Hello, everyone. My name is David. Welcome to the Viavi Solutions Fourth Quarter and Full Fiscal Year 2023 Earnings Call. [Operator Instructions]. I'll now turn the conference over to Henk Derksen, Viavi Solutions CFO. Please begin.

Thank you, David, and welcome to Viavi Solutions Fourth Quarter Fiscal Year 2023 Earnings Call. My name is Henk Derksen, Viavi Solutions CFO. Also joining me on today's call is Oleg Khaykin, our President and CEO. Please note that this call will include forward-looking statements about the company's financial performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations and estimations. We encourage you to review our most recent annual report and SEC filings, particularly the risk factors described in those filings. The forward-looking statements, including guidance we provide during this call, are valid only as of today. Viavi undertakes no obligation to update these statements. Please also note that unless we state otherwise, all results except revenue are non-GAAP. We reconcile these non-GAAP results to our preliminary GAAP financials and discuss their usefulness and limitations in today's earnings release. The release plus our supplemental earnings slides, which include historical financial tables, are available on Viavi's website at www.investor.viavisolutions.com. Finally, we are recording today's call and will make the recording available by 4:30 p.m. Pacific Time this evening on our website. Let's start with our quarterly financial results. Fiscal Q4 revenue came in at $263.6 million, slightly ahead of the high end of our guidance range of $242 million to $262 million, up sequentially by 6.4% and down 21.4% on a year-over-year basis. Operating profit margin of 11.7%, near the high end of our guidance range of 10% to 12.4%, increased by 30 basis points from the prior quarter and decreased 9.6% from the prior year result of leverage on lower revenues. EPS at $0.10 ended above the high end of the guidance range of $0.07 to $0.09, up $0.02 sequentially and down $0.14 year-over-year. The current share count…

Thank you, Henk. During 2023 fiscal fourth quarter, we saw initial signs of stabilization and gradual recovery. Despite the slowdown in overall service provider spend, some service providers have begun to free up funds for network maintenance and optimization, which benefits Viavi's NSE business segment. As a result, our fiscal fourth quarter revenue came in slightly above the higher end of our guidance, and we expect the stabilization and recovery momentum to continue throughout the fiscal year. NSE revenue declined year-on-year but grew sequentially, driven primarily by our NE business segment. NE was up double-digit percentage sequentially, reflecting a rebound in demand from cable service providers upgrading their networks. Demand for lab and production test equipment from wireless and fiber NEMs and semiconductor companies saw gradual recovery from the lows in the March quarter. Op com business continued to perform well, driven by robust demand from the avionics and Mil/Aero customers. Our SE business segment grew 2.5% year-on-year, in line with our expectations. Now turning to OSP. The OSP demand environment continues to be challenging. That said, the fourth quarter revenue came in slightly better than expected, helped by stronger demand for anti-counterfeiting products. 3D sensing revenue was impacted by seasonally lower demand for smartphones and the supply chain transition to new phone models. Fiscal 2023 was a very challenging year for Viavi. Early in the fiscal year, NSE demand experienced a rapid slowdown in orders from service providers. The slowdown pattern was broad-based across all customers and geographies. The slowdown in spend by service providers then spread to the network equipment manufacturers and semiconductor companies, further impacting demand for our NSE products. The OSP business unit started the fiscal year strong, but saw demand for its 2 major products impacted by macroeconomic headwinds. The demand for anti-counterfeiting products was impacted by the inventory corrections as governments dialed back fiscal stimulus, and 3D sensing was impacted by weaker demand for smartphones. Despite the disappointing year, Viavi continued to invest in new technologies and applications, expanding into higher growth markets such as resilient PAT, and initiated and completed the restructuring program to reduce expenses. These initiatives, combined with our strong position in our traditional markets, are expected to result in strong operating and financial leverage as our revenue rebounds. In conclusion, I'd like to thank my Viavi team for managing in this challenging environment and express my appreciation to our customers and shareholders for their support. With that, I will now turn it back to operator for Q&A.

[Operator Instructions]. We'll take our first question from Mehdi Hosseini with Susquehanna.

I just want to go back to your comment regarding service providers. To what extent do you have visibility? Are we reaching a point where your guide reflects a minimum investment? And then on the optical side, just curious to hear what you think with our coming private cycle in the smartphone. How do you see that compared to the prior year upgrades?

So thank you, Mehdi. So the first one, let's put it this way, there are signs of life and multiple discussions with service providers. I mean it took them about 6 months to put a hold, and canceled backlog claimed a lot of CapEx. When we announced in October, remember, they can effectively 0 us out within a month because it's mainly coming out of OpEx. But for a lot of big capital items, they have normally a 6-month lead time that they cannot cancel. So as of March quarter, pretty much all the big spend has been put under control and a lot of the backlog has been -- CapEx has been pushed out. And now as they're stepping back, they're looking, okay, well, I still got to run my network. There's things accumulating and people are screaming for supplies. So we are seeing more and more conversation around upgrading equipment and the -- providing their network maintenance and optimization folks with tools to manage the network. So I think if you ask me that question, let's say, 3, 4 months ago, it was all crickets. There's silence. And right now, there's clearly -- some are more dynamic and aggressive than the others. Like I'd say, cable guys are actually very aggressive in upgrading their networks. But also we are seeing select mobile network and fiber network operators are returning back and doing optimization and upgrades. So I think this momentum will continue to pick up throughout our fiscal year. Now with respect to the 3D sensing, I'd say this coming year -- I mean it's kind of hard to predict the coming year. I mean the market for the -- our prime application is fairly saturated. I mean we are now in both front and rear cameras. So really, the revenue is really driven more by total market demand. And I think what we are seeing is somewhat more sluggish smartphone demand than we saw, let's say, a year ago. And I think in that respect, we're taking a more cautious outlook on the volumes that are going to be demanded this fiscal year.

Can I ask a follow-up question?

Sure.

Just looking into calendar '24, I want to hear your opinion in terms of the catalysts. I personally don't see an urge to install equipment or upgrade equipment for 5G plus. There is plenty of fiber underground. What else could happen with service provider, with cable operators that could at least entice them for some technology upgrade? And tell me if I'm not thinking about this the right way.

Sure. Well, I think I tend to agree with you. But remember, we don't depend -- actually, our business is driven more by turning on what you already got and starting to putting it into exploitation, right? So in that respect, yes, there's plenty of fiber in the ground. There's plenty of equipment in the warehouse. But every time you turn on a circuit or you put it in production or put the equipment into exploitation, you do need field operations to do the work. And the maintenance of the network and things like that are an ongoing thing. And as you have bad weather or you have wear and tear, you constantly got to be doing something to your network. So in that respect, we are more -- more money gets spent on OpEx to get more of what you got. That's actually very good for us. When somebody is building network, it's very good for us. What's not so good for us is when they are kind of in between. So I think the -- I think service providers had to take the equipment deliveries they took. They probably now wish -- they probably now have a big access of the equipment. Some of it's sitting in a warehouse. But little by little, once you have it, you've got to put it into operation. And that's what's driving demand for our products. Now the second element is competition. All it takes is your biggest competitor announce that they're going to be more aggressive than you are. Well, whether you want it or not, you're going to have to respond appropriately. And we are seeing in -- at least in the mobile space, it's a three-way, the proverbial Mexican standoff. And when you have more than 2 strong operators, there is a very strong tendency to cheat, try to do a little more. And of course, the other 2 are watching. So I think as much as everybody in their logic says, "Hey, we're better off doing nothing if we all agree on it," it inevitably takes one person to try to pull a fast one and the rest respond accordingly. Now in case of the, I think, cable operators, they are seeing it as a very good opportunity for them, since I think many of them are healthier than telecom operators. I think they have -- they're taking an opportunity to upgrade the speeds on their network to be more competitive against the fiber and definitely try to avoid wireless broadband still in their customers. So I think the competitive pressure is probably the single biggest thing that it's a service provider spending money, whether they want it or not.

Next, we'll go to Tim Savageaux with Northland Capital.

A couple of questions here. First, I guess I'm trying to reconcile your commentary about stabilization and growth throughout the year with your Q1 guide for NSE, where you got it down a fair bit after a better-than-expected Q4. Anything going on in there that would reconcile those 2 seemingly conflicting comments? Are you seeing seasonality in the first part of your fiscal year, or what have you? And I'll follow up from there.

So I mean, if you take the, I would say, last couple of years out, where during COVID, there was a supply constraint, customers wanted to take products any time you could deliver it. So I think in that respect, the usual seasonality that we have in NSE, whereas you have March and September are the down quarters and June and December are the stronger quarters, there was like, for the last couple of years, it almost became a nonevent because whenever you had a product, somebody wanted to take it. Now I see with the lead times collapsing and, effectively, you can place the usual order and take delivery within the same quarter, we see the ordering cadences back to what traditionally it was, where the September and March quarters are generally the lower end of the demand range and the June and December are the higher end of the demand range. So I think what we see it, we are -- it's all within, I would call, normal way of business. Clearly, it's not -- a run rate is not as high as it was a year ago, but it's following the same kind of fluctuations. But also I'm looking at the booking funnel and the opportunity funnel, and it is a hell of a lot healthier than I would say it was in the March quarter of this year, where everything was just shut down. So the level of conversations, the engagements, negotiation that is going on, it leads to expectations that we're going to see continuous gradual recovery. The second element is the NEMs and semiconductor companies, after retrenching in the first half of the calendar year, we are seeing the competitive pressure and new product introduction driving continuous quarter-on-quarter increase in the lab spend. And that's obviously the second element of our NSE business that was kind of down. It was about a quarter lagging the service providers when it went down. And I think it's finally starting to come back also, but lagging about by a quarter the service providers. And then the last but not the least, I think the -- on our service enablement business, the software business, we feel pretty good about the momentum and the opportunity funnel that we are seeing for our new solutions. And in that respect, I mean even though those things take longer lead times to go from booking into revenue, it's nevertheless a positive momentum.

Got it. And the follow-up, I don't know if this is contributing to this improving funnel, either on the service provider side or NEM side. But what are you seeing around 800-gig kind of high-speed connectivity, either inside or outside the data center, in terms of current trends for Viavi?

So I think that is a very -- so that's -- and remember, we've been selling 800 gig into lab for quite a while. It's now moving to what I would call production, although still there's a lot of tests, there's a lot of fiber operators. I mean there's both, actually. I mean I'm not so sure how much there's an 800 gig right now happening in the data center. But we are seeing a lot of interest from the fiber operators to test and play with the 800 gig to interconnect various data centers. I mean right now, it's in the 400 gig as a norm, but there's early discussions and testing going on with the 800 gig. And some are talking about terabits. I don't know, a terabit is maybe a little too far out. But 800 gig is something that is on the drawing board. But right now, the name of the game is 400 gig within the network. That's for shipping today. The 800 gig is really more around the, I would call it -- even though it's been in the lab for a while with service providers, and it's really select service providers, not the mainstream, this is now entering what's called testing proof-of-concept stage. And those are usually also service providers that are very tight strapped for cash and liquidity. But when it comes to that, this is one area they want to spend the money. Because their idea is if they can directly interconnect hyperscale data centers without bypassing third parties, they feel they can grab some good business.

Next, we'll go to Michael Genovese with Rosenblatt Securities.

Oleg, I want to follow up on Tim's questions. First of all, with 800G inside the data center in for instance, AI clusters, I think we thought that there were design wins that you maybe spoke about mid-quarter. So maybe -- I mean my understanding was maybe it's not driving the current business, but it's an interesting growth driver for the future. Are we understanding that correctly? Or are we ahead of ourselves there?

Well, I mean the -- this is -- when we talk about design wins, it's usually a NEM that's selling equipment that they are using in lab and in production to do both. One is produce the systems; and second, produce the modules to those systems. But I don't think this is -- at least this quarter was that much of a demand in that respect. But we are seeing end-market interest for that.

Okay. And I guess I want to follow up on Tim's other question and then ask my question. I just have one. But the follow-up would be like, I just want to crystallize that I think what I heard is that NE, the upside in NE in the June quarter largely came from cable. And even though that the funnel of business opportunities is greatly improved versus 6 and 9 months ago, the NE guide is sequentially down because of seasonality and not for any other reason. Is that generally right?

Yes, that's pretty much right. And I would say the upside, I mean, came clearly cable, but we also had some major wireless NEMs doing their annual purchase. We have several major NEMs that at various parts during the year take significant deliveries.

Okay. And then just my question, and I know you don't give guidance more than a quarter at a time unless you're giving 3-year CAGRs. But if '22 was the $1.3 billion and then in the 90s of non-GAAP cents, and then this last year was $1.1 billion and below $0.60, I'm just wondering, I mean we've got the first quarter guide and it is what it is. But there's a sense that things should strengthen throughout the year. So I mean do you envision this year sort of looking in between those 2 years? Or more like one or the other? If you could comment, any kind of thoughts there.

Yes. So the way I look at it, usually, year-over-year, you start in strong and then it gets weak. Because our fiscal year ends in June, right? So now if you take the opposite mirror image, like kind of the first half of the year, as it continues to recover, it's almost like you end up with the 2 mirror images of the same thing. So if you think about 2023 fiscal year was slightly above $1.1 billion, I mean from our purely -- you're right. We cannot see beyond 1 quarter. But as we -- but we have to operate a certain scenario. So we're taking a fairly conservative look and say, hey, let's say this year will be, demand-wise, a mirror image of the prior year. So our exit velocity would be equal to the entry velocity of the prior fiscal year. But now we are doing it with a much lower operating cost structure and a smaller outstanding share count. So you then overlay the operating and financial leverage on to it, right? And that shows you, okay, even at like roughly flattish up top line, you're going to see a nice growth at the EPS level. So that's how we're operationally thinking about upcoming fiscal '24.

Next, we'll go to Alex Henderson with Needham.

A couple of just simple operational stuff. Has the benefit of the improved production out of Chandler, Arizona now been fully feathered into the margins on OSP?

Yes, sure. So Chandler is now running in production. So all the start-up costs are behind it. The startup yields and optimation, it's all behind it. And now as the volume increases, all the unabsorbed expenses are being absorbed. So it's clearly whatever the gross margin drag we were getting ahead of time is now behind us.

So June to September in OSP in that production facility is fairly stable on the margin side?

It's already steady state, yes.

Perfect. Second, the cost-cutting moves that you've done, those are fully in the June quarter?

They are partly in the June quarter. They will be fully in the September quarter. So the full quarter impact, you will see in the September quarter. So we're planning with OpEx levels of, call it, $118 million, $120 million per quarter for the September quarter.

And that's the run rate going forward, obviously, with some seasonality to it?

Absolutely, with some seasonality to it, and as revenue recovers, some variable costs, but you should think of that as the run rate.

And on the OSP side, can you characterize whether we're on the counterfeiting products at a point where we're at baseline? Or are we below baseline? Or how do we characterize that? Historically, you've talked about a baseline, and then you'd have these spikes above it. You're talking about it being down from last year because of absorption. But isn't it -- wasn't it above normal and therefore, we're kind of back to baseline here?

Well, I think the baseline has gone up over the years, right? So in terms of the -- when you're talking a baseline, you're talking about revenue, not the cost, right?

Yes, but...

So I'm talking about revenue. So I think this year, we believe it's running below the baseline because of the 2 -- it's a 2 for a fact. On one hand, the fiscal stimulus has ended. A lot of countries are pulling back, but it's further reinforced that they are not only pulling back, they also have taken all the delivery of a lot of products in the past several years. So now they have to burn down all that inventory. So on one hand, they are printing less. On the other hand, it's taking -- they have inventory that's taking them some time to be consumed. And we think we probably should be back in equilibrium by the end of this calendar year. And the second half, we should see a beginning of recovery in the anti-counterfeiting demand, which obviously will drive significant operating leverage for our 3 businesses.

But what do you think the quarterly baseline in the counterfeiting business is?

I think the base business today, we are seeing running around $50 million, closer to $50 million from the normal, about $55 billion and kind of higher end about $60 million. So we said $55 million was the base. At the higher end, we get up to $60 million. Right now, I'd say this is kind of the lowest demand I've seen in a long time.

Okay. So baseline is around $55 million is the normal?

About $55 million, yes.

Which you should get back to once we get through this correction in that business?

Yes. And as you can imagine, this is pretty much almost everything with the exception of materials drops to the bottom line because it's a pure play fixed-cost business.

And at that level, it's -- what type of operating margin at $55 million?

Well, when we -- you got to take a combination of the baseline business and the anti-counterfeiting. So as I say, when both of them are hiring -- firing in all cylinders, we get into the mid, what, 40s? When both of them are in the worst possible shape, we get into the low 40s.

Right. So the baseline on the counterfeiting, excluding the 3D sensing, is higher -- at the higher end of that range, right?

Yes. We don't break it out. But I would say when you kind of run in steady state, you should be in the high 30s, I'd say, for the full business unit.

One more question. So it sounds like the strength in the June quarter came as a result of the seasonal uptake of cable, which is pretty clearly a very seasonal pattern around the summer. They spend and deploy over the summer, and they tend to pull back into the cold weather. As we go into the fourth quarter, I would think that most telcos are under enormous pressure to deliver significantly improved cash flow. I mean certainly AT&T has promised that they're going to see -- deliver much improved cash flows in the back half. So are we at risk that we're getting a little bit of improvement here over the course of the summer, driven primarily by cable, but at risk of a fourth quarter disappointment as a result of them pulling back into that seasonally critical fourth quarter for them on their cash flow.

Well, I say don't believe that. I mean you're right about the cash flow and what they want to do. But remember, the 800-pound gorilla in their cash flow is the CapEx that they spend on equipment and construction. So if they're going to do it, that's what they are pulling. And remember, they couldn't do it a year ago because they had 6 months of NCNR contracts, non-cancelable, nonrefundable. So they have to go it. So they initially shut down all the OpEx expenses. And that's what got us hit. Right now, if you think about the -- what they spend on network maintenance, it's a pimple on the elephant's behind, relatively speaking, but it's giving them significant operational effectiveness just by keeping the network running. So I think the money pool from which we are drawing, even though they're not -- it's not burning a hole in their pocket, they are spending the money, not at the same rate as it was a year ago, but this is one area that they are looking to do to spend to get more out of what they already have installed rather than adding to the capacity. So I think you're right on them buying new equipment and doing new construction. But where I do see them spending money is trying to get more bang for the buck they already spent. And that's what we benefit primarily from.

Okay. That makes good sense. I appreciate that differentiation. Just one last question, if I could. When I look out into the back half of the year and the potential recovery in the first half of next year, the Street's sitting at 2.5% kind of revenue growth, 0% to 5% if you want to a band, and $0.61. And I know you don't want to guide, but do you feel like those are reasonably attainable? Or do you think that they're a little challenging? Or do you think that they're easily beatable? Can you just give us some tone around it?

I mean it really depends on the first half of calendar -- next calendar year, right? I mean we don't have much visibility, but we do know that we think our production part of the business is going to continue to recover. I mean, we are seeing R&D at semi and NEMs kind of getting back. I mean there is a strong competitive angle to it. I mean they cannot forever reduce their engineering spend. We do think the anti-counterfeiting business is going to continue to recover, especially in the second half of the year. And I'd say the -- and we know Mil/Aero is actually pretty strong as well. So the only thing that I -- is that we have to wait and see is to how aggressive the service providers will do in the second half of the calendar year. So if they are conservative, then we are thinking you got to be roughly flattish. If they decide to start getting back and spending a bit more money, then you could have -- then the growth projection could be reasonable.

Next, we'll go to Meta Marshall with Morgan Stanley.

Maybe I just wanted to spend a second on the SE business. You guys have had a number of products that kind of can help drive revenue for your customers. I'm just wondering, in this environment, are they less likely to adopt those? Or are you kind of seeing traction with those products that can kind of help with more revenue upside for customers? And then maybe just a second question. Obviously, M&A in the space has been a little bit tough in the past with just kind of more elevated valuation expectations. I would assume with a more challenged customer set right now, that maybe people's expectations are a little bit more reasonable. So does it change how you kind of view the M&A landscape?

Sure. So we actually feeling pretty good about our SE business these days. It's been a, I'd say, 5, 6 years of restructuring. We reduced spend significantly. And within the existing R&D, we had to retool the product architecture and, more importantly, focus where we are going to invest going forward. And the area where we have a very strong product offering today is around the AI Ops, which is the -- in kind of your automation -- network operations center automation, the artificial intelligence, helping you with the preventive maintenance and things around that landscape. We are seeing pretty good traction, and we are winning some pretty -- against some very heavy hitters in the market, which would give me confidence that this is not a one-off type opportunity. So we see -- we do feel that SE has every opportunity to become a -- gaining momentum through this year, which is finally -- this is the year it's going to finally start contributing to the overall. And by now, we have pretty much flushed all the declining legacy business, which was roughly around $50 million to $60 million 6, 7 years ago. Pretty much all of it has gone away. And we've been replacing it. And from this point on, it's all kind of firing and pulling in the same direction. So in that respect, we feel our SE business on both on the enterprise and service providers side has some very exciting story to tell. And we think that they could achieve pretty good success in the coming years. On the M&A environment, it's quite interesting. I mean clearly, there's only a handful of big transformational M&A opportunities, and we all know what those are. I mean I think they're still fairly inactionable. But what we are seeing very interesting is the lack of liquidity. And all of a sudden, a lot of sizable software, mainly on the software side companies, that are complementary to our SE business. All of a sudden, we've seen the company where, I'd just give you one example that we saw a year ago, and we gave them a very respectable offer, and they walked away laughing at us. They just got sold for 1/4 of our offer a year ago at liquidation because they couldn't repay the debt they were carrying. So there is actually now a lot of very interesting technologies that you can pick up at the bargain basement as tuck-ins. So it's purely becoming a make versus buy. And all of a sudden, you can pick up modules for your software offering below the cost of make. And this is what we are seeing right now, and we are obviously aggressively looking at these opportunities.

Next, we'll go to Ruben Roy with Stifel.

I just had a couple. Oleg, on the topic of improving conversations, how would you characterize that? Is that sort of broad-based across your customer base? Or is it relegated to sort of your larger customers? And also geographically, are you seeing that, again, broad-based geographically? Or is it sort of centered in any specific areas?

Yes. I mean I'd say customer conversation is actually fairly broad-based. It's not a one-off. I mean clearly, there's more intense conversations with the companies like cable. Amazingly, also, the conversations are with the Tier 2 telecom providers. Mainly many of them are private equity funded like fiber deployers and things like that. I mean they were the first ones to kind of pull back, but they're also now coming back and looking at what they're going to be doing. And on the production with the engineering organizations, I think after about two quarters of pulling back, they are back because they need to deliver their road map and products to their customers. So we're seeing that coming back. So I'd say between the engineering CapEx customers and the, I would say, cable and fiber service providers, the talk is much more intensive. The wireless, I think, is kind of quiet still. I think they're still digesting what they already got. But we do think the wireless is going to be coming back probably in the second half of the year.

Got it. And just a quick follow-up. Just a clarification on the lab spend. It sounded like you're starting to see a little bit of discussion or improvement in maybe even orders from semiconductor companies and some of the equipment companies. But then we are still lagging behind the field stuff. So I guess, are you expecting lab to be down again and then stabilize in the current quarter? Or has it already stabilized and...

No, I think the bottom quarter for lab was the March quarter, and it had some recovery in June. And I expect it to continue to recover throughout the year.

That concludes today's question-and-answer session and today's call. We thank you for your participation. You may now disconnect.