Viavi Solutions Inc. (NASDAQ:VIAV) Q2 2023 Earnings Call Transcript February 2, 2023
Operator: Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Viavi Solutions Fiscal Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. I would now like to turn the conference over to Sagar Hebbar, Head of Investor Relations. Please go ahead.
Sagar Hebbar: Thank you, Regina. Welcome to Viavi Solutions second quarter fiscal year 2023 earnings call. My name is Sagar Hebbar, Head of Investor Relations with Viavi Solutions. Joining me on today’s call are Oleg Khaykin, President and CEO, and Henk Derksen, CFO. Please note, this call will include forward-looking statements about the company’s financial performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations and estimations. We encourage you to review our most recent annual report and SEC filings, particularly the risk factors described in those filings. The forward-looking statements, including guidance we provide during this call are valid only as of today.
Viavi undertakes no obligation to update these statements. Please also note that unless we state otherwise, all results except revenue are non-GAAP. We reconcile these non-GAAP results to our preliminary GAAP financials and discuss their usefulness and limitations in today’s earnings release. The release plus our supplemental earnings slides, which include historical financial tables, are available on Viavi’s website at www.investor.viavisolutions.com. Finally, we are recording today’s call and will make the recording available by 4:30 p.m. Pacific Time this evening on our website. I would now like to turn the call over to Henk.
Henk Derksen: Thank you, Sagar. Fiscal Q2 2023 slightly exceeded our lowered expectations, mainly as a result of anticipated headwinds in service provider spending. Fiscal Q2 revenue came in at $284.5 million, down 9.6% year-over-year and above our guidance range of $261 million to $281 million. Viavi’s operating profit margin of 16.2% decreased 560 basis points from last quarter and 710 basis points from prior year, although above our guidance range of 13.9% to 14.9%, EPS at $0.14 per share was down 41.7% from the prior year and 39.1% from the prior quarter results and exceeded the guidance range of $0.10 to $0.12 per share. The current share count was $227.1 million during the quarter, down from 242.3 million shares in the prior year as we continue to improve the quality of the balance sheet.
Cash flow from operations was $46.2 million versus $22.2 million in the prior year. And year-to-date, cash flow from operations continues to be strong at $72.8 million, compared to $75.6 million last year during the first half. Now moving to our reported Q2 results by business segment, starting with NSE. NSE quarterly revenue was impacted by lower service provider spent at $207.1 million and declined 15.2% year-over-year, slightly ahead of our guidance range of $187 million to $203 million. Although on lower levels compared to prior year and as the quarter progressed, demand patterns stabilized within NSE. NE revenue of $179.7 million declined 16.2% year-over-year, driven by the weakness in service provider spending. SE revenue at $27.4 million decreased 8.1% from last year.
NSE gross profit margin at 64.4%, decreased 90 basis points year-over-year. Within NSE, NE gross profit margin at 64.1% decreased 30 basis points from the prior year, primarily due to decline in volume. SE gross profit margin at 66.8% decreased 500 basis points from last year, primarily due to product mix. NSE gross profit margin — operating profit margin at 8.9% exceeded our guidance range of 5.5% to 6.5%, albeit down 980 basis points year-over-year. Now turning to OSP. Second quarter revenue at $77.4 million was up 9.6% year-over-year. Revenue was near the high end of our guidance range of $74 million to $78 million. Gross profit margin at 52.3% decreased 390 basis points from the prior year mainly a result of start-up costs in our new Arizona facility.
Operating profit margin at 35.5% was within our guidance range of 35% to 37% down 70 basis points from a year ago. On February 1, 2023, the company approved a restructuring and workforce reduction plan to improve operational efficiencies and better align the company’s workforce with the current business needs and strategic growth opportunities. The company expects approximately 5% of its global workforce to be affected and estimates it will incur charges of approximately $15 million in connection with this plan. The company anticipates the plan to be substantially complete by the end of fiscal 2023. Now turning to the balance sheet. The ending balance of our total cash and short-term investments was $489.7 million, down $27.4 million sequentially as a result of capital deployment towards both acquisitions and stock repurchases.
As mentioned earlier, operating cash flow for the quarter was $46.2 million, an increase of €24 million year-over-year. The increase was a result of solid collections. In addition, we invested $18.1 million in capital expenditures during the quarter compared to $14.8 million in the prior quarter, primarily due to complete the build-out of our new Arizona production facility. During fiscal Q2, we repurchased 2.2 million shares of our common stock for $25.2 million under the share repurchase program announced in September, leaving the remaining balance of 274.8 million worth of shares authorized for repurchase. As you may recall, in September, we announced that the Board authorized a new common stock repurchase program for up to $300 million.
In addition, we successfully closed the acquisition of Jackson Labs in fiscal Q2 2023. The total purchase consideration comprised of approximately $49.9 million in cash, and contingent consideration of up to $117 million in cash based on the achievement of certain operational and revenue targets to be achieved over a three-year period. This transaction provides Viavi, a leadership position and a resilient PNT, supporting government and service providers in protecting their key infrastructure and assets. The transaction allows us to leverage our existing go-to-market model and utilizes US federal NOLs. Now on to our guidance. We expect the fiscal third quarter 2022 revenue to be approximately $266 million, plus or minus $10 million. Operating profit margin is expected to be 13.6%, plus or minus 60 basis points, and EPS to be in the range of $0.10 to $0.12 per share.
We expect NSE revenue to be approximately $197 million, plus or minus $8 million, with operating profit margin at 7.7% plus or minus 50 basis points. OSP is expected to be approximately $69 million, plus or minus €2 million, with operating profit margins of 13.5% versus minus 100 basis points. Our tax rate is expected to be between 23% and 25% as a result of jurisdictional mix. We expect other income, expenses to reflect a net expense of approximately $4.5 million. Share count is expected to be around 226 million shares based on current stock price levels. With that, I will turn the call over to Oleg.
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Oleg Khaykin: Thank you, Henk. Fiscal second quarter of 2023 came in above our guidance range. driven by better-than-expected NSE performance helped by stabilization in service providers’ demand and spend. Our OSP business grew year-over-year and came in within the guidance range. Starting with NSE. NSE declined on a year-over-year and sequential basis. During the December quarter, we continued to see a continuation of general pullback in service providers’ OpEx and CapEx spend that started during the last two weeks of September. In addition, we also did not see any meaningful year-end budget flush. Decline in NE, was primarily driven by weaker demand in our fiber and wireless lab products by Tier 1 service providers and wireless labs, responding to reduced business outlook.
This was partially offset by stronger demand for our wireless field instruments, driven by the 5G C-band infrastructure deployment. In addition, we saw strong traction for the recently acquired Jackson Labs resilient PNT product, I’m pleased with the market momentum for resilient PNT technology as it increasingly becomes a must-have by the government and service providers as they adapt to resilient PNT technology to protect their strategic infrastructure and assets. Looking at the current quarter, we expect the demand softness to persist as many of our customers are continuing to pare back their CapEx and OpEx in face of weakening end market conditions. That said, we are encouraged with the service provider spend stabilization and are starting to see early signs of near-term recovery.
We expect field instruments demand to start picking up by mid-calendar 2023, our service providers retrench and rebalance their CapEx and OpEx plans and resume their fiber network build-outs and 5G C-band expansion. This is expected to drive the recovery in demand for our fiber and field at products . In addition, we also expect several major cable operators to start upgrading their networks during 2023, and which is expected to drive the demand for our cable field instruments. Our SE business segment grew 14.2% sequentially, in line with our expectations. We expect SE revenue to remain steady at the current levels for the remainder of fiscal 2023. Now turning to OSP. OSP increased 9.6% year-over-year, driven by growth in both anti-counterfeiting as well as 3D sensing products and performed in line with our expectations.
Looking ahead, we expect second half of fiscal 2023 to be weaker with quarterly core OSP revenue moderating to about $55 million per quarter, driven by weaker anti-counterfeiting product demand as some of our major end customers pulled back on fiscal stimulus. We also expect weaker year-on-year demand for 3D sensing products in the second half of fiscal 2023, driven by lower end customer demand. In view of weaker near-term demand environment, we’re implementing a limited restructuring plan for our NSE and OSP businesses intended to align our operating expenses with the expected lower near-term customer demand and to redeploy investment to strategic growth areas in order to position Viavi for accelerated revenue and profitability growth as end markets recover.
In conclusion, I’d like to thank my Viavi team for managing in this challenging environment and express my appreciation to our employees, customers, supply chain partners and shareholders for their support. I will now turn the call over to Sagar.
Sagar Hebbar: Thank you, Oleg. This quarter, we will be participating at Morgan Stanley’s TMT conference in San Francisco on March 6. We will also be attending the MWC in Barcelona and OFC in San Diego. Regina, let us begin the Q&A session. We ask everyone to limit the discussion to one question and one follow-up.
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