Good day. Thank you for standing by. And welcome to the Viavi Solutions' Third Quarter Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Bill Ong, Head of Investor Relations. Thank you. Please go ahead.

Thank you, Christina. Welcome to Viavi Solutions' third quarter fiscal year 2021 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 can 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 includes historical financial tables, are available on Viavi's Web site. Finally, we are recording today's call and we'll make the recording available by 4.30 PM Pacific Time this evening on our Web site. I would now like to turn the call over to Henk.

Thank you, Bill, and welcome everyone and thank you for joining today's call. My name is Henk Derksen, and I'm extremely pleased to have joined Viavi. I joined from Belden where I spent more than 20 years in various finance and operating roles and served as the CFO during the last 10 years prior to coming here. I'm very excited to have the opportunity to work with Oleg and the rest of the Viavi team. I look forward to speaking and meeting with many of you in the coming months. Now on to Viavi’s results. Fiscal Q3 2021 reflects a strong quarter with Viavi record revenue and non-GAAP profitability as well as cash flow for a given March quarter, which is typically a seasonally weaker quarter. Third quarter revenue came in at $303.4 million, which exceeded our guidance range of $280 million to $300 million. Revenue grew 18.4% from a year ago level, exceeding pre-pandemic levels and setting an all-time Viavi Q3 record. The year-over-year performance reflects the robust recovery from last year's pandemic impact, continued strength in wireless and fiber, as well as very strong continued anti-counterfeiting demand in OSP. The average operating profit margin at 20.2% expanded 540 basis points year-over-year and exceeded the guidance range of 17.5% to 18.5%. EPS at $0.18 reached the high end of the $0.16 to $0.18 guidance range and increased $0.04 from a year ago. Stronger than expected volume in our Asia Pacific region resulted in a shift in the jurisdictional mix of income contributing to a higher effective tax rate of 26% versus our 18% to 20% guidance. Going forward for the fourth quarter, we expect the tax rate to normalize within the range of 19% to 21% and be approximately 20% for the full year Now moving to our reported…

Thank you, Henk, and welcome to your first official earnings call at Viavi. I'm pleased with the average performance in fiscal Q3 as we have surpassed the pre-COVID levels of business and achieved the new historical highs in revenue and non-GAAP profitability for fiscal Q3, driven by both of our business segments. The NE segment benefited from continued business recovery led by increased demand for fiber and cable field instruments as MSOs and telco service providers resumed their maintenance and network upgrade activities. The recovery was particularly strong in the Americas and Europe. Our lab and production equipment continued to see strong demand driven by 400 gigi [ph] and wireless infrastructure customers. The SE business segment, as expected, came in weaker in Q3 driven by confluence of two trends; the reduced spending by service providers on existing networks as they gear up for 5G and the delays in new project by enterprise customers until more staff is able to return to work. That said, we expect SE revenues and bookings to start rebounding in fiscal Q4. We expect the SE demand to continue to improve throughout the calendar 2021, returning to and exceeding pre-COVID levels. Additionally, we expect 5G field instruments demand to start materializing in the second half of calendar 2021, as 5G service providers start ramping up their network build outs. Longer term, we expect several major industry and political trends to set up NSE for a multiyear super cycle. The carriers recently made sizable investments in spectrum and are now aggressively working on 5G wireless field deployment plans. The 5G market presents Viavi with new wireless and fiber growth opportunities. Our wireless products are already off to a strong start with solid bookings and business visibility. We are also seeing attractive growth opportunities in Europe as governments…

Thank you, Oleg. This quarter, we will be participating at the Needham TMT Investor Conference on May 20, in the Stifel Cross Sector Investor Conference on June 8. Christina, let's begin the question-and-answer session. We ask everyone to limit discussion to one question and one follow up.

[Operator Instructions]. And your first question comes from the line of Samik Chatterjee with JPMorgan.

Hi. This is Joe Cardoso on for Samik Chatterjee. My first question is actually around supply constraints that you mentioned for the 3D sensing business? And actually, I'm kind of surprised to hear just given the commentary that we've heard through earnings season thus far that you're not necessarily feeling any of those implications on the NSE business. I'm just curious, is that correct? And then what are you guys seeing in the NSE business in terms of supply constraints and whether you’re factoring any into your forward guidance? And then I have a follow up. Thank you.

Sure, great question. We don't have an issue with our supply of 3D sensing products. The issue here is more on the customer side. If they cannot get all their chips, so to say, as they necessary, they have to reduce their forecast. So that's really where we've seen some reduction in forecasts, because they just simply cannot meet all the requirements. So that's one thing. Regarding the NSE, sure, there is a -- lead times are getting longer and there are shortages of supply. But fundamentally, we're not a very big player relatively speaking. And we know how to manage our supply chain, frankly speaking. We saw shortages looming on the horizon as far back as October, November and we took some cash and put a lot of products on the shelf in anticipation of these shortages materializing. And while there were shortages of supply and we obviously chased it, and you just basically put more money on the table and you get the necessary products you need, we were able to meet all our customer demands and not miss any of our deliveries. And in fact, we think our ability to really manage supply chain well will present us with opportunities to pick up some share. While many of our competitors who are cash poor and don't have a good visibility or ability to execute on the product requirements, we think we'll have an opportunity to pick up some share and grab market share from many of our competitors.

I appreciate the color. And then my second question is on the 3D sensing business, specifically around the Android opportunities there. I think last quarter, you highlighted incremental excitement around the Android customer base adopting at least world facing 3D sensing applications that was going into the second half of this year or maybe into next year. I guess, has there been any progress there versus 90 days ago? Is there anything there to be incrementally more excited about? And then on the side of that, it seems 3D sensing applications being adopted for automotive seems to be getting a little bit more exciting, at least from news stories that you're hearing in the press. I guess what's the opportunity around there? And what's your expectation around it materializing? Thank you

So I think I would say three months can make a bit [ph] if we got more information. So I would say today, I'm less enthusiastic about Android moving sooner rather than later. I'm not going to go into the details. But needless to say, it's a very complex technology. And people are finding that 3D sensing is not a slam dunk. You cannot just -- it's not easy to be a fast follower. So for various reasons, I think Android may take a bit longer. And it’d probably be into next calendar year before we see Android making any kind of major adoption. So I think for now, it's very much going to be more of our traditional customer base. That said, automotive continues to progress and we are getting very good traction there. But volumetrically speaking, automotive is not a very big market. You're selling today a lot of it in cabin coverage. But even if you win 100% of it, you're talking about millions of units, whereas in mobile phones, you're talking about tens of millions of units on a weekly basis. So, it's a -- automotive is an interesting market, but it's still in very early stages of adoption. It's mainly limited to the high end packages on various cars. And, of course, automotive has their own problem. They are facing also semiconductor shortages. But it's not really an issue for us, because when you have semiconductor parts shortage, generally automotive customers prioritize their high end models with all the bells and whistles, like 3D sensing. And so in that respect, we're not seeing any degradation in demand there. But it still remains several orders of magnitude, smaller market in unit basis versus the mobile handsets.

Thank you. I appreciate the color and congrats on the results.

Sure. Thanks.

Thank you.

Your next question comes from the line of Alex Henderson with Needham.

Thanks. And welcome to the Viavi call as the new CFO. Congratulations.

Thank you.

Not that Belden wasn’t a great place to work too. I wanted to ask a question on the 3D sensing commentary, this 16% growth. My math would suggest a pretty significant decline in the June quarter, yet as we listen to the commentary of the prime customer, their results over the March quarter were well ahead of anybody's expectations on phone sales. And I would think that the inventories would be pretty lean as a result of that and hence some building. So are you saying that basically, despite depleted inventories, they're unable to get components and therefore, that's what's creating some softness in the June quarter or am I overestimating the March quarter? Can you give us a little bit of a sense, is the June quarter basically half that of the March quarter?

Well, first of all, I'm not going to comment on or explain the delta between major customers, right. And remember, whatever was sold in the March quarter probably was built in the September quarter or even early December quarter. So there is some timing. And I think maybe the differences here is more explained by what we thought our expectations were, given the traditional seasonality versus the actual forecast. So I think -- I wouldn't say necessarily you should read into it that we had significant declines in orders from our customers. I just think we might have been a bit more optimistic in terms of the forecasts that we were expecting to see in the, I would say even in March quarter. March quarter was a bit weaker than we thought it would be. And, of course, June quarter is weaker as well. So I think we would just -- for once we had higher expectations on the mobile handset industry than the handset industry has actually given us.

So if I were to strip out 3D sensing from the OSP business and just looked at the OSP anti-counterfeiting piece, it looks like that was pretty close to 70 million. Is that kind of the range that we should be anticipating it to stay in that's well above the historical? And I think what you had said in the past was five or six quarters of that sustained higher level, is that the level that we should be thinking, or is that too aggressive and a more normalized number?

Yes. I think 70 is too aggressive, because remember we started sort of thinking of kind of base business around 50. Think of it as the high 50s. I think that's probably still for abundance of caution I would take as a number because [indiscernible] quarter where a customer wants a big shipment early. So you may get north of 60. There may be quarters where they digest, you'll fall below 60. But I'd say on average, over say a fourth quarter run rate, I expect to see about I’d say high 50s average versus the high 40s, low 50 average. So I think I would just leave it at that. But we do expect --

The number is below 70 in the March quarter. Is that correct?

Yes. It’s slightly below 70. It was a very strong quarter and it also led to some atypical cyclical tax rates, because of which jurisdiction you accrue the profit. Generally, we get a lot of these orders in the second half of the year or middle of the year. So as a result, we have shown a higher tax rate in the March quarter because of where the profits accrued. But we do expect to continue to see a significantly stronger anti-counterfeiting demand in the foreseeable future. And remember, there's still many countries where print works are still shut down because of COVID. And there is going to be significant pent-up demand, but those are big cash countries. And then the second element I’d say, remember as everybody's printing more and more cash to stimulate their economies, remember that cash quantity is going to be out there. That means the replacement volume, if you cannot stretch it out a couple years out, is not going to be at a higher level as well. And then that leads to a bigger market for our products even down the road as that initial kind of medium term, higher demand for printing declines.

Okay. I’ll get back in queue. Thanks.

Thanks.

Your next question comes from the line of Mehdi Hosseini with Susquehanna.

Yes. Thanks for taking my question. Perhaps, Oleg, if I were to rephrase the prior question, to what extent your success in 3D sensing is from share gain?

Well, we pretty much have majority share of it, so most of the growth there has to come from market growth, right, the greater adoption. So I think we were expecting Android to be kind of the next adopter of the technology starting at the end of this year into next year. And it looks like these plans are going to be pushed out of it. And there's been a lot of -- I'm not going to go into it, but there's been plenty write outs about world facing 3D sensing for Android phones in the press, which all those rumors are true.

Sure. So the content increase in a given high end smartphone made by North America based OEM, is that behind us or are you going to continue to have increased content?

Well, I think the -- as you get more -- most of the near-term content increase will have to come from more world facing cameras penetrating into broader product range. So that's one. But I think also a couple years out as a new generation, we’re also hoping to win some share in the diffuser space as well. So there's still plenty of opportunities to win more content for us.

Sure. Yes. Actually, that's what I was trying to -- but thanks for --

But that’s not a next 12-month horizon. That's more of a further out.

I see. Okay. You made an interesting reference to NSE. You characterized it as facing super cycle as we look forward, and this actually makes sense. Over the past two fiscal years, NSE revenues have been kind of flattish. In fiscal year '19, NSE was up 28%. When you say super cycle, does that imply we’re getting into like two consecutive year of double digit growth? Is fiscal year '18 and '19 reflective of a super cycle?

I don't know about that one. Clearly, the revenue this year is an easy compare on the prior. So yes, you can have a double digit. I think I’ll maybe say more of a like a high single digit growth. But the point is [indiscernible] dips and cyclicality. I think we're going to see more even sustainable strength. And the mere fact -- the reason I'm saying it is the -- only the customers that were really poor spenders or like really been neglecting are now coming back and looking at significant multiyear spend profiles to upgrade the performance of their network and expand their networks. And also if you remember, I mean to really 5G by itself cannot happen without significant upgrade to the fiber. So in a way we are seeing more and more, almost a synergistic pull through on a lot of fiber opportunities as customers gearing up to 5G and it's much stronger than we were even estimating as far back as two quarters ago. And so as a result, we see -- in Europe, it's very big because they have predominantly twisted pair DSL. And as you can imagine, DSL is really, really incapable now to deliver the type of content and bandwidth that even cable can deliver. So in that respect to get consumer broadband, you really need fiber. But also fiber is the essential element prerequisite for you to deploy 5G down the road. So we've seen that strong over there. And in the U.S., we do expect that rural broadband to result in significant investment in fiber and cable and wireless in a lot of these Tier 2 and Tier 3 cities and the broader community. So remember there, it's the mileage that drives the purchases rather than the density.

Great. Thanks for all the detail. Thank you.

Sure.

[Operator Instructions]. And your next question comes from the line of Tim Savageaux with Northland Capital Markets.

Hi. Good afternoon. I wanted to follow up on the super cycle myself. And first clarification of what you just said, Oleg, with regard to things looking much stronger than even two quarters ago. Was that a reference to fiber, 5G or both?

That was really at this point in time predominately fiber and cable actually.

Fiber and cable. And you mentioned you do have some easy compares. So it looks like very strong double digit growth is achievable --

March quarter, yes. So in near term, it’s double digit, single digit down the road. And when I say super cycle, let's put it this way. Whenever you have a technology in transition, it usually has a two to three quarter bump. When we talk about super cycle, you're looking really more like four to six to eight quarters higher level of demand, more evenly spaced, maybe lumpy here and there but it's fundamentally higher level of spend than you've seen before.

Understood. And would you sort of characterize that as a market growth rate? And I ask because you're obviously layering in your kind of new entry into the wireless field test arena. Theoretically, that might enable Viavi to deliver above market growth.

So wireless to me would be an icing on the cake. I'm talking about the mainstream NSE business. It's like fiber or cable, things like that. And that's the kind of base driver. The wireless to us is a higher beta business, because we're a newcomer in the market. So if we succeed, it will be a much -- kind of be an incremental growth on top of it.

Got it. And last question for me if you could comment on kind of what you saw out of the carriers in the March quarter. It looks like not only these budgets increasing, but they may have gotten an earlier start in terms of order activity than the normal. Have you seen that and have you seen that kind of continue here through the calendar second quarter?

Well, I don't know if it's normal. Let’s put it this way. Throughout the shutdown -- remember when they did a hard shutdown in March last year and everybody kind of sat really staring at their navel [ph] in the June quarter. Then in the September quarter, they started looking maybe we should be doing something. Let's start planning. The more of it was taking place in December quarter. And now this year, I think a lot of them have fully baked well founded plans for clearly understanding of what needs to be done to the network. One thing this work from home and shutdowns have demonstrated is the really poor quality of the consumer broadband, right. And I think we're going to continue to see quite a different mix of traffic going forward. There's going to be more working from home. I do believe people will come back to work. But the mix will not be the same as prioritized. So I think there is a lot of good understanding of the network upgrades and rebalancing that needs to take place. And if you overlay on top of it the 5G, it all goes hand in hand because you cannot have 5G without a robust broadband fiber network and you cannot really keep your customers satisfied and try to up-sell them new services if you don't have a very strong broadband offering. And with the convergence of 5G with things like cable and other and consumer broadband, you now have potential new entries and competitors coming into the wireless space, namely cable companies and others. So the increased competition is driving some of the more conservative traditional service providers to really take a deeper look at their networks and spend some real money, and maybe get out of some of those media acquisitions that we've heard about in many years.

Thanks very much.

And your last question comes from the line of Meta Marshall with Morgan Stanley.

Hi. This is Erik on for Meta. Thanks for taking our question. Maybe just a quick one on regional developments. Are you expecting any impact from potentially a weaker India on kind of the OSP or NSE side?

Well, it's probably too early to tell. India is not a very big market for us, but it is a growing market for us. And I think there may be some delays. But if anything, I think India will continue to -- the problems that we are doing India over longer term in fiber and some of the other applications are at this point still looking pretty good. Obviously, it can change in the next month or so. But at this point in time, India, it's more strategic in nature for them to implement these infrastructure upgrades. And so far we see things proceeding as planned.

Got it, that's helpful. And then maybe if we could just double click on some of the comments you made around the world broadband opportunities, trying to understand does that -- do those opportunities for you differ based on potentially those funds being allocated to newer alternative providers? Do you kind of view it as neutral regardless of where funds go, or do you have better positioning in maybe some of the more traditional providers?

Sorry. You’re talking about China or --

Within the U.S.

Within the U.S. Well, clearly the traditional, the big ones are very much into it. But also I'd say Tier 2, Tier 3 are getting -- people with whom we've done the relatively limited business with this whole rural broadband, they're now looking at significantly upgrading their offering. And in many cases, many of them are looking to upgrade their fiber networks in hope of leasing their lines to various wireless service providers. So we are seeing a renewed level of investment and demand from what I would call Tier 2 and Tier 3 service providers.

Got it, that’s helpful. Thank you.

And there are no further questions at this time. Now, I’ll turn it back over to Bill Ong.

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

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. And you may now disconnect.