Ladies and gentlemen, thank you for standing by, and welcome to the Viavi Solutions' Second Quarter Fiscal 2022 Earnings 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. [Operator Instructions] Thank you. Bill Ong, Head of Investor Relations, you may begin your conference.

Thank you, Josh. Welcome to Viavi Solutions' second quarter fiscal year 2022 earnings call. My name is Bill Ong, Head of Investor Relations. Joining me on today's call are Oleg Khaykin, President and CEO; and Henk Derksen, CFO. Please note, this call will include forward-looking statements about the company's financial performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from current expectations and estimations. We encourage you to review our most recent annual report and SEC filings, particularly the risk factors described in those filings. The forward-looking statements, including guidance we provide during this call are valid only as of today. Viavi undertakes no obligation to update these statements. Please also note that unless we state otherwise, all results except revenue are non-GAAP. We reconcile these non-GAAP results to our preliminary GAAP financials and discuss the usefulness and limitation in today's earnings release. The release, plus our supplemental earnings slides, which include historical financial tables, are available on Viavi's website. Finally, we are recording today's call, and we'll make the recording available by 4:30 P.M. Pacific Time this evening on our website. I would now like to turn the call over to Henk.

Thank you, Bill. Fiscal Q2 was Viavi's second highest quarter for revenue and a quarterly record for non-GAAP profitability. Second quarter revenue came in at $314.8 million, up 5% year-over-year, exceeding a guidance range of $296 million to $310 million. The strength was driven by record revenue in our NSE business segment, offsetting anticipated temporary weakness in our OSP segment. Viavi's record operating profit margin at 23.3% expanded 100 basis points year-over-year and 60 basis points sequentially and exceeded the guidance range of 20% to 21%, a function of operating leverage on higher revenue volume, favorable product mix, and discipline OpEx control. EPS at $0.24 tied a quarterly record high and increased $0.01 or up 4.3% year-over-year and exceeded the $0.18 to $0.20 guidance range. The share count of 242.3 million shares is consistent with our expectations and includes the dilutive impact of the remaining convertible notes of approximately 4 million shares. Now, moving to our reported Q2 results by business segments, starting with NSE. NSE achieved a new quarterly revenue records at $244.2 million, up 18.1% year-over-year and exceeded a guidance range of $230 million to $240 million. Within NSE, NE revenue increased 18.5% from a year ago to $214.4 million, reflecting strength in fiber and wireless products. SE revenue came in at $29.8 million, increased 15.5% year-over-year, driven by strength in our assurance and data center products. NSE gross profit margin at 65.3% increased 200 basis points year-over-year. Within NSE, NE gross profit margin at 64.4%, increased 180 basis points from last year, primarily a result of leverage on higher revenue volume. SE gross profit margin at 71.8%, increased 360 basis points year-over-year, reflecting both higher revenue and favorable product mix. NSE's record operating profit margin at 18.7% exceeded a guide range of 15.7% to 16.7%, primarily result…

Thank you, Henk. I'm pleased with Viavi's performance in the fiscal first half of 2022, during which we achieved record revenue and non-GAAP profitability. Our fiscal first half revenue came in at $641.6 million and non-GAAP EPS was $0.48, which is a new Viavi record. The NE segment demand strength was driven by fiber and wireless, a double-digit percentage growth from the same period last year. Our fiber field products achieved a new revenue record as service providers both in Americas and Europe continue to upgrade and expand their networks with fiber. Customers started to adopt our 5G field instruments in late calendar 2021 and we expect this deployment momentum to continue throughout 2022. Our 5G lab equipment demand continues to be robust with initial field deployment of ORAN technology expected this calendar year. The cable product demand moderated as our cable customers prioritized fiber deployment over the traditional coax upgrades. That said, we expect the industry to launch a new coax upgrade cycle with DOCSIS 4.0 sometime in 2023. Longer term, we expect most cable networks to move to fiber and wireless technology. The 400-gig optical transport demand continues to be strong with many leading customers starting to make initial investments in the next generation 800-gigi technology. As many of you are aware, our industry has been experiencing component shortages of advanced semiconductor devices. That said, we have been successful in securing critical components in meeting our customers' demand. Our ability to execute has resulted in market share gains and enabled us to drive upsides to our revenue guidance. At this time, we are starting to see the supply starting to catch up and we expect to see a much more favorable supply chain situation by mid-calendar 2022. The SE business segments came in just under $30 million in…

Thank you Oleg. We will be participating at the Susquehanna Technology Investor Conference virtually on March 4th, and the Morgan Stanley TMT Investor Conference in San Francisco on March 10th 2022. Josh, let's begin the question-and-answer session. We ask everyone to limit discussion to one question and one follow-up.

[Operator Instructions] Your first question comes from Alex Henderson with Needham. Your line is open.

Thank you very much. First off, congratulations on a good quarter in a tough environment. I was hoping you could talk a little bit about the OSP business, what you're thinking in terms of the degree to which the [indiscernible] security products stay at this lower run rate that you're talking about, or whether there's some indications of any change in the demand structure there? And then the second piece, if you could talk a little bit about where we are in terms of 5G adoption of 5G cores versus 4G cores? Thanks.

Sure. Thank you, Alex. So, the -- firstly, anti-counterfeiting -- well, I think the -- as I've mentioned for about five quarters, we're in significantly higher volumes. And then I'd say late last year, we've seen decrease in demand as everybody continues to digest what they bought. We expect most of that digestion have taken place last quarter and maybe this quarter, and this business gradually start creeping up to a little bit better volumes, but we don't think it's going to get to the kind of level that we saw during the pandemic. We think high 50s run rate is kind of good for core business, going to be kind of the new normal. If you remember, a few years back, it was low 50s, then we kind of got to mid-50s, then it got to the low-60s. And we think kind of higher 50 range is the good assumption for the foreseeable future. Now, it doesn't mean that there won't be any quarters where we'll pop over 60 maybe for a quarter, but I don't think it's going to last as long as a year. And that usually would happen when a major economy starts redesign -- launches a new redesign currency. So, I'll say as a good way to think long-term, I think it's an intermediate term, assume like high 50 run rate as the norm for core business. In terms of the -- you did ask about 3D sensing. 3D sensing is going to moderate. As I said, our elite customer had challenge getting supplies. So, they really took a hard step two rebounds. And it just confluence of events, we saw both anti-counterfeiting and 3D sensing drop. Last quarter, we expected to meaningfully kind of start bouncing back this quarter and continuing to the fourth…

Great. Thank you very much.

Thank you.

Your next question comes from Mehdi Hosseini with Susquehanna International. Your line is open.

Yes. Just wanted go back to impact the supply chain disruption. Oleg, can you just help us understand what your December and March quarter upside would be if you didn't have any challenges with procuring components?

Well, I mean, let's just say there's two upside. The first one is we will have significantly lower COGS. So, we'd probably pick up one to two percentage points in that gross margin if we did not have to pay through the nodes surcharges and expedite fees and things like that to make sure we get the components. And the second one, I'd say on the topline revenue, we probably would be able to ship $5 million to $10 million. And the reason for that is if you get components in the quarter, but you get it, let's say after the chance of the third month, it's very difficult to build and ship the product. So, that's generally where we see the challenge getting all the components by the end of the second month, so we can finalize and ship the product into third month. So, that's generally how we see. And then it just kind of just keeps rolling over into the next quarter.

Okay, great. And just looking beyond the March quarter, it has been a while since you last updated on your target, especially for topline and operating begin margin. Is this the occasion where you can give us an insight how we should think about the second half, especially as some of the revenue are pushed into the second half of calendar year? And how we should be thinking about opportunities looking into that next fiscal year?

Sure, so I will start and I'll turn it over to Henk. So, remember, we are going to have our Analyst Day in September, and that’s where we will provide a longer term model. But clearly, our current model is already running ahead of what our three-year projection was. We expect -- so first calendar quarter generally has a lot of statutory costs that we accrue for the year. So, generally, there's some headwinds on our OpEx and gross margins. But even with that, we are looking to be in $0.20 plus EPS. In terms of the operating margin, I'd say probably looking at about low 20 already, even with -- we could normally consider March quarter to be one of our weaker quarters. So, in that respect, we're already there. And I do think as NSE continues to gain momentum and if we had mentioned sustains, we could see our gross margin start moving up to -- maybe towards closer to mid-60. And obviously, as the OSP business recovers, it will make it that much easier. Henk anything?

So, yes, we'll be presenting to you a very granular plan upcoming September Investor Day, like we did three years ago, we'll give you outlook for revenue growth, margins, on consolidated basis, and by segment. And as Oleg said, very pleased with our performance so far. We're ahead of our plan. We averaged 23% in the first half and there's a little bit of statutory cost. We think we will post solid performance for the back half.

Your next question comes from the line of Samik Chatterjee with JPMorgan. Your line is open.

Great. Thanks for taking my question. I guess, if I can just start with one for Henk first. Henk just a bit surprised after the record margin or operating margin that you had this quarter, I'm a bit surprised with the guidance for the March quarter, does look like you're expecting sequential moderation and a material sequential moderation in March, despite almost like similar or maybe a slight moderation in the revenue, but OSP is going up in terms of mix as well. So, I'm just -- if you can unpack that a bit, because I'm surprised with the magnitude of the moderation sequential in terms of operating margins?

Yes, so our margin outlook, as you said, on the high end, the revenues are consistent with what we just posted. But we do have to factor in as a typical increase in statutory costs, which is about $4 million to $5 million. So, that's about 1$ or a 0.5%. And then we anticipated maybe a little bit normalized mix. Our guidance is typically prudent. So, that's the rationale here. On the tech side, we posted a 12.5% tax rate for the second quarter and our guidance --- and that's 16% tax rate for the March quarter.

Okay. And just for my follow-up, then, Oleg you've been more recently focused on investing and growing the SE business. This is obviously higher on rate in terms of quarterly revenue for SE. But based on how the portfolio looks today, what the capabilities are, what's the sort of opportunity set for SE, what can be the ceiling in terms of quarterly revenue? What does that portfolio allow you to do before you have to sort of acquire to add more capabilities?

Well, I think -- listen, we think organically, we could probably -- well, I probably shouldn't get out ahead of myself, we think we can grow that business at a much higher rate than overall Viavi if everything goes as planned, and at least double the rate as we want to target. And obviously, with the new platform, a new product it's coming in at meaningfully, higher gross margin than the rest of the other. But it's really a function of scale, obviously, for it to make meaningful impact. But we think at the very least, we should grow at double the rate of NSE business overall.

Thank you. Thanks for taking my questions.

You're welcome.

Your next question comes from the line of Tim Savageaux with Northland Capital. Your line is open.

Well, good afternoon. Congrats on the quarter. And that's good timing because that sort of begs the question, what is the overall NSE growth rate, if SE is going to grow double that? And that's really going to focus on my question. And, Oleg, you talked about double-digit growth in fiber and wireless in the quarter, you've got some easy comps here, but you appear to be guiding to something around a 10% growth in any year, going forward. And so my question is given the trends you see in the market here, which looked pretty positive, is double-digit growth achievable in the network enabled business, more sustainable as we look into next year?

One thing I learned 10% growth year-over-year is -- becomes increasingly more and more difficult. So, the comparables -- easy comparables don't last that long. And that 10% on $100 million is one thing, 10% on $800 million is a different number, right? And so I think, listen, I mean, when we talked originally, we were talking more or like, 5% type growth. We think for the overall NSE business maybe moving into the higher single-digits is a reasonable number. I remember we do have some -- I expect some of the segments like DSL and cable decline over time, things like fiber and wireless increased over time. So, overall, clearly the growth segments will grow meaningfully in double-digits. But you also got to assume some of the legacy segments will decline. So, net-net, we're kind of thinking our goal is to get from mid-single-digits to maybe higher single-digits for that segment.

Great. Thanks very much.

Sure. Thanks.

Your next question comes from the line of Richard Shannon with Craig-Hallum. Your line is open.

First one is on 5G in the field instruments, sounds like you're getting -- showing some signs of early progress there. We'd love to get a sense of how far out you see -- you could see kind of these share gains started to manifest themselves? And any way that you can characterize the kind of the dollar opportunity or relative to the base that you have in 5G today. If any way you can help us think of that. That'd be great please.

Sure. I mean, what 5G is a little tricky, right. So it's a we have a 5G system cast, which is a significant business for us today already for infrastructure that primarily targeting network equipment manufacturers, but also the service provider labs, and some of these new players like Rakuten, and others who are coming in the ORAN, right. So, that's when they more infrastructure, kind of big iron, big software type products. And then there is a field instrumentation business where we're a new comer and there we are viewing the market may be about $300 million run rate per year when it's fully converted to 5G. And we're targeting 25% to 33%. market share. So, we think this year, we probably should be -- when all said and done, things start renting out, we should be comparably, maybe in the 20s maybe hit 30 and then continue growing into next year, as Europe and other regions start adopting 5G And as the 5G starts rolling out into private networks.

Okay, great. That's a great perspective. My follow-on question is on gross margins. I may have misheard you into prepared remarks Oleg, but I thought I heard you say gross margins go higher as you grow here. And I guess with 5G field instruments, I guess my understanding was there was going to be slightly lower gross margins that are generally higher balling and kind of a product. So, just want to make sure that level sets together?

Well, so let me give you a little perspective. If you take, like fiber cable, DSL, what kind of wireline instrumentation and you will take wireless instrumentation. The wireless market generally carries higher margins. So, even -- let's say the same thing, you have a handheld for cable, you have a handheld for wireless, there is a significantly higher gross margin on the wireless instruments than the reason the cable. And part of it is you don't need as many -- you just don't sell as many wireless instruments, but they generally come at a higher margin. So, I guess you need to have that in order to recoup your investment, right. So, for example, you'd be selling tens of thousands of units in cable space, and you may be selling 10,000 to 20,000 in the wireless space. Also now, as we get more wireless content in our instrumentation, we expect the average ASP to go up and the average margins to go up actually as well.

Okay, that's very helpful. Thanks for all that.

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

Great. Thanks. Maybe first question for me. Oleg you mentioned that you were seeing some share gains right now on any business just from ability to, you know, not having not having as many supply chain issues, just wondering as supply chain reverts, or loosens, how do you hold on to the -- some of those share gains that you've seen? And then second, maybe kind of building upon Tim's question of just, you know, clearly fiber is going to be a growth market for years. But just do you see digestion periods over time? Do you see labor or supply chain kind of being a gating item to how fast that business could grow in the near-term? Thanks.

Sure. So, I think the first question was well, much on the mundane share. So, in many deployments, generally, when they do it, they kind of tried to do 80/20. Ideally, they want to have 100%, but they want to keep everybody honest, to squeeze your own price, they bring a second that called price rabbit for 20%. Well, a lot of these price rabbits often cannot execute, right, and as is the case right now. And what we're doing is we're taking 100% share. And as you're doing all these deployments, it's kind of like possession is 80% of the law, once your -- the equipment is in and everybody's practiced. At certain point, when things do get back to normal, you continue to have that natural momentum, because people are used to using a certain type of equipment, they're trained, you create a whole new barrier for switching costs, and things like that. Also, at the same time, when we doing that, we are introducing a lot more software content, and the -- kind of the software, like a cloud applications, where all these instruments upload data into the cloud and they generates reporting and visibility. Well, as you get more and more Viavi instruments, and you use Viavi software to optimize your network operations, and monitor your network, it just becomes really -- yes, somebody can offer you much lower price, but it's going to be pennywise and pound foolish, and she cannot use that instrument for a lot of other things. So, we obviously do our best to make these barriers permanent, obviously, there's going to be some of the share may go back, just for them to keep us honest, I guess. But generally, once you gain share, it becomes like a new normal, okay. Now, regarding the constraints. Listen, labor is a big constraint and in North America, they are rolling out fiber and it is a huge challenge. You've got the same people who are building your fiber, they need those people to build your wireless network, right. So, to the extent, we fuse the two together and we introduced a lot of automation and a lot of the solutions that can run in the background and your network and reduce the truck rolls and reduce, you know, improve the productivity of your, you know, constrained assets that gives us tremendous opportunities. And we're actually seeing that a lot in fiber. I mean we view the whole build out of wireless and 5G networks and fiber networks will present us with significant opportunities for this whole field of fiber monitoring where it's not just instruments, you actually sell a lot of big products and a lot of software that resides in the network, and actively and passively monitoring your network operations and triggers alarms when there's a problem. So, we actually like -- the more constrained you are on resources, the more our value proposition resonates with you.

Perfect. Thanks so much Oleg.

Sure.

There are no further questions at this time. I'll turn the call back to Bill Ong for closing remarks.

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

This concludes the call. You may now disconnect.