Good afternoon, and thank you for standing by. Welcome to the Viavi Fiscal Third Quarter 2022 Earnings Call. [Operator Instructions] I will now turn the conference over to Head of Investor Relations, Mr. Sagar Hebbar. Please go ahead.

Thank you, Sarah. Welcome to Viavi Solutions third quarter fiscal year 2022 earnings call. My name is Sagar Hebbar, Head of Investor Relations and Corporate FP&A. 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 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, excess 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. 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. I would now like to turn the call over to Henk.

Thank you, Sagar. Sagar has been with Viavi for more than six years as Head of Corporate Financial Planning and Analysis and now assumes the additional role as Head of Investor Relations. Bill Ong recently left the firm to pursue a new opportunity after having been with Viavi and formerly JDSU, for more than eight years, and we wish him great success in his future endeavors. Now on to Viavi Q3 results. Fiscal Q3 is a record for Viavi’s March quarter for both revenue and non-GAAP profitability. Third quarter revenue came in at $315.5 million, up 4% year-over-year, exceeding a guidance range of $301 million to $315 million. Growth was primarily driven by continued solid performance in our NSE business segment an improving sequential performance in our OSP segment, albeit down year-over-year. Viavi’s operating profit margin at 21.5% came in at the high end of our guidance range of 20.5% to 21.5%, improving 130 basis points year-over-year. EPS at $0.22 increased 22.2% from $0.18 in the prior year, a combination of strong operating performance, reduced tax rate and lower share count. The share count of 236.8 million shares is lower than expected because of additional redemption of convertible notes. However, it still includes the dilutive impact of the remaining convertible notes of approximately 4.9 million shares. Now moving to our reported Q3 results by business segment, starting with NSE. NSE revenue at $230.8 million, up 9.3% year-over-year, came in at the low end of our guided range of $229 million to $239 million, as a result of COVID-related shutdowns in Shenzhen [ph] in China late in the quarter. Within NSE, NE revenue increased 7% from a year ago to $204.3 million, reflecting continued strength in our fiber, wireless and lab and production products. SE revenue at $26.5 million increased 30.5%…

Thank you, Henk. The second half of fiscal 2022 is off to a good start. During fiscal Q3, we have achieved the new historical highs in revenue and non-GAAP profitability. I'm pleased with both NSE and OSP performance in delivering strong results despite supply chain challenges and COVID-related shutdowns in China. . The NE segment growth was driven by fiber and wireless. Fiber grew double-digit percentages from the same period of last year as North American service providers upgrade and expand their networks with fiber. Optic 11 production business also saw strong customer demand, driven by 400 GigE and initial deployment of 800 GigE. Wireless demand continues to be strong, up mid-single-digit percentage from a year ago levels as customer mix shifts from NEMs to O-RAN deployment. Demand for cable products moderated cyclically lower. The SE business segment had a robust Q3 with revenues growing 30% year-on-year. We saw strong growth in assurance solutions and data center products. We expect SC to benefit from the anticipated strong market demand for 5G and growth in network traffic. We continue to execute successfully despite supply chain shortages. Our ability to secure critical components, build inventory and meet customer demands has been a great differentiator and enabled us to grow revenue and market share. Now turning to OSP. The OSP business segment delivered better-than-expected revenue and profitability with revenue exceeding our guidance range. Although our Q3 anti-counterfeiting product revenue decreased year-on-year as central banks globally moderated their demand from COVID high stimulus spending, it was up 20% quarter-on-quarter as 3D sensing and anticounterfeiting demand recovered from the December quarter. Looking ahead. We expect Q4 revenue to be up year-on-year, benefiting from stronger anti-counterfeiting and 3D sensing demand. Fiscal 2022 is expected to be another record year for revenue and profitability at Viavi. Fiscal 2022 is also the last year of our three year guidance provided during the Analyst Day in September 2019. We are proud to have exceeded our three-year targets despite the global pandemic and challenges in the supply chain. As we plan the next phase of our growth, we will be hosting an Analyst Day in Boston on September 13, 2022, to outline our strategy and goals for the next three year cycle. Please save the date, and we hope to see you there. We will continue to provide more information regarding the event in the coming months. In conclusion, I would like to thank my Viavi team for another quarter of strong performance and express my appreciation to our supply chain partners, customers and our shareholders for their support. I will now turn the call over to Sagar.

Thank you, Oleg. Sarah, let us begin the question-and-answer session. [Operator Instructions] Please go ahead.

Thank you. [Operator Instructions] Your first question comes from the line of Alex Henderson with Needham. Please go ahead.

Great. Thanks. So first off all, congratulations. Good quarter. You made a comment fairly late in the quarter. You saw some pressures on supply chains out of China. It seems pretty clear that China has gotten worse in April. Is there additional pressures evident in 2Q? And can you quantify the magnitude of the impacts for the two quarters? And while we're on the subject, did the change in conditions in Europe as a result of the war in Russia have any impact on demand in EMEA? And do you have any operational exposure to Russia or Ukraine? Thanks.

Sure. Thank you, Alex. So in China, I would say it's kind of was a onetime impact that kind of permanently shifted some supply because what they've done is they increase the amount of days and quarantine your incoming products and your outgoing products have to be. So once you've done that adjustment, and it roughly cost us, I'd say, probably about $8 million in revenue shipment, which all kind of – it's coming in the June quarter. That's part of the reason the June quarter is going to be extremely strong. And I think once that's factored in, it's now that new lag and lead time is built in. So now the product is flowing accordingly. And it was really just the – just put additional requirements for incoming components to sit some few days in quarantine and then outgoing components have to go in quarantine. So that's now all fully factored, in our guidance for the June quarter. As to the situation in Europe. Viavi overall, I think we have about maybe $8 million to $10 million of revenue in that region, and that's all now being factored in. And we have some salespeople in the region that we have been working to either to move or let go. So that's where we are.

So just to be clear, $8 million to $10 million annually or quarterly or...

Annually, annually.

Annually, right. And so that's been backed out of the forecasted and zero exposure at this point. And receivables exposure?

Pretty much been zeroed out.

No receivables.

No receivables exposure.

Perfect. And the last question that was in that opening salvo, was there, has there been a change in demand in EMEA as a result of the war causing either cancellations, longer close time? I did notice your European business was a little bit weaker than we had expected. Any change in demand conditions?

No, I think there is no impact. I mean, in the quarter, it’s a few $100,000 so it didn't really move the needle one way or the other. But in general, in Western Europe, no impact.

Okay, thank you.

Thanks, Alex.

Thank you. Your next question comes from the line of Tim Savageaux with Northland Capital Markets. Please go ahead.

Hi, good afternoon and congrats on the good results. I want to follow up on a comment you made, Oleg, about double-digit growth in fiber in the quarter, which is pretty strong and kind of lever off some commentary from very large fiber suppliers, such as Corning, talking about expectations, even at their scale for double-digit growth for many years, maybe to be enhanced by some of these infrastructure stimulus projects. I mean do you think that type of double-digit growth in fiber is sustainable over a period of time? Or is there anything in particular driving that this quarter? And I have a follow-up.

Well, I mean, I don't think anything is sustainable at 20% growth. I think the – you got to look at the March quarter a year ago. That's where a lot – things were just starting to recover. So we have obviously an easier compare. Although March quarter was already quite good for us last year as well. So I would say what's been driving it is several major players are aggressively ramping up their fiber – they already deployed it. They've been deploying fiber for many years. Now they're turning it on and they are turning on new customers. And that requires significant spend on field instrumentation and outfitting all the checks with all the equipment. And we have pretty much won significant chunk of that business. And also, in some ways, thanks to our amazing job of our supply chain organization, we're able to deliver the product where none of our competitors can even source the components. So that's what I said in my comments, the prowess of our supply chain management has really been instrumental in not only benefiting from this increased spend in fiber, but also capturing share for the remaining business because a lot of major players that would give you, let's say, 70%, 80%, and they would have a second source for 20%, 30%. And if second source cannot deliver, then you take the entire 100%. So that clearly has been an additional icing on the cake.

Got it. And I wouldn't hold you to 20%. Just trying to get you to 10% there. But that's fair enough.

Well, I think higher single-digit growth is obviously, for the foreseeable future, is something we can definitely strive for.

Okay. I'll take that. And the follow-up is on the wireless side where you mentioned mid-single-digit growth. I wonder if you've seen a material contribution on the wireless field instrumentation side. And to the extent you really haven't yet, and that's more second half, can that take wireless growth to the same rate as fiber or maybe even greater, for a while at least?

Well, I think the – I don’t think wireless will ever be as big as fiber, because I mean, fiber is just fundamentally a much bigger market. And if you look at – think about number of fiber checks, ultimately, what we need in this country, it’s in tens of thousands, whereas the wireless industry is obviously much more compact. There, we have about maybe several thousand, right? And we feel very good about our position in the wireless field. And we’ve upgraded our goal for entering this market now to be more like 1/3 of the market instead of a 1/4. And we’re already seeing orders coming in and it’s starting to ramp. And I do believe the second half will be much stronger in terms of deployment. So when I talk about the wireless, its traditional NAMs taking their deliveries, but we’re also now seeing more and more orders coming in from – in new entries as well as service providers as they’re deploying ORAN, and we feel particularly good about our position in the ORAN. And it’s kind of in a way, if you think about ORAN as in between the NAM equipment and the field equipment, we’re actually having strong position in both. It really makes us a, by far, the best choice for ORAN deployment in the industry. And we feel as things really pick up pace, ORAN could become a major growth driver for the wireless business, where traditionally, it was more driven by NAM’s demand. And with the unbundling or kind of opening up to architecture for 5G to other players, A, it’s increasing the number of customers for us. It’s increasing the number of test points that need to be tested. And it also increases number of applications, not only being a service provider, but also increasingly private networks. So in that respect, I think the market expansion for the infrastructure test with the emergence of the Open RAN network is actually expanding our addressable market significantly on the infrastructure side. And of course, as that gets bigger, it actually creates even more flywheel effect on our field instruments for the wireless instruments.

Got it. Thanks very much.

Your next question comes from the line of Samik Chatterjee of JPMorgan. Please go ahead.

Hi, thanks for taking my questions. I guess my first one, Oleg, if I can take you back to your comments about the targets issued at the 2019 Analyst Day. And when I look back, I think at that point, you had issued a growth target of 2% to 5% CAGR – revenue CAGR. Obviously, the cadence through the three years didn’t plan – probably track as you expected because we started with a tough year initially after that Analyst Day. But for the last two years, you’ve been – or last fiscal year and this year, you’re on track to hit the high end or be higher – be above the high end of your range that you had guided to. And so I’m curious like how to think – how you’re thinking about sustainability of the growth beyond sort of the 2% to 5%, the high – above the high end of that range that you’ve issued in the past. Would you – are you thinking about the current growth rates being higher primarily on account of pent-up demand? Or do you see some of the drivers that’s helping you deliver this growth being more sustainable as you sort of think about the next two years to three years? And then I have a follow-up, please.

So well, if I think about it, clearly, we did not foresee the global pandemic. We thought there may be a recession or so and we figured we’ll handily blow away through our growth. So, we have plenty of buffers built in. And obviously, it proved to be a heck of a lot tougher. But we still exceeded on the top line and significantly exceeded on the bottom line through the operating leverage, right? So – and in terms of what we’re seeing is the market actually has improved in the dynamics. Before, it was very much driven by DSL and cable on the field instruments. And today, we fundamentally have a much more diverse and more dynamic, I’d say, higher growth environment where fiber is becoming a major play in the field instrumentation and wireless with our new wireless tools, it’s opening up new markets. And some of the new segments like ORAN and with the 5G and our revamped SC business, we actually think we’re going to be in a higher growth segment than we were – while we were restructuring the business kind of from the JDS Uniphase days to the modern Viavi. So we actually – I don’t want anybody to steal my thunder for the Analyst Day, but we do feel that the next three years we are much more optimistic about the next three years than we were about the last three years. Because the first three years was really stabilized the patient. The next three – the last three years was get the patient into fighting shape and start kicking butt in the market. And I think going forward, it’s all about full speed ahead. So we feel that the dynamics of our end markets are diversity of our end markets and the new applications that we are playing in are actually going to be a more dynamic environment in the coming three years than what we seen in the last three years.

Got it. Got it. For my follow-up, on the 3D sensing piece of the business, you mentioned you’ve seen sort of demand pick up from the low point in December, which is contrary to the seasonality on the unit front for your primary customer there. And if I remember correctly, you have a lead time two to three weeks, which is you generally have been pretty closely aligned to unit demand that the customer sees. It does suggest that the customer might be changing sort of their buying pattern in terms of building a bit more inventory. Just curious to get any more color on that front and does that sort of impact then the timing of the benefit that you see, or the ramp that you see into the next product cycle?

Sure. Well, I remember December was a very unusual quarter in that respect and our customer actually talked at length about it. The reality is they weren’t able to get all the chipsets. So their demand was artificially constrained. And since we have a lead – short lead time, when they knew they could not get all the product they needed, they reduced their number of bills and it adversely impacted us within quarter, the actual demand. Well, a situation improved in March quarter, they built more units and they obviously placed more orders with us. And I do see some level of linearization in the March and June quarter. The builds are a little bit higher because I think traditionally they would build a lot in this second half of the calendar year and clear back in the first half and kind of do the June quarter as a transition to the next product here. I think given the shortages and supply constraints in the December and September quarters they’re now making up some of the volume in the first half of the calendar year. So it’s giving us a bit of a stronger demand. And I think, I don’t claim to know if it changes their pattern or not, but reality is we can respond on a dime and in that respect, I think we are the least of their worries in terms of supply chain.

Great. No, thank you. Thanks for the color. I’ll see the floor here. Thank you.

Sure.

Thank you. Your next question comes from the line of Meta Marshall with Morgan Stanley. Please go ahead.

Hey, this is Karan Juvekar on for Meta. Thank you for the question. So I just have two quick questions. One, are you seeing any disruption in demand from supply chain complications elsewhere in the installation chain, for example, inability to find labor or availability of equipment? Are you seeing those sort of things differing demand?

So, well, I think the – I wouldn’t say about inability to find labor. I think the – there’s two types of supply chain challenges. One is especially if you are exposed to China production as you’re probably well aware with the zero COVID policy, they’ve implemented number of additional controls that increases the quarantine on incoming components and outgoing product. So as a result, you now have to factor in longer lead time of getting parts into China, getting product manufactured and shipped out of China. So – but that’s the kind of one time adjustment. And it happened really late and I would say in the third quarter, in our March quarter. The set second challenge is really the steel components and it’s a very narrow set of components. I’d say by and large, we don’t have an issue anymore with the semiconductor devices or passive components, but the high performance analog mixed signal and FPGA continue to still under tight supply. But we do think we are going to see situation improving by summer.

Got it. Okay. Thank you. And then just one quick follow-up, you sort of mentioned this earlier in the call that you’re seeing share gains. And I just was wondering, are there any particular end markets that you’re seeing share gains right now, given sort of these supply chain challenges and maybe you being able to mitigate them a little bit better? Thank you.

Well, I’d say in the NSE across the board, we are seeing share gains. Some of them are very tactical, like for example, in a field instruments where you have multiple sources, a lot out of our competitors just can’t deliver the product. They cannot get the parts they need to build their product and ability of your supply chain to execute versus your competitor. Basically customers give you a 100% of the business, which is a big deal because once you have a 100%, you got it for the next whole product cycle with replacement parts with support so on and so forth. So that’s where you pick up. I would say tactically market share in the field. And then on the advanced technology space like our wireless business, our 800 GigE and so on having a product and the bleeding edge of performance with the latest standards and far outpacing the competition, we are winning market share by basically extending our technological leadership over our competitors.

Got it. Thank you. Helpful.

There are no further questions at this time, Mr. Hebbar, I turn the call back over to you.

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

Thank you. You may now disconnect your lines.