. Nonetheless, we anticipate that demand will bounce back in the March and June quarters, especially in the second half of our fiscal year for 3D sensing, as they weren't able to stock up as much earlier. Consequently, we've seen a significant delay in demand due to these shortages. We initially expected a decrease in anti-counterfeiting demands for March, but some of that has come in earlier. Overall, I think we're potentially missing about $10 million due to component shortages, which brings our revenue estimate down to around $245 million. On the anti-counterfeiting side, there's about a $10 million reduction due to inventory adjustments in 3D sensing. A couple of months ago, I thought December could set a new record for Viavi, but here we are.

Mehdi Hosseini, Analyst

Got it. Okay. I also want to follow up my second question that has to do with a big picture. Last time, we got an update on the model was on Analyst Day back in September of 2019. And so far, you've actually tracked to that model, like $1.3 billion of revenue opportunity and $0.90, $0.95 of earning. So when are we going to get the next update, especially as we start thinking of FY '23, does that hinge on any opportunities that you're working on, you want to wait until you close a couple of these tuck-ins? Or is it more related to just given your arms around the core business or a combination of the two?

Oleg Khaykin, President and CEO

Yes. So when we give a model, we really base it on the business that we own. Any acquisition will be an upside to that model. And as you know, we are approaching next September. We're going to do the next Analyst Day where we provide kind of visibility ahead. We certainly are pleased that even we did count on some recession or pull back, we do not foresee the once-in-a-century pandemic. But even with that, we are actually spot on where we were looking to be in terms of both revenue and profitability. We may even do a little better. But we will start, I'd say, beginning of next calendar year talking about what's next, what's for Viavi in terms of growth. And there, we mainly talk about organic, all the inorganic opportunities we don't discuss as a matter of our policy. They will be all on top of our guidance. And so by the time September comes, I think you'll have a pretty good idea of where we are going and we'll just formalize our strategy, guidance and the projections by then.

Operator, Operator

Next, we'll go to Michael Genovese of WestPark Capital.

Michael Genovese, Analyst

I appreciate you on all the detail on the call so far, and I really just have a few clarifications of things that I missed because I'm slow. On the core OSP, I didn't quite understand on 2Q, are we going to the mid-50s level in 2Q. Was that the guidance?

Oleg Khaykin, President and CEO

Sorry, could you repeat that? I missed what you were saying about the guidance.

Michael Genovese, Analyst

Core OSP, anti-counterfeiting.

Oleg Khaykin, President and CEO

Core OSP, so we said that includes mainly anti-counterfeiting. The run rate pre-COVID was around $50 million. It went up a little bit. But the last 5 quarters, we were running closer to $60 million or even low 60s. All we are saying is starting in the December quarter, it's starting to moderate somewhere in between the COVID run rate and pre-COVID run rate. So take it somewhere in the middle of mid-50s of the kind of base demand.

Michael Genovese, Analyst

Got it. 2Q is December. Got it. Okay. So that I know you said it a couple of times, but I kept missing it. Did you say that 3D sensing in the quarter was slightly up or slightly down year-over-year?

Oleg Khaykin, President and CEO

So we had a September quarter was up. It was a very strong quarter. We had a very robust customer forecast because they saw a significant increase in unit volume because of the world-facing cameras. So even with the ASP reduction road maps, the volume was more than offset the ASP reduction that we shipped in the September quarter. Well, come the December quarter, given the shortages of other components to the forecast that our customer anticipated, we now actually have a bit of a surplus in their inventory of our filters. So they reduced their demand for Q2 to work off the excess from Q1 that they cannot consume, because of the shortage of components. And I would say the Q3, Q4 will restart again at the regular run rate.

Michael Genovese, Analyst

Yes, I understand that. However, if the second quarter is approximately 50% lower compared to both the previous year and sequentially, do you anticipate the second half of the year to be relatively flat compared to the same period last year? Essentially, are we looking at a situation where we are down by half compared to last year's December quarter, and should we plan for the year based on that understanding? Does that make sense?

Oleg Khaykin, President and CEO

Yes, we were initially assessing at the start of the year how many units our customers would produce, considering the mix of front-facing and rear-facing cameras or just a single camera. Looking at our unit forecasts and the decrease in average selling price, we anticipated that our performance would be approximately flat compared to last year. However, with the expected decline in unit volume, we now believe it will likely decrease by about 10% for the year due to a shortage of other components, leading to fewer units being produced.

Operator, Operator

Gentlemen, your next question will come from Tim Savageaux of Northland Capital Markets.

Timothy Savageaux, Analyst

Congratulations on a strong first fiscal quarter. I'll give the OSP topic another shot before discussing the testing side. It appears you are forecasting a sequential decline of around $30 million. It seems that more than 50% of that is due to 3D sensing? Perhaps about two-thirds? Would you say that's accurate? Could you clarify the overall sequential decline and differentiate what is attributed to 3D sensing versus currency fluctuations? Then I will follow up.

Oleg Khaykin, President and CEO

Well, so we don't break down, but it's substantially less than half is the 3D. We had a very strong September quarter anti-counterfeiting demand. In fact, that one was substantially higher than the normal run rate. And 3D sensing is a combination of, I'd say probably, it's a bit more than half is anti-counterfeiting and a little bit less than half is 3D sensing.

Timothy Savageaux, Analyst

Excellent. And on we go to the comm side of things. So obviously, you saw some upside in Network Enablement in the September quarter and are guiding for further sequential growth in December. And you've heard this question from me before. But to what extent does that contemplate sort of a strong year-end spending dynamic, you might even call it a budget flush, amongst some of the big U.S. carriers in particular, C-band spending looks to be ramping into year-end as well as cable spend or to what extent is that kind of more normalized demand?

Oleg Khaykin, President and CEO

This year, there is very little budget flush. Budget flush typically occurs when there is an abundance of inventory and components, allowing for quick order fulfillment. However, in the current environment, that rapid pivot is not possible. Our incoming orders are largely programmatic, focusing on extensive projects involving wholesale network deployment or upgrades, or refreshing field staff's equipment. There is a significant shift in how many operators are approaching network maintenance. For the first time in five years, I see that maintenance and network operations are increasingly reliant on highly automated, intelligent testing and measurement, which enhances field staff productivity as well as network resiliency and performance. Additionally, we are also seeing a rise in sales of larger equipment, such as racks of testing equipment that monitor policies and utilize substantial software. While we still refer to it as NE, it encompasses more than just handheld devices; it includes larger, core network products.

Timothy Savageaux, Analyst

All right. I understand your point about product delivery. We might experience an increase in orders, perhaps reflecting a budget flush or something similar, where carriers are lining up.

Oleg Khaykin, President and CEO

In many orders, they provide guidance. If it was simply a flush, they would say, I need this much, can you deliver? If not, they would look for other options. However, we can inform them that we cannot deliver. They would then ask when we can deliver and would want to set a schedule because it's necessary, rather than them just wanting to spend the money. Currently, I’m not observing much flushing. This is why, if you look at many service providers' announcements, they all have a strong grasp of their capital expenditures. It's not due to a lack of effort; fundamentally, there's just a shortage of supply.

Operator, Operator

Your next now from Meta Marshall at Morgan Stanley.

Meta Marshall, Analyst

I have a couple of questions. First, regarding the supply chain, I understand there is some impact, but it seems relatively minor for you. Are you noticing any decline in customer demand due to difficulties in assembling all parts of their projects, leading to a reduced need for test and measurement? This seems to be a result of supply chain issues affecting customer demand. Secondly, are the limitations you're experiencing causing you to pay more for equipment? Do you anticipate having to implement any price changes, and will you be able to pass those costs on?

Oleg Khaykin, President and CEO

Sure. Regarding how they allocate their spending, they have specific plans in place. Much of our expenditure is driven by fiber plant expansion and the deployment of 5G. You cannot effectively build, activate, optimize, or troubleshoot without the necessary tools. Thus, it's essential to provide your technicians or construction teams with these tools. Additionally, enhancing network reliability and performance also demands more from the equipment used within the network. This aligns with their overall strategy and growth plans, which they have been discussing with us for several quarters, and now it's starting to materialize. It’s not just a temporary trend. As for components, we believe we have fared better than most competitors in securing them. However, to be fair, it's easier for us to obtain the volumes we require since our product margins are relatively high. Even if we pay a premium for components, the effect on our margins or pricing isn’t significant. We have been passing on increased costs, such as logistics and various surcharges. More importantly, we have systematically implemented price increases over the last several quarters, some of which already started early and will really take effect at the beginning of the calendar year. This aligns closely with what we are observing in the semiconductor market, where prices for components are rising by about 10% to 20%, likely starting in January. We felt it was necessary to act proactively and adjust our contracts and customer pricing early. Although we incurred significant expedite fees and premiums to secure these components, we do this because we invest a lot to ensure we obtain our fair share. We have communicated to our customers that we will pass these increased costs onto them, and as of now, none of our customers have refused business with us. They recognize that prices are increasing universally.

Operator, Operator

And next, we'll hear from Richard Shannon of Craig-Hallum.

Richard Shannon, Analyst

Head over the topic of your 5G field instruments. Oleg, I think you made a brief remark in the prepared section on how that's going, and I think you said things are moving along well here in the early stage. Maybe if you can kind of characterize the rate of success where it kind of leads you to share relative to your expectations as you really starting to kind of do R&D into this area a couple of years ago and can you give us some color there, that would be great, please.

Oleg Khaykin, President and CEO

What we are currently observing is the initial deployment phase. Our teams, including engineers and field technicians, are beginning to implement pilot projects. I'm actually quite pleased that this process is just beginning and progressing slowly because if full orders were placed now, I wouldn't be able to supply thousands of units immediately. It’s somewhat fortunate that some deployments are being delayed, as we are still in the early stages and have enough materials to support these initial efforts. However, as we ramp up, we will require significantly more materials, which likely won't be available until around February of next year. In this regard, we have sufficient stock to get everyone started. While not all teams are receiving everything they want, it's enough to keep them engaged with Viavi test flow and methodology, and to ensure everyone is trained and ready for a faster rollout.

Richard Shannon, Analyst

Okay. That's fair color. I appreciate that. My second question is quickly on cable TV. It's really the issue for the most part of the last few years haven't highlighted that much, but I think this is a second quarter in a row that you have. I guess maybe you can give us some color within the SE business, how big of a contributor that is? And how sustainable do you see the upswing here in cable TV?

Oleg Khaykin, President and CEO

We're still selling some handheld instruments, but sales have significantly decreased since DOCSIS 3.1 has been in place for a while. Now, we mainly focus on replacement sales and a few additional products. The next major development will be with DOCSIS 4.0, which is likely a couple of years away. Despite this, we continue to sell a substantial amount of equipment. The key driver in the cable sector for us isn't really copper; it's fiber. Cable companies are evolving from traditional cable providers to fiber operators. As a result, they're purchasing large quantities of our fiber equipment, similar to what telcos and wireless carriers do. An interesting shift is that as they extend fiber deeper into their networks, they lose visibility over different segments because, in the past, copper and amplifiers provided feedback and visibility. Now that they are replacing that with fiber and splitting nodes, they need to monitor their fiber networks closely. Consequently, we're observing cable companies becoming significant customers of our fiber monitoring equipment, which allows them to monitor hundreds of fiber lines across large areas. The lines separating telcos, wireless carriers, and cable companies are increasingly blurred, with all three primarily becoming fiber customers—though their fiber testing needs may differ somewhat. Additionally, many cable companies are venturing into 5G by establishing 5G infrastructure, leading them to also purchase 5G equipment from us, which is quite surprising.

Operator, Operator

And gentlemen, it appears we have no further questions today. Mr. Ong, I'll turn the call back over to you for any closing comments.

William Ong, Head of Investor Relations

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

Operator, Operator

Again, thank you all for joining us. We wish you all a great afternoon. You may now disconnect.