Good day, ladies and gentlemen. Welcome to the Viavi Solutions First Quarter 2016 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I’ll now introduce your host for today’s conference, Bill Ong, Senior Director, Investor Relations. Please go ahead, sir.

Thank you, Ashley. Welcome to Viavi Solutions fiscal first quarter 2016 earnings call. My name is Bill Ong, Senior Director of Investor Relations. Joining me today are Rick Belluzzo, Chairman of the Board and Interim CEO; and Amar Maletira, our new CFO. Paul McNab, our Chief Marketing and Strategy Officer will join us for the Q&A. 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. We encourage you to review our most recent 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 are non-GAAP. We reconcile these non-GAAP results to our preliminary GAAP financials, and discuss their usefulness and limitation in today's earnings release. Also I will point out that corporate allocated costs are now included in the segment operating margin results discussed on this call. The release plus our supplemental slides and historical financial tables are available on our website. 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 Rick.

Well, thank you, Bill, and thank you to all you for joining us today. I am pleased with the Viavi results that we are announcing today for both businesses, OSP and NSE. While we continued to have a lot of work ahead of us we made significant progress in Q1. Viavi’s fiscal first quarter revenue, operating margin and EPS met or exceeded the high-end of our guidance range. We had a number of notable exceptions during the quarter and we are on course in executing our long-term strategy to expand profitability. Let me begin with OSP, which had a stellar quarter, with record revenue and profitability that drove earnings upside in the quarter. Strong demand for anti-counterfeiting products was driven by large banknote volume increases, which we expect to continue in fiscal Q2, more on this later in the call. While Q1 is typically a challenging quarter for NSE, we delivered improvements in most areas, including year-on-year bookings growth up 10.3%, our first double-digit percentage growth quarter since fiscal Q3 of 2014. We also achieved significant expense reductions over last year's levels. Our Network Enablement segment or NE is demonstrated signs of stabilization, which has been a top priority. The rate of year-on-year performance decline has slowed in fiscal Q1, down 3.2% from a double-digit level we experienced last quarter. NE saw a business pickup from some of our major North American service providers, as well in increasing wireline instrument growth from a major NEM customer. Our Service Enablement segment or SE showed a 29.1% sequential revenue increase, although it was down 5.1% year-on-year. SE’s growth product mix versus legacy product mix for deferred revenue plus backlog continues to improve with just better than a 60/40 ratio as compared to just better than a 50/50 mix a year ago. We…

Thank you, Rick. I'm pleased to be part of the team and see a lot of potential in Viavi to grow topline as well as opportunities to improve profit performance. So before I get into our results, I would like to briefly comment on the separation. During our fiscal first quarter of 2016, we successfully completed the separation of our Communications and Commercial Optical Products or CCOP and the WaveReady business on August 1, 2015 with the spin-off of Lumentum and the renaming of JDSU to Viavi Solutions. CCOP and WaveReady are two JDSU’s discontinued operations and therefore our financial focus going forward is the Viavi business, which consists of both our Network Service Enablement or NSE business and Optical Security Products and Performance or OSP business. Now turning to our performance in the quarter. Even with the incredible work required to complete the separation, we remain focused on executing our plan. Revenue of $229.7 million exceeded our guidance revenue range up $14.4 to $220 million and both NSE and OSP exceeded guidance as a result of better execution. Revenue was up 6.7% year-over-year despite currency headwinds of roughly 4 percentage points. The revenue growth was primarily driven by strong performance in our OSP business. Our operating income at $28.7 million grew $15.7 million or 120.8% year-over-year. Operating margin of 12.5% exceeded our guidance of 7.5% to 10.5% and was up 650 basis points year-over-year as a result of strong performance in OSP and solid operating expense management. Operating expenses were down 6.1% year-over-year, primarily driven by reduction in our G&A expenses. We plan to continue driving higher OpEx savings over time as we optimize NSE’s expense structure and reinvest some of the savings into our revenue growth initiatives. Both the NSE and OSP business segments delivered operating margin results…

Thank you, Amar. I'd like to ask everyone to limit their discussion to one question and one follow-up Ashley, let’s begin the question-and-answer session.

[Operator Instructions] Our first question comes from Patrick Newton of Stifel. Your line is open.

Hey, good afternoon. Thank you for taking my questions. Rick and Amar, welcome to the team. Jumping right in, Rick you alluded to the structure of -- pressure on the expense side of your NSE business is unacceptable and obviously too high and I think that’s something that most of the street would echo. But I am curious if you could help us dive into that, and perhaps this is little bit premature. But what is the right way to think about the correct expense ratio for the NSE business, is there publicly traded entity that you intend to mirror from a cost structure perspective? And if we look at OpEx, is there lower-hanging fruit on the sales side or the R&D side because it seemed to imply that there was some cost cutting initiatives that could impact both line items?

Yeah, so we’ve done pretty thorough benchmarking. You can think about some of our competitors or people in the industry with the range of operating expense structures and gross margin structures based on the software content of their product offering. So we’ve kind of laid those out, we’ve studied those, and then we’ve evaluated where we fit, what our target is that we need to get to over a period, let’s say, 12 to 18 month period of time. So we are not ready at an analyst meeting, we will be specific about what those goals are, but within that, we feel that we’re most off on G&A, that’s an area where we will have the most areas of improvement. And then we’re somewhat off on R&D which we think we achieved by getting focused on the right segments to align with our strategy. And sales and marketing has a little bit of an offset because frankly we have a lot of work to do right now to build our sales and marketing capability. And so while we think there's opportunity for improvement, it’s kind of secondary to the other areas. And then we also as we move to NSE business -- oriented business with more software content, even though there is a deferred revenue impact, there is a longer-term trend towards higher margin. So we've lined all this out and that results in near-term work to get our cost structure down again mostly around G&A as well as some R&D work that we’re still doing as a result of the $50 million announcement we made before and other optimizations that we will make across how we -- we’re driving our product strategy. We’ve had a lot of silos. We’re driving that into a more end-to-end more consolidated platform, so we can gain more efficiency as well out of our R&D investment. So I don’t give you specific numbers there, but we really see ourselves getting to a point where we can get back to growth are the segments we're in are growing and then we can get into profit margins starting in the high-single digits, eventually the double-digits and you can do the math while kind of operating structure we need to achieve to do that.

Perfect. That's helpful. I guess just shifting gears I wanted to talk about your largest NE customer, obviously there is some distraction with recent mergers. And I guess now that noise kind of dying down I think you alluded to some strengths in the September quarter from this customer and then you had a overall book to bill of greater than one in NE. With these particular customers, are you seeing any more clarity in the orders or any potentially pent-up demand? And then on the potential for budget flush, I’m curious you alluded to, Amar on your presentation that it’s more the purchasing decisions are on an annual basis. So you’re implying that the budget flush is the thing in the past or you have somewhat of a conservative outlook into the December quarter?

Yeah. Let me just start about -- we didn’t make a best usage about our particularly large customer. I would just say that I think things -- by statement is that things are improving somewhat. But as we said in our results, our top customers, our revenue from our top customers has improved. And so we believe that is the case. And so I don’t know what more to say about it. I think we’re positive about it. We will also say that we believe that lot of trends in the market around broadband and wireless and higher performance and a 100 gigabit. And we go through whole list of things that we think will continue to result in more infrastructure development and purchasing of our products. And we believe that the outlook for the market is pretty good relative to the last couple of years.

One thing I’ll add to that, Patrick, is that you probably saw a recent announcement about our Velocity channel program, where we’ll see an accelerated expansion of our NE business outside of not just the top one but the top five North American service providers as well as into the enterprise too. So we do think there’s opportunity there. And from the technology perspective that Rick was talking about, we do see signs from very good upside on our fiber lab instruments and fiber optic production line test with our main partners that has strong growth in 100 gig deployment coming forward as well potentially as G. Fast on the access side and DOCSIS on the cable side. So we do think the opportunity is good for us from leveraging all of that through our channel globally.

So Patrick, thanks for the question. This is Amar here and look forward to meeting you. So regarding budget flush, if you look at what happened last year, we didn't really see any budget flush. So we are not expecting any budget flush. I think it’s prudent to plan that way. If there is some flush that will come in that will be -- we’ll see how that all pans out. But at this moment in time, we are not anticipating or expecting any budget flush.

Thank you for taking my questions. Good luck.

Thank you.

Thank you. Our next question comes from Mark Sue of RBC Capital Markets. Your line is open.

Thank you. I understand the benchmarking to get the cost structure relative to your peers. However, there's a prevailing view that the Viavi Solutions, NE and SE are somewhat still relative to competitors and your service providers have all the purchasing power. So shouldn't the near-term focus as should be doubling down on R&D, increasing spending in product development and not cutting R&D to placate near-term investors?

I think we’re trying to balance that. I don’t want to make a sound like cost-cutting is the only strategy we have because it clearly is not. We are investing in some of the segments that we believe provide opportunity in a significant way. So I really don't believe that we should be just reducing our expenses. But I would say that we do need to make more and more strategic choices of how we spend our money to get them the most area of opportunity. And if you look through our entire portfolio, we see things that we believe we are differentiated and we don't -- we believe that we’re have superior architecture and approaches to some of their problems that people have, and we want to go after those and play them hard and we will invest to do that, but I also believe we have to make trade-offs. And so that's what you have to do in a company like as you got to make bets and you’ve got to decide how to cover those bets and we intend to do both of those aggressively.

One thing I would say to that as well, Mark, that’s okay.

Yeah.

That’s okay. And to Rick’s point on the R&D side, we mostly increasing to kind of a self-funding model where we’ve got cash outflow coming from our NE business and investments to be made in our SE business increasing as we combine those to a platform. So that any savings we made from a G&A side, but Rick mentioned, flows through to bottomline and that’s the balance we’re trying to get.

Okay. That’s helpful gentlemen. And then, SE, the booking dynamic there, was that really related to push outs and why would that be, is that imply to solutions are still being debated or considered or is that a matter of deployment complexity? Anything you can help us understand kind of how you're seeing SE and how we should think about it longer term?

Yeah. I think, I have to say since my short time here as CEO and I've dug through everything we have. I’m very excited about our portfolio in SE. Some of the solutions we bring and the approaches we bring are very well received by our customers. Having said that, we have very long campaigns to win these businesses, our funnel and the number of opportunities we have in SE is very, very strong. And I guess, what is challenging, of course, is just to close them. There is competition but it's limited. I mean, there aren't that many players in some of these segments that we see is as we are in the most potential, but to me its most of getting through the proof of concepts and all the other steps that you have to take to be able to close these opportunities.

That’s helpful. Thank you and good luck guys.

And I mentioned the Latin America win in the script, for example, because it’s -- we are seeing those wins. The smaller the service provider is almost -- is less of a campaign. But we are seeing those wins and believe those will continue to leverage out into some larger opportunities.

And one thing we should also mention is enterprise, of course.

Yeah. What is that?

Very good book ship business and so we saw a very high double-digit growth faster than the Network Performance Monitoring and Diagnostics market that we compete in. So we grew far more than the market in that space as you see the migration from private to public. We’d also actually exploiting the migration from 16 gig to 32 gig on the fiber channel side, as well as some maturation of the Gen3 PCIe market. So the enterprise side is doing very well and the good thing is market is book ship, no rec issue there.

Yeah.

Understood. Thank you, gentlemen

Thank you.

Thank you. Our next question comes from Alex Henderson of Needham. Your line is open.

Hi. This is Josh Buchalter on behalf of Alex. Thank you for taking my question and congratulation on the good result. Within the NSE group, I wanted to ask about what kind of steps you’re taking for the revenue diversification? And maybe can you help us understand why there is such strong growth in the top five customers but the decline in the outside the top five? Thank you.

Yeah. I’d be happy to address that. Historically, is a company we have done very well with the large service providers. We've been very well-positioned there. And always have been less well-positioned globally, less well-positioned with some of the smaller opportunities in the industry. So we think that’s not the best place to be. I mean, we certainly intend to continue to be strong with the large service providers, but the market is becoming more and more distributive. Some of the large providers are looking to contractors to provide some of their testing capability. That means we have to sell in smaller chunks, more growth in Asia and so on. So we believe that that a shift that we have to make. I would further say that when we went through some of our cost reductions before, we had headcount reductions in sales and those were often made, what I would call it more of the edge of the market that in the core strength that we had in service providers. So that’s kind of the history and we saw the revenue result of that. So what we are doing today is, we’ve returned back a bit of the headcount on the sale force. We are actually rebuilding and in fact moving high back-up from where we were a month or two ago in our sales count deployment. We have introduces velocity program. We really not had a complete channel program in the company and so that's something we believe is really critical to expand our reach and to move into different segments. We are looking at some of the developing markets, where pricing is more aggressive and how we can repackage our offering and how we can deliver more cost competitive solutions. So we can win more there. We've done some resource shifts through the sales force from our product groups and I could go on and on, building our lead gen capability. We are pushing and have been pushing in recent months on many levers to be able to get the NE business back to a stable if not growth opportunity, which is what we think is consistent with the marketplace and so we are really all over that, because that that’s where we are going to get the most immediate revenue improvement, while we want to build bookings in SE we know that in many cases it takes longer to see that revenue. So that's the big opportunity. We are focused on that, working very aggressively to put in place, what I would call a more complete go-to-market capability that goes beyond big service providers into various segments, into various geographies to smaller sized customers. And I would also say that’s part of our cost reduction strategy as well, because we really need to turn over a lot of the processing of our business to partners, who can do it more efficiently then we can in some of the smaller purchase quantities.

One thing I will add to that, there is lot of program is a big deal. And to Rick’s point North America was up high single-digit and China was a very high double-digit, although, much smaller base, but frankly, EMEA was down double digits, Asia-Pac was down high single-digit and LatAm was down high single-digit. And so we do believe there is a lot upside, particularly on our NE business to take through channels. So we have -- as you sure you read on the press release this morning, a very extensive program to make up the gains, losses that we had in those other regions.

Thank you. That's very helpful. And then, lastly for me, given, what’s going over the NOLs, how should we think about modeling the tax rate going forward, it’s been somewhat lumpy? Thank you.

So I think the tax rate, that’s why we have given a specific guidance, Josh, on the tax rate. Based on what you saw in Q1, I think, you should model the same tax rate in -- from Q2 to Q4.

Great. Thank you and congratulations again.

Thank you.

Thank you.

Thank you. Our next question comes from Rod Hall of JPMorgan. Your line is open.

Yeah. Thanks for the question guys. I guess, I wanted to go back to the OpEx commentary, like I think, some of the prior questionnaire had mentioned, most of the market believes that that OpEx need to come down, particularly in NSE business? I am just wondering why you guys aren’t qualifying anything today, is it because, Rick, you only had a couple of months here to take a look at the business and you're just still analyzing things and/or do you think that that you need to wait until a permanent CEO’s named and then at that point what that person determines just how aggressive they want to get on cost cutting? I am just trying to understand, why not quantification today and then when might we expect some sort of qualification and then I have a follow-up?

Okay. What we -- we discussed this, we do have a model. We have a model that we're pursuing internally and we have a very extensive program, where we are going through individual certain parts of our business to really get to the core reasons why we are more complex and why our expense structure is what it is. So, I don’t want to get any impression that we are not pursuing this aggressively. We have a model that’s we think sufficiently aggressive and we're pursuing it. We discussed when to talk about that publicly, we decided that an Analyst Day kind of environment would be the best environment to do that. And yes, certainly, a CEO, we’d like a new CEO to be on Board to embrace that or do a different one. But that’s a factor that I think also plays into the view that we should wait until we put that together. But I would just kind of say again that we’re very clear what we have to be -- what has to be done. We have very clear goals. We’re pursuing them and we believe as I said before that it gets us -- our goal is to get the high single digit types of operating income within the next 18 months. And so you can do the math with assuming fairly flat gross margin over that time period, maybe some slight increase and see the work that we have to do. But we’ll be more clear on it. But we just said that we need to get pass some of these other points before we do that.

Okay. And then just on the follow-up, I just wanted to check on, your OSP margins has been running really well last couple quarters. Just wondering if you guys could comment on the sustainability of those margins. I know you’ve had a lot of big currency deals going through that. Did that continue or how should we be thinking about those margins moving forward?

So Rod, this is Amar here. I look forward to meeting you sometime soon. So on the OSP margins, we -- margins of 41% in Q1 was mainly driven by a, favorable product mix. When you have anti-counterfeiting business growing, it usually comes in at a very high margin, and number two is a very high operating margin operating leverage on this incremental revenue. What I would suggest is if you are thinking about how to model it, I think we have provided 35.5% as our Q2 guidance plus or minus 1, I think you should focus on that. I don't think we will be getting to 41%. And this was as I said Q1 was an all-time record quarter both on revenue and profit and should not expect that to repeat.

Okay. So I’ll just take the 35.5 out into the future, not much fluctuation from them the way we….

Well, I'm not -- I'm actually not guiding for the second half but I think that’s -- that's something that you should consider for Q2 at least and then see how your model works.

Okay. Thanks Amar.

Thank you. Our next question comes from James Kisner, Jefferies LLC. Your line is open.

Yeah. I’d like to kind of start with the housekeeping question. I believe you guys said that the second quarter is shorter. I guess, as a shorter quarter, I was wondering how much you kind of quantify the revenue and expense impacts from that and overall clarify the second quarter performance?

Sure. I think the math can be very simple there. Right, it’s 14 versus 13 weeks quarter but let me just give you some colors here. So when we provided the guidance for Q1, we had already contemplated this was going to be a 14-week quarter. So that was not a surprise. Now when you think about Q2 -- from Q1 to Q2, you definitely need to start thinking about, hey one week less of book and ship, right. So if I exclude that, you will see that our revenues for our NSE business actually sequentially goes up from Q1 to Q2. So you can do a rough math on that. We were $165.5 million in Q1. It’s a 14-week quarter and you can do roughly the math on the impact for one week. Does that help?

Yeah. How much the business is book and ship at this point. Maybe you can talk about proportionate CMI of NSEs?

I didn’t follow the last part of the question. I'm sorry. You just …

I am just wondering how much of the business is really attributed to booking shipping, some exposed number of days in the quarter, is it -- and I guess I talked about or maybe question might be how much your bet is in vendor managed inventory at this point if any?

Yeah, we don’t really have any in vendor managed inventory, so it’s not that. I think it’s -- when you’re having extra week, you cut off to read your -- you have an extra few days, which you also have more things to ship, I think that’s why we talk more about book to ship because that extra week is mostly an advantage around shipping more products. So it does have an impact.

Okay. And just on channel development, I am just curious if you can I guess talk at least conceptually if not quantitatively about the investments that you're making in a channel, is there period of time, are those investments are pretty dilutive and a point at which in time you think that due to channel that now will be accretive, just talk about those investments that you’re making in channel and a nature of those?

Yeah, I will make a comment. Paul might be able to add to it. I mean, I don't think it's a just kind of the nature of the channel. I don't think of it as being very dilutive. I think the revenue upside, we will see benefit very, very quickly. And the investment has been underway now for months as we put together all the ITs, infrastructure and the programs and all the other elements. And so a lot of the investment has been made and we think that from here forward, it’s going to be -- it’s going to have a positive impact that would be my judgment, I don’t know if we have a number of our investment there.

So the only big investment and it’s not really investment, we have $3 million contra revenue MDF that we have in place, but by and large it’s driven from a three tier channel architecture where we go from the top. We have Elite and Premier and Authorized partners and we fund based on that on MDF. So it’s essentially a self-funding model, essentially.

Thanks very much.

Thank you. Our next question comes from James Fawcett of Morgan Stanley. Your line is open.

Hi. This is Meta Marshall for James. A quick question on just, if you could speak to any kind of dissynergies that you’re seeing now that you guys just some momentum, particularly as you try to kind of expand your customer base. And then just a housekeeping question. I don’t know any person that you’re going to make a cash transfer to Lumentum which doesn't appear to have taken place. Is that still planned in the next quarter, or is the dynamic of that changing? Thanks.

Yeah, let me take the second question first. So we did do the cash transfer and that’s done, that’s already reflected in our cash flow and short-term investment of $903 million. So we did complete the cash transfer.

Okay. Great.

And I would say I do not -- I am not aware, I've not found any or seeing any dissynergies that concern me or that are even notable. So I think that the way we’ve structured the company is and doing the spin really allows us to get more efficient to have a more homogeneous, it’s got a business management model for writing the company. And so I haven't seen dissynergies that have caught my attention. So I think we’re -- we can become more efficient and more effective I believe today more than we could before the spin.

Great. Thank you.

Thank you. And our final question comes from Jorge Rivas of Craig-Hallum. Your line is open.

Thank you, guys, for taking my question. So I want to dig in a little bit on the areas of growth in your SE segment. So first on location intelligence, wondering if what drove the growth was actually uptick on demand through, maybe you’re able to accelerate your VSOEs. And on the same lines on the network instruments side of the business, I know in the past there were some execution issues that probably caused some share losses, but it seemed like enterprise it well in the quarter. So I wonder if you can provide some color as well on network instruments and what exactly drove growth in the quarter.

Okay. So let me start up with the enterprise and then I’ll go into the location intelligence. So in the enterprise side, we increased and improved our sales coverage model that helped for lot to me believe the velocity channel program will take that and globally fitting that was very well. So we did grow high double digits on the enterprise side. And we did see on our SNT business, our storage and network test business some decline in that side of the business, but overall we did see, as I said, growth of 15%. And some of our product line as Rick said, we are increasingly moving towards virtualized model that allows us just to make increased penetration cloud and we’re seeing some slight uptick on that side, but that’s where a major growth opportunity is. So we’re making major inroads in the, I would call the network performance monitoring and diagnostics segment on the enterprise. On the LI side part of the business, we’re seeing major growth there from the mobile operators addressing the burgeoning demand for LTE, hotspots growth there and as well as both these as well. And so we’ve seen extremely high double-digit growth from a revenue year-on-year perspective on the LE side of that business, so that’s being very positive. We’ve seen that growth in North America, mainly we’ve seen a lot of growth there, a lot of growth in LatAm as well. So did answer your question?

Yes. So it sounds like it’s more of an uptick in demand that you’re seeing on LI, more broad-based, right. But I was wondering, I believe last quarter you had mentioned that you guys were looking to accelerate a little bit VSOEs?

Yeah. Sorry, I forgot to mention the VSOE. So yes, the VSOE, it’s a performing, making progress on that. As Rick said, our funnel is very strong. Obviously, you have to go through acceptance. It’s a lumpy business. So we did have a major acceptance, again from top five North American service providers. So we are getting acceptance. We feel our pool of customers is strong, so we do believe we’ll get VSOE and we just have to work through the acceptance issues.

Okay. Great. Thanks a lot. That’s all for me.

Thank you. That does end the Q&A session for today. I would like to turn the call back over to management for any further remarks.

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