Hello, everyone. My name is Rob. Welcome to VIAVI Solutions' Second Quarter Fiscal Year 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question- and- answer session. I'll now turn the conference over to Ilan Daskal, VIAVI Solutions CFO. Please go ahead. Thank you, operator. Good afternoon, everyone, and welcome to VIAVI Solutions' Second Quarter Fiscal Year 2024 Earnings Call. My name is Ilan Daskal, VIAVI Solutions CFO, and with me on today's call is Oleg Khaykin, our President and CEO. 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 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 that 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 discussed on this call, 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, as well as 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 we'll make the recording available on our website by 4:30 P.M. Pacific Time this evening. Now, I would like to review the results of the second quarter of fiscal year 2024. Net revenue for the quarter was $254.5 million, which was above the midpoint of our guidance range of $240 million-$260 million. Revenue was up sequentially by 2.7%, excuse me, and on a year-over-year basis, was down 10.5%. Operating margin for the second fiscal quarter was 13.2% and exceeded the high end of our guidance range of 9.6%-12.8%. Operating margin increased 80 basis points from the prior quarter, and on a year-over-year basis, was down 300 basis points. EPS at $0.11 exceeded the high end of our guidance range of $0.06-$0.10 and was up $0.02 sequentially, and on a year-over-year basis, was down $0.03. Moving on to our Q2 results by business segment. NSE revenue for the second fiscal quarter came in at $179.6 million, which is above the midpoint of our guidance range of $169 million-$185 million. On a year-over-year basis, revenue was down 13.3%, primarily due to lower CapEx spend by NEMs and weaker spend by service providers. NE revenue for the quarter was $155.5 million, which is a 15.2% year-over-year decline. SE revenue was $24.1 million and grew 1.3% from the same period last year. NSE gross margin for the quarter was 63.4%, which is 100 basis points lower on a year-over-year basis. NE gross margin was 62.5%, which is a decrease of 190 basis points from the same period last year, and was primarily due to a combination of product mix and lower volume. SE gross margin was 68.9%, which is an increase of 460 basis points from the same period last year and benefited from higher-margin product mix. NSE's operating margin was 3.6%, which is an increase of 270 basis points sequentially, and a decrease of 530 basis points on a year-over-year basis. NSE operating margin was above the midpoint of our guidance range of 0%-4%. OSP revenue for the second fiscal quarter came in at $74.9 million, which was at the high end of our guidance range of $71 million-$75 million and was down 3.2% on a year-over-year basis. OSP gross margin was 52.1%, which is a decrease of 20 basis points from the same period last year and was primarily due to lower volume and unfavorable product mix. OSP operating margin was 36.4%, which is 140 basis points lower sequentially and increased 90 basis points on a year-over-year basis. OSP operating margin exceeded the high end of our guidance range of 32.5%-34.5%. Moving on to the balance sheet and cash flow. Total cash and short-term investments at the end of Q2 was $571.8 million, compared to $489.7 million in the same period last year. Cash flow from operating activities for the quarter was $20.4 million, versus $46.2 million in the same period last year. We have not purchased any shares of our stock in the second quarter, as we plan to retire the outstanding balance of our March 2024 convertible notes in the amount of $96.4 million. The fully diluted share count for the quarter was 223.5 million shares, down from 227.1 million shares in the prior quarter, and was two, versus 222 million shares in our guidance for the second quarter. CapEx for the quarter was $5.8 million, which is $12.3 million lower versus the same period last year, when we were completing the construction of our new facility in Chandler. Moving on to our guidance. For the third fiscal quarter of 2024, we expect revenue in the range of $245 million-$253 million. Operating margin is expected to be 10.4%, ±160 basis points, and EPS to be between $0.05 and $0.09. We expect NSE revenue to be approximately $176 million, ±$3 million, with an operating margin of 1.5%, ±150 basis points. OSP revenue is expected to be approximately $73 million, ±$1 million, with an operating margin of 31.8%, ±200 basis points. Our tax expenses for the third quarter are expected to be around $8 million as a result of jurisdictional mix. We expect other income and expenses to reflect a net expense of approximately $3 million, and the share count is expected to be around 224.7 million shares. With that, I will turn the call over to Oleg. Oleg? Thank you, Ilan, and welcome to your first earnings call with VIAVI. The fiscal second quarter, 2024 came in stronger than expected. Revenue was slightly above the midpoint of our guidance, helped by stronger demand for 400G and 800G fiber, Mil-Aero and SE products. EPS came in above the high end of our guidance, driven by richer margin revenue mix and lower OpEx. In the near term, we expect stronger demand in the above product areas to help offset continued weakness in the service provider spend. Starting with NSE. The second fiscal quarter NSE revenue came in above the midpoint of our guidance range. Although the NSE revenue declined on year-over-year basis, driven by a slowdown in 5G and fiber build-outs by major service providers, there was a number of bright spots. Fiber lab and production has continued to recover, driven by strong 800G demand, offsetting weakness in computing and storage. Aerospace and defense products saw robust growth, driven by strong demand for avionics and PNT, or positioning, navigation, and timing products. And the new SE products continued to perform well, resulting in a slight year-over-year growth despite the decline in service provider spend. Looking ahead, we expect continued demand recovery and growth in our fiber lab and production, aerospace and defense, and SE products, compensating for the continued near-term weakness in the service provider spend. Now turning to OSP. OSP declined on a year-over-year basis, primarily driven by lower demand for anti-counterfeiting products. This decline was partially offset by strong 3D sensing demand. Overall, OSP results came in at higher end of our guidance range. In the March quarter, we expect OSP to be slightly down from the December quarter, with a stronger demand for anti-counterfeiting products, offsetting the seasonal decline in 3D sensing. Looking ahead to calendar 2024, we expect telecom service provider spend to continue to be soft, with the notable exception of the North American cable operators. We expect cable spend to ramp in the middle or second half of calendar year 2024. That said, our strategy in the past six years to diversify outside the service providers into lab and production and aerospace and defense, makes it easier to ride out the telecom cycle downturn. NEM production spend is seeing a faster recovery versus service providers, driven by the demand for the new technologies such as 800G and Open RAN. Recently, VIAVI was awarded a $21.7 million grant by NTIA to create an advanced test lab to empower and accelerate the development of Open RAN technologies and components. This award reflects VIAVI's technology leadership in 5G, upcoming 6G, and O-RAN. Our aerospace and defense products are seeing strong demand and growth, driven by the next-gen avionics and the need to protect critical infrastructure and assets against jamming, spoofing, and cyber warfare. In conclusion, I'd like to thank my VIAVI team for managing in this challenging environment and express my appreciation to our employees, customers, and shareholders for their support. With that, I will now turn back to the operator and Q&A. At this time, I would like to remind everyone, in order to ask a question, press star, then one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. ... And your first question comes from the line of Michael Genovese from Rosenblatt. Your line is open. Great. Thanks a lot. Oleg, first question is just on the service provider market, just to understand, make sure I heard the comments right. It sounds like you're saying all of 2024 calendar expects to be weak there, with cable getting better at the end of the year. First of all, did I hear that right? And secondly, did your expectations change in the last three months? Like, has the carrier stuff, the telecom stuff gotten more pushed out, or was that consistent with three months ago? Well, so here, let me just say, look, the reality is, I don't know what the second half is gonna look like from service providers. We know the demand will be somewhat stronger in the June quarter. It's always stronger. Beyond that, you know, I just think, I mean, clearly, it's not getting any worse, it's getting a little better. But, you know, I would still prefer to think of it as a flat to slightly recovering as the kind of more surround day, 'cause I think, you know, they're still pretty weak. But, you know, the point is, we're seeing it's coming in, but it's not as dramatic as I would have liked to see. Now, the area that is stronger is the cable. In fact, we were expecting cable to start spending, and coming in in the first half of calendar year. But as you probably know, there were some delay driven by technology readiness in deploying the DAA architecture by some of the vendors, and as such, the ramp is being pushed by one or two quarters. So, we know it's coming. We're already seeing some orders, but the spike that we were expecting in the March quarter got pushed out. That's why we are guiding March quarter flat to slightly down. It was gonna be slightly up in the absence of that slowdown. I mean, let's put it this way, I feel a lot better about the environment in which we're operating than we were even a quarter or two quarters ago. I just don't wanna get ahead of our skis on service provider recovery, because when I see it, I'll believe it. I mean, so I think they still got a lot of balance sheet issues they need to address before they really start spending significantly. Okay. That's like- So just take it as an abundance of caution. I mean, do I feel better about what's going on? The answer is yes. Am I seeing big dollars coming in? The answer is no. Now, one thing, what we did see interesting, is we're seeing pretty good traction on our Service Enablement products with the new architecture, AI apps, which drive OpEx reduction and things like capital avoidance. So there we are seeing pretty good traction. But on the instrumentation, particularly with fiber deployment, I think there is a pause that may at least last six months. Maybe towards the second half of the year, things will get better. But at this point, I think it's... My crystal ball is telling me I'm not seeing anything dramatic changing. Understand. Understand. Great. Next question. This, this 800G fiber lab in production sounds, you know, very interesting. And, you know, I, I think you've probably had either two or three quarters of, of sort of measurable, you know, revenues there. So I assume that that is increasing and, and, you know, any color you can give us on that, and, you know, not sure whether you would answer this question, but sort of, you know, how much of any that represents, you know, either now or what it could be in the future would be, would be very helpful. Well, so I mean, our lab and production business, I would say on any, let's see. If I think about the, you know, we have a Network Enablement and the SE, so Network Enablement is about 87%. I'd say our lab and production is, you know, I think it but it also includes wireless, is about 40%. So, and of that, I'd say fiber lab and, you know, kinda compute, high performance computing is roughly half of that, right? So maybe 20%. And, now, with the storage being a slowdown, we saw the computing and storage was weaker. I mean, all of that business really kind of bottomed out around the June quarter. But what's really been driving the recovery of that business is the fiber production and the fiber lab demand, and it's driven by 400G and 800 G products, right? So I think, so what I'd say is, it's now recovered. First of all, it's recovering, continue to grow. I think the, you know, the same players who are building telecom modules and now more recently, you know, these AI, you know, enterprise data center modules are buying the equipment. You know, I've been trying to ascertain, like, for so many million ports, how much equipment is being bought. I think we're probably not there in terms of truly understanding how the CapEx spend is linked to that, because it's still early in the game. But, exactly same equipment that they use on the coherent telecom module line, they're using it also on building the data center modules for the AI applications. Perfect. Great. Yeah. Sounds like, going forward, that'll be interesting, you know, to figure that out, that relationship. I can't wait to get an update on that. Okay, last question for me. I'm sorry to take so much time. But I'd like to ask... Well, one question, which is, can you just help me understand, see? Because the revenues were pretty good for, you know, the quarter. The earnings were good, the revenue guidance is good. I'm just still not seeing the reason, why the EPS guidance is lower. So could you explain that to me? Sure. Thanks for the question. So, as you know, you know, our third fiscal quarter, seasonality from a seasonality perspective, is usually kind of slower than the second quarter, so if you think about it on a consecutive basis. Then also when you have kind of the beginning of the calendar year, there are some incremental costs, you know, associated, you know, with employee related, and that kind of drives kind of in terms of the OpEx. But again, as Oleg mentioned earlier, you know, the traditional seasonality, when you think about it, is kind of, you know, it, it's kind of building up really nicely, you know, when you think about, you know, the rest of the year, including, you know, the fourth quarter. Yeah. So there's a lot of statutory cost accrual that happens in the first quarter of the calendar year. Yeah. You know, on the OSP, you know, you notice there's a lower margin because it's a cyclicality of a 3D sensing. The second half of a fiscal year is a much lower utilization, so there is more under absorption in that respect. Now, that said, you know, the anti-counterfeiting is coming back, so it offsets some of it, but not all of it. Last quarter, the 3D sensing was quite strong. Okay, great. Thanks so much for all the answers to the questions. Thanks. Thanks again. Thank you. Your next question comes from the line of Tim Savageaux from Northland Capital Markets. Your line is open. Tim, your line is open. Okay. Figured it out. Good afternoon. Oleg, can you remind us of your lead times in service provider fiber test? You know, generally, if we get an order, I'd say within two months, we can turn it around. So it's all within a quarter, more or less. Now, except for some things like, you know, if it's a, you know, you know, some products are very quick, like, for example, fiberscope and things like that. Other products- Mm-hmm ... like, where you're buying a whole bench, where you have a MEMS, switches, and things like that, if we have them in inventory, we can turn it around within, I'd say, two-three months. Where would you assess your service provider customer inventories to be with your product? Zero. I mean, it's all just in time. Right. And I guess the reason I ask you this is that, you know, throughout the early part of reports here from both, you know, some of your bigger peers, Corning, Nokia, as well as some of the bigger service providers, you know, we have seen some early indications of project-based kind of increases in plans for 2024. And I'm just trying to reconcile what's been a pretty consistent drumbeat here with what we're hearing from you. And I think there could be... You know, typically, you lead these things, but I don't know. Might you lag at this point because of the lead times? I wonder. No, I don't, I don't think so. Are you seeing some of the same things? I don't think we're lagging. Okay. Once they decide. So when they tell these guys they're gonna do a project, they may tell it to them before they tell us. Because once they're ready to start building, they just place an order, and within two months, they get their equipment. It's pretty quick. Makes sense. I'll pass it along. Your next question comes from a line of Alex Henderson from Needham & Company. Your line is open. Thanks. Can you give us a little bit more granularity on the size of the 3D sensing in the quarter and, you know, the expectation for the 3D sensing in the March quarter? Well, so generally, Alex, 3D Sensing, half of the annual demand comes in the September and December quarter. Sorry, two-thirds comes in the September and December quarter, and one-third comes in the March and June quarter. So, I would say we ran right around $20 million-$25 million in the quarter. In the upcoming quarter, you're looking at, what, 10, $10 million or so? This quarter? I think- Yeah, the March quarter. ... maybe a little more than 10, but, let me see. 15, almost thinking. Yeah. Yeah, tell you. Yeah. Yeah, it's about... yeah, around a little. It's $10 million ± $1.5 million. Okay. And, can you give us an update on the plant in Phoenix? It's now fully operational. All of the benefits of the cost improvement are in the mechanics of the counterfeiting business at this point. Is that correct? Yeah, so, what we're seeing now. So, you know, that's when you know where people are running out of inventory. So you start seeing a lot of unforecasted spot orders popping up, like, hurry up and ship as soon as you can. So, we're starting to see more and more of these type of things popping up. They're not big orders, but it's telling us, you know, the inventory is starting to deplete itself in the channel. So, in the March quarter, we're expecting a little bit stronger demand from what we were thinking maybe even three months ago. So that's actually helping us to offset some of the 3D Sensing decline quarter- on- quarter. Generally, it is fully operational and we still have, you know, more capacity, you know, for additional growth there. So it's not, you know, Yeah In terms of full utilization, it's not yet there in terms of the availability that we can get. Fully operational, but not fully, Yeah. Not full capacity. Right, of course. Alex, let me give you a correction. Actually, 3D Sensing is gonna be closer to about $16 million in this quarter. 16. 16. Perfect. Thanks. Yeah. Um- I was thinking about the end of year. So going back to this split on 800 G products, just to be clear. So the ratio of ports to equipment is quite low, right? I mean, we're talking about, you know, double-digit port per, you know, you know, kind of ratio there. I assume that this is predominantly going into the production side of it, it's not going into the field deployment, and you're talking about how many products can go through a test and measurement, you know, process in any given period, but that's a sampling process. So the ratio is very, very high relative to the total number of ports that go across that equipment, right? Well, I mean, you know, and it varies, right? So when you start production, you tend to do a lot more tests. So you have a lower number of ports per, let's say, $1 million of equipment. As you get with experience curve, you start, and you feel comfortable, you start, decontenting the test, so you spend less time on a tester. So yes, the equipment predominantly goes into the production lines. I mean, you have all these factories in China and other places that are building these modules. So when they start, they generally use more intensive testing, and then as they get more comfortable, they start reducing and doing more of a, sample testing or, less extensive testing per module. So, that's why it's continuously moving target. So I mean, in one case, we've kinda did a one project and we have gauged. It came out to about $0.40 per module of CapEx, per module of capacity. So if you're doing a port, you need about $0.40 investment per port on the capacity line. So you build a, let's say, 1.5 million units a week line. So you probably—I mean, I think it works out to about $0.40, so about $300,000 for that capacity that you got to invest. I mean, but it's only one data point, and other people do it differently, so they spend more. I mean, so it's still very early to tell. Yeah. So we've already seen very significant ramp in productions of both NVLink and InfiniBand products going into the AI clusters. From what I can tell, you really haven't seen any meaningful contribution from that at this point. So should we then think that as we move into the second and third phase of production ramping, that the sampling rates actually, you know, go up, and therefore, we shouldn't be looking at the rate of growth in AI as the primary driver of the overall demand, you know, curve, as opposed to the sampling percentage? Well, I wouldn't go, I wouldn't go that far, because remember, what the first thing they did is they redeployed the same lines that were building telecom coherent business that dropped quite significantly. They redeployed those assets to the AI data centers. And, you know, and, just when you also think about it, if you're just doing alignment on like, say, InfiniBand, you're putting photonic integrated circuit, aligning with the processor, that is really more semiconductor packaging. When you're actually building the actual module with lasers and everything else, that's where you tend to use more of our optical test equipment. I see. Okay. Just going back to the telecom piece for a second. There's obviously a very large inventory glut out there of telecom equipment that has to be absorbed. Has there been any build in inventory in your product areas, or is that just something that didn't happen because they weren't constrained as much on that, those type of products? So we have no inventory in the channel. I mean, pretty much the orders kinda got turned off at, say, December quarter of calendar 2022. So if anything, a lot of the inventory in the field is getting long in the tooth, and we know that there is a lot of wear and tear, and there needs to be a replacement coming up. So we actually already seeing signs that people say, "Hey, I will need to replace. I mean, what would be the terms? What will be the lead times?" So in that respect, you know, people will kinda sweat the assets, they will swap the assets, they will cannibalize, and then they'll have to do a wholesale replacement. So, you know, when I say kind of flattish 2024 or like the—I just think, I just don't think—I know they need to do it, I just don't know if they can afford a massive replacement. But, you know, hey, there could be a good chance that in the second half we'll see more and more of these type of things popping up. But I don't have that kind of visibility beyond six months. Great. Thank you. Sure. Thanks. Your next question comes from the line of Meta Marshall from Morgan Stanley. Your line is open. Great, thanks. Oleg, you mentioned kind of you were more encouraged about cable spending kind of earlier in the year. Just wanted to get a sense, is that DOCSIS 4.0? Is that just their networks are running hotter? Just given some of the comments you just said to Alex, just kind of what is the trigger to that investment? And then on the flip side, since, you know, you kind of think that wireless may take a little bit longer, just what do you think should be kind of the early signs of wireless resuming? Thanks. So if I look at so cable, right, first, I think we know it's gonna be happening. It was actually we were expecting some of the orders start popping up in the March quarter and then accelerating into June. From what we've heard, and I'm not gonna you know name any names, but there's been a delay in some of the core technology development by leading you know infrastructure providers. So I think that is being pushed by one to two quarters, in terms of getting the software ready and everything needs to be working. So I think that's where we are with cable, but I do see actually cable happening this year. On the so what was your second part of your question? Just on the wireless side. Oh, the wireless, yes. So the wireless, you know, well, we all know, you've seen the Ericsson, Nokia, Samsung, and all the deployments with T-Mobile, Verizon, AT&T, so that has slowed down. So the area where we are seeing less is on kind of the field equipment and a lot of the sales related to deployment. Where we continue to see a CapEx being spent is on product development. So, you know, we have not seen significant decline in the R&D CapEx for 5G, and now we're seeing some of the elements of 6G popping up. It's just generally, I think the wireless infrastructure is a bit more muted in terms of aggressiveness, I'd say, in Europe and North America. Now, that said, India is doing pretty well. But, you know, it's obviously... I wish the margins were better in India, but I think, clearly demand is right now, India is one of the few bright spots for infrastructure deployment. Great. Thank you. Sure. Your next question comes from a line of Ruben Roy from Stifel. Your line is open. Yes, thank you. Oleg, I just had a couple of quick questions, really follow-ups. I think you talked about a little bit of this, in answer to the prior questions, but just in terms of service provider, it sounded to me like you're saying that you are having conversations, right? So, you know, last quarter, I think you talked about not seeing any decommits. I would imagine that that's still the case. But also, you know, with some of the service providers still figuring out their budgets for this year, is that giving you a little bit of, I wouldn't call it hope, but, you know, sort of, visibility, I guess, into thinking that you can still, you know, turn out to what should be, you know, sort of a normal seasonal year? You know, meaning June up and then, you know, September a little bit down like usual. Is that driving that or any, any other detail in those conversations? So I think this year, I mean, I don't want to jump too far ahead, but actually, September may actually be stronger this year than normal because the cable is maybe happening in September as it gets pushed, right? So but generally, I say what we see from service providers, there's a very healthy trans business. You know, if things go bad, then just replacements and things like that. What generally drives the like another like you know I'd say 20% more, which makes a big difference, is whenever they are doing buildouts or upgrades to their networks. And right now, what I don't see, I mean, at least this time, you know, in terms of the trans business, it's like orders coming in and they get released, and it's, there's no problem. So, you know, the ongoing business is going pretty well. People are maintaining their network. They're just keeping things running. What I'm not seeing yet is the people doing big step functions and expanding capacity or upgrading the network or extending the network. Some of these projects are a little bit more. I mean, we know they are being planned. I know there's plans for that. I just don't know when they're gonna decide to pull the rip cord and launch it. And I just kind of looking at the general environment in the telecom sector, I think they prefer if every quarter they don't do it, they just you know, bank more cash and retire more debt. So I think, one, you know, if I were kind of just, you know, looking at the from competitive approach, as cable guys start upgrading their networks, I think some of the service providers will see need to, you know, get back to extending their networks. So I think- Mm-hmm. You know, I just don't, you know, I don't want to be a killjoy, but I, I just don't see cash burning hole in the service provider's pocket, that they need to go and start digging and laying new fiber or aggressively starting deployment. The area where we do see fairly good momentum, but it's on a much smaller, like an order of magnitude, smaller scale, are these Tier 2, Tier 3, primarily private equity-funded fiber operators, who are laying fiber in anticipation of data centers coming to the area, or service providers extending 5G networks to the area, or they finally needing a fiber to extend their network into some of these rural communities. So that is one piece that is ongoing, but, you know, it's an order of magnitude smaller amount of volume than somebody like AT&T, Verizon or British Telecom or Deutsche Telekom would spend on an annualized basis. Right. Thanks for all that detail, Oleg. And then just a quick follow-up for Ilan. I might have missed this on the balance sheet discussion. Are you where you need to be then on leverage, and do you expect to come back into the markets to repurchase in the near term? I might have missed that. Apologies. Yeah. So probably for the next quarter or two, you know, we'll be focused more obviously on the retiring of the convert, and you know, it continues the overall, you know, buyback continues to be part of our capital allocation model, right? I mean, we are not deviating from the overall strategy, but probably on the buyback for the next one to two quarters, you know, we'll be more muted about it. We just decided to bank some cash- Yeah So we can retire the whole convertibles. In a way, it's a synthetic share buyback because you're avoiding, Right ... you know, dilution down the road. Right. Right. Got it. Okay. Well, thank you very much, gentlemen. Thank you. Thanks. There are no further questions at this time. I will now turn the call back over to Ilan Daskal for some final closing remarks. Great. Thank you, operator. This concludes our earnings call for today, and thank you everyone for joining today's call. This concludes today's conference call. Thank you for your participation. 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