Good afternoon. My name is Kelly and I will be your conference operator today. At this time, I would like to welcome everyone to the Viavi Solutions Third Quarter 2017 Earnings Conference Call. All participants are in a listen only mode. After the presentation, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Bill Ong, Head of Investor Relations. You may begin your conference.

Thank you, Kelly. Welcome to Viavi Solutions' third quarter fiscal 2017 earnings call. My name is Bill Ong, Head of Investor Relations. Joining me on today’s call are Oleg Khaykin, President and CEO, and Amar Maletira, 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. 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 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 supplementary slides, which include historical financial tables are available on our 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 the website. I would now like to turn the call over to Amar.

Thank you, Bill. Fiscal Q3 Viavi revenue of $196 million met the guidance midpoint. OSP revenue exceeded the guidance range due to better than expected demand in our anti-counterfeiting business, while NSE revenue was below the guidance range. Viavi revenue declined 11.1% year-over-year, as the growth in the OSP business was offset by the decline in NSE. Viavi’s operating income at $23.4 million declined 10.7% year-over-year. Operating margin of 11.9% was near the guidance midpoint and flat from the prior year despite lower revenue in fiscal Q3. Overall, Viavi's operating expenses declined 10.6% year-over-year or $11.7 million, driven by expense reductions across the board. EPS at $0.09 exceeded our guidance range of $0.06 to $0.08. The upside to the high end of our guidance range of $0.08 was due to some non-operational benefits. Now, moving to our fiscal third quarter 2017 results by business segment. Starting with NSE. NSE revenue at $132.1 million declined 16.6% year-over-year, driven by a 16% decline in the NE segment, and an 18.5% decline in the SE segment. NSE gross margins at 64.5% increased 100 basis points year-over-year. This was due to 540 basis points of improvement in SE's gross margins at 61.7%, partially offset by a modest decline of 30 basis points in NE's gross margins at 65.3%. NSE operating expense in the quarter was $89.6 million. Despite a 10.9% reduction in NSEs operating expenses from a year ago, we still reported a 3.3% operating loss due to the steep decline in NSE revenue. During the quarter, we executed a previously announced NSE restructuring plan. In Q3 we reduced approximately 6% of our work force, primarily in the SE business segment. The balance of the 10% work force reduction or the remaining 4% will largely occur in our fiscal Q4 or the June quarter.…

Thank you, Amar. We exceeded our EPS guidance range as all speaking in above expectations due to a stronger than expected anti-counterfeiting demand, and in part offset weaker than expected NSE revenue that was impacted by weaker service provider and enterprise spend. The March quarter is historically challenging for the NE core instrument business. North American service provider spending was seasonably weak and while there was some instrumentation bind taking place, it was at lower rates than historical. That said, our year-to-date core instruments revenue outside the North America was up nicely year-on-year. Fiber instrument sales softened in the quarter as we saw optical spending starting to grow given the significant amount of fiber deployment over the past 12 to 18 months. Customers are assessing their optical deployment needs as they rebalance their supply demand requirements. On the positive trends, cable demand was meaningfully up as customers finally starting to upgrade to DOCSIS 3.1. We expect cable spending trend to follow a rolling wave pattern and take place over multiple quarters. The access business also saw its first sequential revenue uptick in more than the year. Our service providers are beginning to deploy G.Fast copper access technology. We expect the G.Fast technology adoption also to take place over multiple quarters. The data center or enterprise business came in weaker due to a lackluster enterprise customer spending and some order push out. That said, we expect to see a recovery in this business in the fourth quarter, helped by expected seasonally stronger demand in several deals pushed out from Q3. During Q3, we launched a major restructuring of our service enablement business. Major cost and personnel reduction notwithstanding, we are successfully managing a soft landing for this business as we frame it around a smaller, focused profitable and sustainable core business. Moving on to OSP; the anti-counterfeiting business is rebounding stronger than we expected in the second half of 2017. We expect anti-counterfeiting business to continue to follow its historical cyclicality as our customers rebalance their inventories to match market demand. OSP operating margins were better than expected due to higher revenue levels from a year ago. Regarding 3D sensing, we continue to work with our customers to meet their demand requirements and timelines. As we stated in prior earnings calls, we will provide an update on 3D sensing in our fiscal Q4 earning call in mid-August. In conclusion, I would like to express my thanks to our customers and employees for their continued support of Viavi. I'll now turn over to Bill.

Thank you, Oleg. This quarter we’ll be participating at Stifel Technology Investor Conference in San Francisco on June 5th and William Blair's Growth Investor Conference in Chicago on June 14. Kelly, let’s begin the question-and-answer session.

[Operator Instructions] Your first question comes from the line of Rod Hall from JPMorgan. Your line is open.

Oleg, I wanted to come back to you in a few a little bit and just see if you could get any further color on your visibility there. Obviously that whole carrier spending environment has been pretty volatile. And just help us understand how much confidence you got that these deals do you come back in, in Q4. And also may be talk just a little bit about the trajectory of the OpEx there in NSE. Do you expect that trajectory to continue to come down or what should we be modeling there from an OpEx point of view? Then I have one follow up.

Sure thank you Rod. Well I mean as you can imagine -- well, there is really two stories in NSE right. There is North America and then the rest of the world, right? So our primarily downwards push has really been down in the last, I'd say three quarter by fundamentally pull back of spending by North American operators, and significant M&A activity in both cable and telecom space. So as such, we've seen a lot less willingness to spend money, and clearly that impacted our instrumentation sales. Now in terms of the rest of the world, we've had a very nice growth year to date, year-over-year across all our other geographies in both SE as well as NE. So when I look at it, I say okay well, is it market share loss, is just a systemic lower spend? There is clearly different spending pattern emerging between North American operators and the rest of the world. I guess some of it is in part because there has been significant spending in North America in 2015, 2016 fiscal years though some of them are now working to digest it, but also because of the significant M&A there is kind of hold on discussions to what to spend, how to spend until the companies figure out what they need. Now that said, the biggest impact was spending on instrumentation at the edge, which is accessing cable, and I would say it was really the story -- I will say behind the June, September and December quarters will be finally now seeing [ph] although its been delayed, we expected it to be sooner -- finally we're seeing the upgrade to DOCSIS 3.1 and G.Fast, and that’s starting to pick up the spend among the NSE customers. On the enterprise side, we are…

And just really quick follow up. Can you just say whether -- give a yes or no answer. Should we expect revenue in fiscal Q1? Is that when we expect revenue to start and then I know you want to give more detail in the next earnings report.

You are talking about 3D sensing unit?

Yes.

Okay yes, so you are trying to steal my fourth quarter thunder, but yes we are expected to start shipping production in Q1. So we will see some initial revenue, but the way it generally works is we produce the product, we ship them into the hub. Only as the product gets pulled from the hub and passes incoming inspection, the revenue gets recognized. So there is some lag between the shipment of the product and the time you are going to recognize revenue. So we do expect to start shipping production in Q1. How much of the revenue gets recognized, we are not certain at the time, but the ramp will happen -- I'll say between Q1, Q2, and Q3 of next fiscal year.

Your next question comes from Dmitry Netis of William Blair. Your line is open.

Thank you very much guys, nice results and I would say pretty decent guidance given the environment we're in. I have a couple of questions. One I just want to kind get a little clarification on the instrumentation side of the business. Oleg can you, if I were to sort of ask for you to kind of give me a product mix there, if I combine cable and access in one category and then fiber and maybe everything else in another, is that a roughly 50-50 split? Anything you can tell us just to guide -- see the magnitude of the cable access business starting to reaccelerate here for you and how impactful it may be going forward?

All right. We don’t give the mix but as you can imagine, if you combine cable and access, you could actually say its all access right, the edge -- there is the single biggest bucket because of the volume at the edge. So I don’t want to go and start providing the mix but cable and access is a significant chunk of revenue right? Fiber is somewhat smaller than combination of the cable and access, and the rest would be metal. So the biggest, if I would look at the cable and access to say 2 years ago, that was easily over 50% of the revenue right? So there is been significant pull back as customers say hey, why am I going to buy equipment if I'm going to be transitioning to 3.1 DOCSIS and G.Fast while throwing to the mix significant amount of M&A, some slippage on schedules, and that revenue dropped significantly in the past three quarters or so. And just now finally in this fiscal third quarter, we are starting to see a pullback in both of these product lines and volumes starting to increase the DOCSIS 3.1 and G.Fast are trying to ramp.

Okay great and my follow up is one for Oleg, one for Amar. I guess on the -- I just want to get some clarity on the data center business. I suppose that's the network instruments business. Continue to kind dive in, can you explain what exactly is happening? I thought that business was starting to pick up for you because of the changes you had made recently, has something else happened there affected it? Number one. Number two is how is the channel doing? If you could comment quickly on the channel program you put in place? Are you still happy with the sales leads that you generate from there. And then lastly to Amar. I just want to pick your brain on a convertible note and see when you think you will be back on the market, maybe buying the old convert out and how you feel about keeping the two converts on the books at the moment for whatever reason? I don’t know if it’s the M&A thoughts you have or is something else. But you'd need to maintain that level of cash on the balance sheet but just give us some plug there.

You squeezed in about four questions in one. We will go ahead and do that. On enterprise, actually we still feel very good about that business. We just introduced to you a revamped product platform. Our new organization, our sales force, I think three quarters of it is less than couple of quarters on board. And we are seeing very good traction. So as ugly as the March quarter came in, I actually feel pretty good about this business for several reasons. First, March is usually the weakest quarter because their busiest and biggest quarter is typically in December. But even in this March quarter we saw some -- a lot of I would call first. We actually were getting deals in the seven-digit range that we never were getting in the past. And we won them. So we are now winning some serious type of business. But also with that kind of serious business, if one of those deals slips from quarter-to-quarter, it hurts meaningfully. So I think I would say -- I don’t want to make excuses for that business, but clearly as I look at the trajectory and I look at the bookings pipeline that they are building, its all in the right direction. I am not going to hold it against them if they got some bookings relatively late and we just couldn’t get it to customer in time. But I think the organization is performing well, the product line doing well and I'm optimistic on that business unit going forward. And this quarter is obviously going to be a good quarter for them. They have some of these yields that slipped coming this quarter plus they have quite a few nice design wins. So they are going to drive -- we expect a nice revenue from them. So I think it’s a business that's still transition. It's still in turnaround mode, but qualitatively I like all the indicators that I am seeing. And we will give them time to accelerate.

On the convert and what we are doing about it, as you know, we issued a new convert firstly refinance the existing converts, and secondly to give us some flexibility from a capital allocation perspective. So we saw the opportunity, took advantage of very favorable market conditions to lock in a local pond rate at a higher conversion price. Now we do have internal plans here, Dmitry and I won't talk specifically on the timing et cetera, but our internal plans have various options. One is, we want to opportunistically go and buyback the old converts on the conditions that appropriate. We do have certain criteria that we have set upside. Number two, we can call it on the first good it date of August 20, 2018, and when we call it, we have the flexibility to either settle in cash or stock any amount of the stock above the conversion price. And number three is as you can see, we are opportunistically also buying back our shares through existing share buyback program so that if there is a double dilution, we could try and offset the dilution proactively. So you can be assured as we have done in the past with our capital allocation, we have stated capital allocation goals and priorities and we have executed against it. And we will do so even in this case. But it was -- our new converts was essentially to refinance our existing converts and we will do that opportunistically since we still have about 14, 15 months to go.

And my first question was in consolidation and M&A? Any comment there real quick?

We don’t comment on these things.

Your next question comes from Patrick Newton of Stifel. Your line is open.

Just wanted to focus on the cyclicality of the OSP business, which you brought up in your prepared remarks. Is a $60 million run rate in the FY'18 for the full year I guess there a realistic quarterly level? And I guess the reason I'm asking, I'm trying to understand if the results and guidance represent kind of a high-water mark for the OSP business from a cyclical perspective or could you still grow from here?

I think I don’t want to guide fiscal year '18, but just building on my comment, when we said it will revert back to the cyclical demand, we believe mid-50 to high-50s is the core business. That’s quarterly revenue range that you should be thinking about. Now 3D would be on top of that, but the core business should be mid-50s to high-50s.

Great, that’s helpful. And then I guess just looking at the NSE business, I wanted to kind of pick apart the sequential guide. Given the commentary that you had around the NE business benefiting from enterprise push outs and then you also spoke to momentum building for cable and G.Fast. Should we expect that the SE business will decline sequentially in the June quarter, or could be see both sub segments grow?

Well I think that’s a very good question. When you look at our guidance for NSE, the NSE revenue guidance calls for a 3.7% sequential growth, so roughly about 4% sequential growth at the midpoint. Now within that, as Oleg mentioned we are seeing some momentum. As you see our book to bill was greater than one. So what we have done is the NE business its projected to actually go up mid-single digit sequentially. On the flip side, the SE restructuring to scale down some of our unprofitable product lines impacts the SE revenues. So SE revenue is declining sequentially, sort of double digits, whereas the NE business is projected to be up mid-single digit.

And then any color you can give around SE as we look into 2018 given the restructuring?

Clearly when you take out the amount of cost we're taking out, our whole thing about SE is first really about quality of revenue rather than quantity. So by taking out the significant cost and shutting down the product lines where don’t feel there is a positive upside, we do expect some pull back. Its not a very big pull back from a current run rate and we would prefer to give guidance more when we give 2018 guidance in fourth quarter. But the way I look at it, its actually overall a net major positive. Yes, we're going to lose some low-quality revenue but we're going to have a significant increase in the operating through fall for that business unit, and get it at the very minimum to the break even or profitable.

It's all about profitable revenue, and if you recall Patrick what we mentioned, maybe last call as well as during the Analyst Day, SE as a percentage of the total mix of NSE is around low-20s to high 20% of the total mix of NSE. As we go restructure and make it more profitable, we expect it to be between 15% and 20% by fiscal year '19 and fiscal year '18 should be more towards the 20% as a percentage of the total mix.

Your next question comes from Alex Henderson from Needham. Your line is open.

I just wanted to go back to the breakout NE and SE for a second. So if I take the numbers you just gave, 5% sequential growth in SE and take the network enablement down by double digits, I'm actually coming out with numbers that are below that low end of your band. I was wondering if you could just make sure that you said that correctly or I heard it correctly.

So sequentially you will see our NE business grow mid-single digits within the guidance and SE business -- so you're right, SE business will be mid to high single digit decline, not double digit decline. So you are absolutely right.

So I thought you said the NE was going to decline, not the other way around sorry.

[Multiple speakers] year-over-year not quarter-on-quarter.

NE is going to grow mid-single digit sequentially. SE is going to decline mid to high single digit sequentially. And the overall revenue growth for SE year-on-year is going to be double digit decline.

Going back to the business in OSP segment for a second. So you obviously had a pretty good spike in margins there or in revenues there, and I assume that translates a little bit more of a spike in margins that the bottom line. As we go back into the $58 million, $59 million a quarter range from the $64 million here in the March quarter, would we then expect some contraction than the operating margins back towards the 40% range?

I think it will be -- so we always guided between 39% and 41% for the OSP business. And what we believe is given all the operating expense reduction as well as the gross margin focus in that business, we should be more towards the high end of the range, of between 39% and 41%.

Probably 40% is the same…

40% is the midpoint, more biased towards the high end.

So I was just really referring to the -- I know you don’t want to give guidance going out, but as you had said mid to upper 50s, and revenues there I assumed that’s associating with the midpoint of that 39% to 41% range.

I would say given all the cost work and efficiency work they are doing, it should be more towards the high end.

Yes, I think traditionally we have always guided high 40s to low 40s. I think given what the team has done and all the improvements they put in place, we comparably to -- when they run at their steady state for them should be at the higher end, which is 40% 41%.

That’s right. And then once we have 3D coming in, I think that should take the margin rate down, and -- below 40%, but it should be operating profit dollar accretive.

So just going back to the cost cutting program. So it sounds like there is pretty good slug that came out in the March quarter. You've also got a pretty good slug coming out in the June quarter. So I should be -- just thinking about OpEx declining sequentially, continuing to decline sequentially into the September quarter, is that the right way to think about it?

Yes, that’s right. So let me just recap. So when we announced the restructuring last quarter, we baselined the $35 million of net OpEx savings to our Q2 NSE OpEx of $95.7 million, which is a December OpEx of $95.7 million. So we've said, that's baseline versus the baseline we will reduce $35 million of annualized OpEx which is 8.75 million per quarter -- that is the quarterly OpEx reductions. Now we have gone from $95.7 million to 89.6 million in Q3 and in Q4 we should be getting almost 90% or more of that savings. You should definitely expect a sequential reduction from Q3 to Q4, and that’s all incorporated in our guidance.

Your next question comes from James Kisner from Jefferies. Your line is open.

Hey guys David [indiscernible] for James. I just want to clarify; did you guys have any impact on the NSE margins during fiscal Q3 from the restructuring or is this really just a fixed cost absorption which resulted in op income margin you are seeing below what you guys have thought?

We did get benefit from the SE restructuring in our margins in fiscal Q3. But also keep in mind we did have a big impact from a steep decline in revenue. So that steep decline in revenue in the NE business offset the margin improvements in fiscal Q3. So when the revenue comes back up, I think that’s going to create a positive operating leverage in the model.

Okay thank you, then just on 3D sensing, without getting in too much detail, it sounds like you guys are very confident that you will start shipping in fiscal 1Q. Is that, I mean if you guys are shipping to the hub, is there a chance at the part, that the filters could then sit in the hub for a potentially another product cycle or how do you guys think about that in terms of when it gets pulled out, and you guys have started recognizing revenue.

So when we had our Analyst Day there was a lot of talk about, everybody talking about 3D and one. We back then said listen, its surely to talk about it. We will talk about it as we get closer to it because all along we knew that we're not going to see hardly any shipments until first quarter of fiscal 2018, right? So we do expect to optionally do start seeing revenue in the Q1, because it’s a -- you don’t ship into a hub unless there is a demand, right? So it's basically the hub is purely there to ensure just in time, make sure that everybody ships the part that they need, and they pull to inspect and they consume. So a lot of the time, and I don’t know this particular supply chain. I will obviously learn a lot more once we start shipping. But typically, with these kinds of deals where I had with my other businesses I ran in the past, products don’t spend more than a week in the hub. It's always continuously churning of the product.

Okay that’s very helpful. So it sounds you guys feel very confident about 3D sensing business moving forward in that timeframe.

Yes, you know the thing is, when you look at it in most of the revenue, for most things, once it leaves the factory, you recognize the revenue. In this particular case it’s a -- you push the revenue recognition line towards incoming inspection acceptance, rather than leaving the back of your factory.

Okay great and just one last quick question for me, did you guys see any increase in the prepayments that you guys first announced, I believe it was three quarters ago now.

Nothing worth commenting.

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

I just wanted to go into a little bit of the visibility on NSE and just a sense of the timeline between when you might know that the carrier is going to deploy G.Fast or DOCSIS 3.1 or fiber into a certain city, and then kind when you would expect to see that equipment around the new, just that tend to be three months, six months, just a little bit about that timeline. And the second question would just being the prepayment you received last year, where there any restrictions as far as other partners that you could work with or is it unrestricted?

So with that, the first question was on NSE.

Timeline of the cabling…..

The way we know all the players both on cable and telecom side, and their conversion to the DOCSIS 3.1 or G.Fast right. So we roughly know who is doing it. How are they doing it is really a quarter-to-quarter decision, how they do it. And mean our visibility on it is probably at most three months. So we know it's going to happen. In which sequence and where it happens is really subject to their capital decision on quarterly basis within our service provider accounts. So for example, G.Fast, I mean we have seen -- G.Fast happening already in some U.S. and European accounts, but its -- they are not really just flipping the switch and exchanging everybody. Its more like gradually, like successive ways spread over multiple quarters. But one of the things if you follow the equipment provider out reporting, you see they usually get a big pop in orders within one to two quarters, because those are the things our customers need to do to upgrade their central offices. But once they are upgraded, they can actually rollout new modems at a leisurely pace because all of them are backwards compatible. So the retrofit takes time over a longer period of time than the second central office. And instrumentation is pulled largely at the pace of the conversion of modems. So in that respect we know that it's going to happen. It's not the question of if. It's really a question of when and that is kind of one of these things every quarter they tell us what they are going to do and there is very little long term visibility. So that hopefully answers your first question. And second one no, any prepayments we take does not limit us from working with anybody else. And from our perspective, prepayment is really function of the level of risk in capital or business risk that we are being asked to take by a customer. Clearly the risk is modest within -- fixed within our internal operational guidelines. We don’t look for prepayments but if it’s a significant step up in the capital or production capacity, then we definitely look for a prepayment.

Your last question comes from [indiscernible] from Craig Hallum Capital. Your line is open. And the caller has removed himself from the queue. So I'll now turn the call back over to the presenters for closing remarks.

Thank you Kelly. This concludes our earnings call for today. And thank you everyone.

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