Viavi Solutions Inc (VIAV) Q1 2022 Earnings Call Transcript

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Viavi Options Inc (NASDAQ:VIAV)
Q1 2022 Earnings Name
Nov 6, 2021, 2:00 p.m. ET

Contents:

  • Ready Remarks
  • Questions and Solutions
  • Name Members
  • Ready Remarks:

    Operator

    Girls and gents, thanks a lot for standing by, and welcome to the Viavi Options First Quarter 2022 Earnings Convention Name. [Operator Instructions]

    And right now, I will flip issues over to the Head of Investor Relations Mr. Invoice Ong. Please go forward, sir.

    Invoice Ong — Investor Relations

    Thanks, Bob. Welcome to Viavi Options First Quarter Fiscal 12 months 2022 Earnings Name. My identify is Invoice Ong, Head of Investor Relations. Becoming a member of me on immediately’s name are Oleg Khaykin, President and CEO; and Henk Derksen, CFO.

    Please observe, this name will embrace forward-looking statements concerning the firm’s monetary efficiency. These statements are topic to dangers and uncertainties that would trigger precise outcomes to vary materially from present expectations and estimations. We encourage you to evaluation our most up-to-date annual report and SEC filings, notably the chance components described in these filings.

    The forward-looking statements, together with steering we offer throughout this name are legitimate solely as of immediately. Viavi undertakes no obligation to replace these statements. Please additionally observe that until we state in any other case, all outcomes besides income are non-GAAP. We reconcile these non-GAAP outcomes to our preliminary GAAP financials and talk about the usefulness and limitation in immediately’s earnings launch. The discharge, plus our supplemental earnings slides, which embrace historic monetary tables, can be found on Viavi’s web site. Lastly, we’re recording immediately’s name, and we’ll make the recording obtainable by 4:30 p.m. Pacific Time this night on our web site.

    I’d now like to show the decision over to Henk.

    Henk Derksen — Government Vice President and Chief Monetary Officer

    Thanks, Invoice. Fiscal Q1 2022 displays a Viavi document in income, non-GAAP profitability and earnings per share. First quarter income got here in at $326.8 million, up 14.8% year-over-year exceeding our steering vary of $303 million to $317 million, primarily because of better-than-anticipated provide chain administration inside our NSE enterprise, in addition to favorable timing of shipments in our OSP enterprise phase. For the reason that outbreak of the pandemic, quarterly revenues have persistently improved sequentially, exceeding a previous document of $313.7 million in income within the December quarter 2019 by $13.1 million.

    Viavi’s document working revenue margin at 22.7%, expanded 140 foundation factors year-over-year and 190 foundation factors sequentially, and exceeded the steering vary of 21.5% to 22.5%. EPS had a quarterly document of $0.24 per share, exceeded the $0.20 to $0.22 steering vary and elevated $0.03 or up 14.3% from the 12 months in the past interval. The share depend of 242.3 million shares contains the dilutive affect of the convertible notes of roughly eight million shares. Now shifting to our reported Q1 outcomes by enterprise phase, beginning with NSE. NSE income at $227.9 million elevated 24.2% year-over-year, exceeded our guided vary of $210 million to $220 million.

    Inside NSE, NE revenues elevated 26.4% from a 12 months in the past to $204.9 million, reflecting power for our fiber, wi-fi and cable merchandise. SE income at $23 million, elevated 7.5% year-over-year, a results of restoration from our assurance and information middle merchandise. NSE gross revenue margin at 64.7% elevated 50 foundation factors year-over-year. Inside NSE gross revenue margin at 64.8% elevated 100 foundation factors from final 12 months, primarily a results of leverage on increased income quantity. SE gross revenue margin at 63.9% decreased 290 foundation factors year-over-year as a result of product combine. NSE’s working revenue margin at 13.5% exceeded our steering vary of 12% to 13% primarily a results of working leverage on increased income.

    Working revenue {dollars} greater than doubled as margins elevated 630 foundation factors from a 12 months in the past, reflecting the leverage and progress together with the aforementioned increased gross margin and disciplined opex management. Now turning to OSP. First quarter income at $98.9 million is down 2.3% from final 12 months’s income document of $101.2 million and displays OSP’s second highest income quarter. Income exceeded our guided vary of $93 million to $97 million, primarily a results of robust buyer demand and timing of shipments. Gross revenue margin at 57.7% decreased 260 foundation factors year-over-year and displays the affect of product combine and barely increased manufacturing variances in comparison with final 12 months’s document.

    Working revenue margin of 44.1% is close to the excessive finish of our steering vary of 42.5% to 44.5%, a lower of 260 foundation factors from a 12 months in the past because of the aforementioned discount in gross revenue margin. Now turning to the stability sheet. The ending stability of our whole money and short-term investments was $921.7 million, a rise of $218 million sequentially on the prior quarter and up $326.2 million in comparison with the prior fiscal 12 months. Along with free money move era, the elevated money possession displays the current $400 million high-yield bond providing we accomplished on the finish of September, offset by the partial affect of a deeming $275 million in principal worth of convertible notes in early September.

    Working money move for the quarter was $53.4 million, a lower of $10.5 million in comparison with $63.9 million within the 12 months in the past interval, reflecting elevated investments in stock to make sure we proceed to fulfill our on-time dedication to our buyer. We invested $15.7 million in capital expenditures throughout the quarter in comparison with $8 million within the prior 12 months. The elevated capex displays a brand new manufacturing facility in help of elevated future demand in-built Arizona. Early September, we entered right into a separate privately negotiated trade settlement with sure holders of the 1.75% senior convertible 2023 notes and the 1% senior convertible 2024 notes.

    This transaction lowered the principal worth of our 2023 convertible notes from $225 million to $131.2 million and our 2024 convertible observe from $460 million to $278.8 million, leading to a $85.9 million GAAP-only loss included in curiosity expense and different revenue. The remaining excellent stability of our mixed convertible observe is $410 million in principal worth on the finish of the quarter, a discount of $275 million in comparison with the prior quarter and prior 12 months. We settled the mixed retirement of $275 million in principal worth of convertible notes partly in money for a complete of $197 million in addition to by issuing 10.6 million shares of Viavi frequent inventory.

    Subsequently, the Board approved the repurchase of as much as $190 million of those shares, which commenced at begin of the second quarter and is anticipated to be accomplished no later than by the top of the third quarter. As of yesterday, November 3, we repurchased 2.4 million shares underneath this program at a median worth of $15.48 per share, together with commissions. As well as, and underneath the already current inventory buyback program, we repurchased $8.5 million of Viavi inventory at a median price of $16.52 per share together with commissions throughout the first quarter. In whole, as of the top of the primary quarter, we repurchased $95.5 million out of the $200 million approved share buyback plan. This program is now prolonged till the top of September 2022.

    In late September, we accomplished a $400 million high-yield observe providing at a beautiful fee of three.75% curiosity due in 2029 with internet proceeds of roughly $393 million. The proceeds might be used for basic company functions, together with replenishing the funds used to retire indebtedness. Please see our earnings supplemental deck posted on the Viavi web site for extra particulars. We’re happy with the profitable issuance of our first high-yield notes in addition to the retirement of roughly 40% of our convertible notes. This completes an necessary step in optimizing our capital construction, and we count on will create the monetary flexibility to permit us to execute our progress goals.

    Now on to our steering. The present macroeconomic atmosphere stays unsure with important provide chain challenges in addition to the continued pandemic. Consequently, we count on the fiscal second quarter 2022 income to be roughly $303 million, plus or minus $7 million. Working revenue margin is anticipated to be 20.5%, plus or minus 50 foundation factors, and EPS to be within the vary of $0.18 to $0.20 per share. We count on NSE income to be roughly $235 million, plus or minus $5 million, with working revenue margin at 16.2%, plus or minus 50 foundation factors. OSP income is anticipated to be roughly $68 million, plus or minus $2 million, with working revenue margins at 35.5%, plus or minus 100 foundation factors.

    Tax fee is anticipated to be roughly 17%. We count on different revenue and expense to replicate a internet expense of roughly $6 million, which incorporates the complete affect of the change in curiosity expense because of the high-yield observe issuance, internet of the convertible notes retirement. Absent of any modifications to the principal notes, we are able to count on the web expense of roughly $6 million additionally for fiscal Q3 and This fall. At present inventory worth ranges, and as we full the aforementioned share repurchase program, the estimated totally diluted share depend utilized in our calculation is 243 million shares for the second quarter. We additionally count on the totally diluted share depend to cut back to roughly 239 million shares, beginning on the finish of the third quarter and to roughly 237 million shares on the finish of the fourth quarter.

    With that, I’ll flip the decision over to Oleg.

    Oleg Khaykin — President and Chief Government Officer

    Thanks, Henk. Our fiscal 12 months 2022 is off to a powerful begin with document income and non-GAAP profitability in Q1. I am happy with each NSE and OSP efficiency in delivering robust outcomes regardless of provide chain challenges. The NE phase demand power was pushed by fiber, wi-fi and cable. Service suppliers proceed to improve and broaden their networks with fiber, leading to a document income quarter for our fiber subject devices. The wi-fi demand continues to be robust, up double-digit share from a 12 months in the past ranges. 5G subject deployment is accelerating with 5G networks being overlaid on prime of current 4G infrastructure. With 5G ORAN know-how now broadly utilized in, we are actually beginning to see preliminary deployment of ORAN within the subject as properly.

    Cable was additionally robust and was up from a 12 months in the past ranges. A lot of the current cable demand was in help of MSO’s bandwidth enlargement and 5G deployment. Semis and information middle demand for 400 gig continues to be very robust, with early 800 gig product adoption anticipated someday in late calendar 2022. Whereas continued shortages of high-performance semis have challenged our business, we’ve been capable of efficiently mitigate, for probably the most half, the availability constraints in Q1 and exceeded our income steering. We proceed to see provide challenges persisting into Q2 and Q3 and replicate them in our steering accordingly.

    Lastly, we count on to see the availability constraints to start out assuaging by mid-calendar 2022. The SE enterprise phase continues to get well with the income and buyer enterprise funnel rising properly. We count on SE to proceed to enhance and develop as enterprise clients reevaluate their IT challenge wants and 5G assurance alternatives begin to materialize in late calendar 2022. Now turning to OSP. The OSP enterprise phase delivered robust income and profitability led by sturdy demand for anti-counterfeiting merchandise. Throughout the previous 5 quarters, we’ve seen considerably stronger demand for anti-counterfeiting merchandise.

    As we stay up for 2022, we count on the demand to reasonable down from the present run fee as central banks digest their inventories and alter financial insurance policies. That mentioned, we count on the anti-counterfeiting income run fee throughout the calendar 2022 to stay above the pre-COVID ranges. 3D sensing income was up barely from a 12 months in the past ranges, with increased unit volumes as a result of broader adoption of world-facing purposes. Within the coming quarter, nonetheless, we count on the demand to be moderated downward as a result of provide chain constraints not associated to Viavi.

    We count on the demand to partially get well in calendar 2022 as part bottlenecks get resolved. Long run, we count on our principal progress drivers, 5G, fiber and 3D sensing to proceed driving progress and profitability for Viavi. In conclusion, I would like to specific my appreciation to the Viavi staff for its continued robust execution in delivering one other document quarter. I want all our staff, provide chain companions, clients and our shareholders to stay secure and wholesome.

    I’ll now flip the decision over to Invoice.

    Invoice Ong — Investor Relations

    Thanks, Oleg. We might be holding our 2021 annual shareholder and proxy assembly subsequent week on November 10. We may even be taking part on the JPMorgan CES Tech discussion board on January 5, 202, and the Needham Development Convention on January 10, 2022.

    Bob, let’s start the question-and-answer session.

    Questions and Solutions:

    Operator

    [Operator Instructions] And we’ll take our first query immediately from Alex Henderson at Needham & Firm.

    Alex Henderson — Needham and Firm — Analyst

    Thanks so much. I respect it. Good quarter, and I believe you guys are doing the suitable factor on the — with the bond providing. So I am glad to see that. By way of my query, I hoped you can discuss just a little bit concerning the outlook in 5G and to what extent broadly, you have been seeing provide constraints. For those who may give us some quantification on how a lot the availability constraints impacted the general enterprise, however specifically, the 5G facet of it, whether or not that was an element or not?

    Oleg Khaykin — President and Chief Government Officer

    Certain Alex. So Properly, 5G is a few of our newer devices. And clearly, they’re utilizing extra superior chips in some methods. Provided that the volumes are simply beginning, we’ve some stock already prebuilt. But it surely’s truly one of many areas the place we’re in all probability seeing a few of the extra insurmountable shortages, at the least within the very brief time period. And that is one space the place we nonetheless have not been capable of get all of the elements in-house, nevertheless it’s nonetheless early within the sport within the ramp. So it isn’t as unhealthy, and we have been in a position — at the least within the Q1, we’ve had sufficient materials to start out preliminary shipments. Q2, we’re a bit extra constrained, and we proceed to work on it.

    And after we present steering, we base it on the chipset and all the fabric that we’ve in-house and we all know we are able to construct. After we guided at Q1, we clearly supplied a decrease quantity. And we mentioned, hey, we’ve a better alternative, however we do not know if we’ll get elements or not. And fortuitously, my staff has completed an important job, and we had been capable of safe the availability and that considerably exceeded our steering. And it is just about the identical factor this quarter. I imply there’s quite a lot of demand. We can’t meet all of it with every thing that we’ve immediately. Proper now, we go off of the idea that we’ve materials in hand or coming that — and that is sort of drives our income.

    And the excellent news is the merchandise that we can’t meet, they simply mainly get pushed out into the subsequent quarter and the shoppers usually are not canceling. With just a few exceptions, they don’t seem to be canceling the orders. They’re simply pushing out the orders into the long run quarters. Particularly to 5G, what we’ve been seeing on the 11 manufacturing facet, we’ve not been having any points. We have been capable of get our allocation of servers to ship the product, though there have been some challenges. On the instrumentation facet, is admittedly the realm on the RF devices the place we’ve a little bit of a tighter provide, however then quite a lot of the adjoining devices, particularly with fiber associated to 5G, we’ve been capable of shut the hole on provide and ship all of these devices as properly.

    And the great factor I’d say is our wi-fi devices are receiving superb adoption and really robust curiosity coming from leasing firms in addition to a number of contractors. In order the 5G will get accelerated, we really feel fairly good about robust demand for our merchandise. I believe at this level, we’re actually centered on closing the hole on the — a few of the chipsets that we require for quantity scaling. And it in all probability might be, I would say, February of subsequent 12 months that we must always have the ability to shut the hole on the availability.

    Alex Henderson — Needham and Firm — Analyst

    So the query actually is how a lot of an affect did you might have on revenues within the present quarter that was simply reported and in your forecast? I imply is there $10 million, $15 million price of product that you just could not ship. And what are your assumptions for the fourth quarter. I like — the colour is nice. However that actually wasn’t the query.

    Oleg Khaykin — President and Chief Government Officer

    So — properly, you are speaking concerning the September. So September quarter, we largely closed the hole, and we — I believe we had upside of about $12 million, $13 million. And what we wanted to ship, there was no affect on the September quarter. I believe this quarter, there’s in all probability, I would say, $5 million to $10 million hole that we — is excellent. And Q3 might be nonetheless too early to invest, as a result of we do not know what the deliveries might be.

    Alex Henderson — Needham and Firm — Analyst

    After which one final query, only a follow-up query. So that you cited the return to pre-COVID ranges. Simply so that everyone is on the identical web page, what sort of income streams for OSP does that characterize? I imply, I do know what’s in my mannequin, however I am unsure which interval you are particularly referring to.

    Oleg Khaykin — President and Chief Government Officer

    Once I discuss pre-COVID, I speak about anti-counterfeiting, proper? That is particularly. So keep in mind, our base fee was round 50 and perhaps barely increased. Up to now 5 quarters, we had been operating nearer to 60% and even I believe after we go — we are saying the brand new ranges since sort of labored themselves out. Will probably be clearly operating above the 50, in all probability under 60. So I would say, taking mid-50s in all probability an affordable quantity.

    Alex Henderson — Needham and Firm — Analyst

    And the time to taper to that could be a couple, two, three quarters or is that…

    Oleg Khaykin — President and Chief Government Officer

    I’d say, beginning within the December quarter.

    Alex Henderson — Needham and Firm — Analyst

    I see. So the taper is beginning now and also you hit at that stage instantly within the December quarter.

    Oleg Khaykin — President and Chief Government Officer

    Sure, I would say instantly and possibly for the subsequent a number of quarters at the least. However then once more, they may are available simply as they took quantity down, they may come again and decide it up, particularly a few of the actually huge person economies of anti-counterfeiting. Numerous their printing vegetation are operating at low utilization, due to the COVID restrictions. So they’re consuming the stock a bit slower. As issues alleviate they usually decide up extra shifts, I think about quite a lot of it’ll work out, and we’ll in all probability see some elevated demand. However net-net, I would say now the brand new sort of, what we name, a steady-state demand is the next stage than it was pre-COVID.

    Alex Henderson — Needham and Firm — Analyst

    I respect the solutions. Thanks.

    Oleg Khaykin — President and Chief Government Officer

    Certain.

    Operator

    And gents, your subsequent query will come from Samik Chatterjee of JPMorgan.

    Samik Chatterjee — JPMorgan — Analyst

    Nice. Hello Oleg.

    Oleg Khaykin — President and Chief Government Officer

    Hello.

    Samik Chatterjee — JPMorgan — Analyst

    Thanks for taking my query. I suppose only a couple. Oleg,you talked about within the press launch and also you talked about it, the $400 million observe providing offers you quite a lot of flexibility when it comes to investments, each within the enterprise organically and inorganically. So simply needed to get your ideas about first, organically the way you’re enthusiastic about areas of funding and what capabilities you’ll want to add? After which how does the M&A pipeline look? And I’ve a follow-up after that.

    Oleg Khaykin — President and Chief Government Officer

    Certain. We even have numerous — we’re making fairly just a few investments. We have not actually talked about a few of the product traces. And now they’re beginning to materialize. So clearly, fiber — I imply, wi-fi has been an enormous recipient of quite a lot of our new inside R&D. And with a slew of our new merchandise popping out and the reception they’re getting, we really feel fairly assured about success of those merchandise out there. We even have numerous different packages. We’re in all probability a bit too early to speak about, however we — it is an entire new set of income streams for Viavi that we’ve not — they don’t seem to be in our present mainstream.

    And we proceed to spend about, I would say, in all probability, I would say, 10% to fifteen% of R&D in that space. And we’ll be getting extra vocal about it within the subsequent calendar 12 months as many of those merchandise are actually approaching, what I’d name, a main time. And the opposite factor — the final one is our SE. In order you understand, I have been all the time very cautious about it. We’re now beginning to really feel an increasing number of bullish about our Service Enablement enterprise. It has been completely restructured. Now we have our new structure, and we’re getting quite a lot of good traction from the market in 5G house in addition to the — quite a lot of the assorted enterprise and the service supplier purposes. So we’re cautiously optimistic that our SE enterprise is beginning to develop once more. And with each quarter, we’ll develop a stronger and stronger conviction.

    Samik Chatterjee — JPMorgan — Analyst

    Oleg, any feedback on the M&A pipeline, sorry, earlier than I ask my follow-up.

    Oleg Khaykin — President and Chief Government Officer

    So M&A, clearly, we’ve our funnel. I imply each — we all the time like to have a look at the personal firm alternatives. I imply there’s all the time clearly some public alternatives, we proceed to discover. And clearly, that $400 million offers us great flexibility to go do offers, particularly from the carve-outs and personal firm acquisitions.

    Samik Chatterjee — JPMorgan — Analyst

    Okay. And for my follow-up, and that is extra a layman’s query right here, which is, I imply you mentioning the availability constraints that you just’re seeing. You are seeing robust demand, however you are not capable of ship to your clients. And in case your clients be the cable supplier or telco, in the event that they want to deploy gear, how are they responding to that scarcity? Are they nonetheless pushing forward with the deployments? After which as soon as in a few quarters, the availability eases, is that demand for take a look at gear completely misplaced? Or do they essentially simply decelerate the deployment exercise and we simply catch as much as this pent-up demand in a few quarters as soon as provide eases?

    Oleg Khaykin — President and Chief Government Officer

    So I’d say lower than 10% of the demand will get misplaced. It does not get misplaced, what it does is that they go spend cash on the subsequent factor. And it is normally after they have some finances flush and they should spend. By and enormous, clients are inserting orders and it is a finest effort. We ship no matter we are able to on this quarter, after which we fulfill the remainder of the demand down the road. So I believe in that respect, I would say majority, I would say, 90% of the demand will not be perishable. And what’s truly the great factor about additionally right here is the shoppers now respect the shortages of semiconductor provide. So even earlier than there was wait and attempt to place order solely as near the time they want it as they need.

    Now they’re truly participating with us a lot earlier and discussing the wants within the subsequent six to 9 months and offering us superior visibility and inserting orders. And lots of of them are getting into into like — issues like materials accountability agreements the place they’ll assure taking the product, as a result of we’ve to go and supply the fabric and purchase all of the elements. So in the event that they later change their necessities, they must compensate us for that. So it simply exhibits you the robustness and power of their conviction and the demand is actual.

    Samik Chatterjee — JPMorgan — Analyst

    Thanks. Thanks for taking my questions.

    Oleg Khaykin — President and Chief Government Officer

    Certain.

    Operator

    And subsequent we’ll transfer to Mehdi Hosseini of SFG.

    Mehdi Hosseini — SFG — Analyst

    Sure, sir. Thanks for taking my query. Once I have a look at your reported September income and your information for December, on combination it is just about in step with what I used to be anticipating. And if I had been to take your remark that there is a $5 million to $10 million of a niche in provide and demand. To me, that is a slightly upside. So maybe in that context, you may inform us what are the important thing finish market segments which might be driving this upside?

    Oleg Khaykin — President and Chief Government Officer

    Properly, so Mehdi, I believe you are method too variety. I am truly — I believe we’re about $10 million decrease than I’d have anticipated, as a result of I do know you are proper, you bought your mannequin. I imply the realm the place we have been a bit stunned, as you have heard a couple of main cell phone provider with a serious buyer of ours, has confronted scarcity of elements. Sadly, for us, we had been one provider, who delivered our justifiable share. However consequently, by delivering robust September quarter, we now must take a pause within the December quarter to permit them to burn off the product that we shipped.

    Due to the scarcity of the elements, they don’t seem to be going to have the ability to eat it on the identical fee. So now we do imagine our demand will rebound within the March and June quarter and really our second fiscal half might be stronger in 3D sensing consequently, due to the shortcoming for them to prebuild every thing earlier on. So there, we have seen fairly a little bit of demand push out, due to the shortages.

    And I’d say, we had been anticipating the anti-counterfeiting to start out pulling again within the March quarter, a few of it received pushed in a bit earlier. So I would say between that and on OSP facet, I believe on the NSE facet, I believe we’re in all probability leaving about $10 million on the desk due to scarcity of elements. So there, we’d have been round $245 million or so income vary.

    On the OSP, there’s in all probability about good, for instance, $10 million drag in the other way, due to the discount within the counterfeiting and rebalancing of inventories on 3D sensing. So between the 2 of them, I imply, I truly thought like a few months in the past, our December can be an all new document for Viavi however — however so it’s.

    Mehdi Hosseini — SFG — Analyst

    Acquired it. Okay. I additionally wish to comply with up my second query that has to do with an enormous image. Final time, we received an replace on the mannequin with an Analyst Day again in September of 2019. And to date, you have truly tracked to that mannequin, like $1.3 billion of income alternative and $0.90, $0.95 of incomes. So when are we going to get the subsequent replace, particularly as we begin considering of FY ’23, does that hinge on and any alternatives that you just’re engaged on, you wish to wait till you shut on a few these tuck-ins? Or is it extra associated with simply given your arms across the core enterprise or mixture of the two?

    Oleg Khaykin — President and Chief Government Officer

    Sure. So after we give a mannequin, we actually base it on the enterprise that we personal. Any acquisition might be an upside to that mannequin. And as you understand, we’re approaching subsequent September. We will do the subsequent Analyst Day the place we offer sort of visibility forward. We actually are happy that even we did depend on some recession or pull again, we don’t foresee the once-in-a-century pandemic. However even with that, we are literally spot on the place we had been seeking to be when it comes to each income and profitability. We could even perform a little higher.

    However we’ll begin I would say, starting of subsequent calendar 12 months speaking about what’s subsequent, what’s for Viavi when it comes to progress. And there, we primarily speak about natural, all of the inorganic alternatives we do not talk about as a matter of our coverage. They are going to be all on prime of our steering. And so by the point the September comes, I believe you may have a fairly good concept of the place we’re going and we’ll simply formalize our technique, steering and the projections by then.

    Mehdi Hosseini — SFG — Analyst

    Yeah. Thanks.

    Oleg Khaykin — President and Chief Government Officer

    Certain.

    Operator

    Subsequent, we’ll go to Michael Genovese of WestPark Capital.

    Michael Genovese — WestPark Capital — Analyst

    Thanks, I respect you all of the element on the decision to date, and I actually simply have just a few clarifications of issues that I missed as a result of I am sluggish. On the core OSP, I did not fairly perceive on 2Q, are we going to the mid-50s stage in 2Q. Was that the steering?

    Oleg Khaykin — President and Chief Government Officer

    Sorry, may you repeat once more? I missed — you speaking concerning the — which steering?

    Michael Genovese — WestPark Capital — Analyst

    Core OSP, anticounterfeiting.

    Oleg Khaykin — President and Chief Government Officer

    Core OSP, so we mentioned that features primarily underneath counterfeiting. The run fee pre-COVID was round $50 million. It went up just a little bit. However the final 5 quarters, we had been operating nearer to $60 million and even low $60 million. All we’re saying is beginning within the December quarter, it is beginning to reasonable someplace in between the COVID run fee and pre-COVID run fee. So take or someplace in the midst of mid-50s of the sort of base demand.

    Michael Genovese — WestPark Capital — Analyst

    Acquired it. 2Q is December. Acquired it. Okay. In order that I do know you mentioned it a few instances, however I stored lacking it. Did you say that 3D sensing within the quarter was barely up or barely down year-over-year?

    Oleg Khaykin — President and Chief Government Officer

    So we had a September quarter was up. It was a really robust quarter. We had a really sturdy buyer forecast, as a result of they noticed a major enhance in unit quantity, due to the world-facing cameras. So even with the ASP discount street maps, the quantity was greater than offset the ASP discount that we shipped within the September quarter. Properly, come the December quarter, given the shortages of different elements to the forecast that our buyer anticipated, we now even have a little bit of a surplus of their stock of our filters. In order that they lowered their demand for the Q2 to work off the surplus from Q1 that they can not eat, due to the scarcity of elements. And I’d say the Q3, This fall will restart once more on the common run fee.

    Michael Genovese — WestPark Capital — Analyst

    Sure. I perceive that. However I suppose if 2Q is simply roughly order of magnitude down year-over-year and sequentially, it isn’t the identical quantity, however roughly 50% down year-over-year and sequentially. However do you count on the again — I do know you made feedback on the again half, do you count on that to be type of flattish year-over-year? So on the comparability, we’re mainly simply down half of the December quarter? I imply, is that a great way to consider it? We’re down year-over-year, half of final 12 months’s December quarter, and that is the place we must always mannequin the 12 months. Does that make sense?

    Oleg Khaykin — President and Chief Government Officer

    Are you speaking about 3D sensing?.

    Michael Genovese — WestPark Capital — Analyst

    Sure, 3D sensing sure. So flat year-over-year, besides that the December quarter is mainly half of what it was final 12 months.

    Oleg Khaykin — President and Chief Government Officer

    Sure. Proper. We had been planning — we had been wanting starting of the 12 months sort of anticipation what number of models are clients going to construct, the combo of two filter world-facing and rear-facing digicam or simply just one digicam, we had — simply sort of wanting on the forecast of models and with the ASP discount, we felt will probably be roughly flat year-over-year, proper? With the discount in unit quantity, we now assume we’ll in all probability be for the 12 months might be about 10% down, proper? As a result of there’s essentially going to be fewer models consumed, due to shortages of the opposite elements. They will construct your models..

    Michael Genovese — WestPark Capital — Analyst

    I respect that reply and I am sorry, make clear. The opposite issues so many instances, however I respect it. Thanks.

    Oleg Khaykin — President and Chief Government Officer

    Certain.

    Operator

    Thanks. Gents, your subsequent query will come from Tim Savageaux of Northland Capital Markets.

    Tim Savageaux — Northland Capital Markets — Analyst

    Good afternoon. And congrats on an important first fiscal quarter. Let me do that OSP factor another time after which I will comply with up on the take a look at facet. So simply to — you are guiding mainly down $30 million sequentially. It seems like that is greater than 50% 3D sensing when it comes to the affect? Perhaps — I do not know, perhaps 2/3 of that. Is that truthful to say? Are you able to characterize it in that fashion, as a result of should you have a look at the overall sequential decline, what’s popping out of 3D and what’s popping out of forex? Then I will comply with up.

    Oleg Khaykin — President and Chief Government Officer

    Properly, so we do not break down, nevertheless it’s considerably lower than half is the 3D. We had a really robust September quarter and the counterfeiting demand. In truth, that one was considerably increased than the traditional run fee. And 3D sensing is a mix of, I would say, in all probability it is a bit greater than half is anticounterfeiting and just a little bit lower than half of 3D sensing.

    Tim Savageaux — Northland Capital Markets — Analyst

    Glorious. And on we go to the comm facet of issues. So clearly, you noticed some upside in community enablement within the September quarter and are guiding for additional sequential progress in December. And you have heard this query from me earlier than. However to what extent does that ponder type of a powerful year-end spending dynamic, you may even name it a finances flush, amongst a few of the huge U.S. carriers specifically, C-band spending seems to be to be ramping into year-end in addition to cable spend or to what extent is that sort of extra normalized demand…

    Oleg Khaykin — President and Chief Government Officer

    Sure. So I’d say this 12 months, there’s little or no finances flush. As a result of actuality is finances flush occurs when you might have loads of stock, loads of elements and you may shortly — you place an order in finish of November and also you get product by the top of December, proper? On this atmosphere, you can not even pivot that shortly. So — and in addition, we have a look at the orders that we’re getting. They’re very a lot a programmatic, orders as an enormous packages, the place they’re doing a wholesale and new community deployment or improve or receiving their subject workers with new gear.

    So we’re truly seeing an enormous change within the mindset for lots of operators and the best way they strategy upkeep of their community and I believe the primary time, I would say, within the 5 years since I joined that I am seeing the upkeep and community operations turning into rather more depending on extremely automated, clever take a look at and measurement, which improves productiveness of the sphere workers and the resiliency and efficiency of the networks.

    And in addition what we’re seeing is it isn’t simply handheld instruments. We’re promoting quite a lot of huge iron, what I’d name. It is like racks of take a look at gear that sits within the community and displays, polices with quite a lot of software program. So I imply, despite the fact that it is nonetheless known as NE for us, it is a — it isn’t identical to you are just a little handheld by and enormous. It contains quite a lot of the, I’d name, huge iron sort merchandise that go into core of the community.

    Tim Savageaux — Northland Capital Markets — Analyst

    All proper. So — and I take your level on supply of product, perhaps we see an order flush, type of a finances flush or one thing like that, the place you might have carriers sort of getting in line within the…

    Oleg Khaykin — President and Chief Government Officer

    In quite a lot of the orders, they supply steering. And if it was purely a flush, they are saying, hey, I would like this a lot. Are you able to ship? If not, they will transfer on to the perhaps the subsequent factor they wish to purchase. However we are able to inform them, hey, I can’t deal like, OK, properly, when are you able to ship? Let’s schedule — put a schedule as a result of we’d like that, proper, slightly than we have to spend the cash. So truly, at this time limit, I am not seeing a lot flushing. That is why should you have a look at quite a lot of service suppliers announcement, all of them massively perceive their capex. And it isn’t for the dearth of attempting. It is simply essentially, there’s simply no provide.

    Tim Savageaux — Northland Capital Markets — Analyst

    Yeah. Thanks very a lot.

    Oleg Khaykin — President and Chief Government Officer

    Certain.

    Operator

    Subsequent now from Meta Marshall at Morgan Stanley.

    Meta Marshall — Morgan Stanley — Analyst

    Nice, thanks. A few questions for me. Perhaps on the primary query, simply on provide chain, understanding some affect, however comparatively minor for you guys. Simply questioning if buyer demand, such as you’re seeing sort of your buyer demand come down any simply because they cannot put the entire items of the challenge collectively, so they do not want sort of the take a look at and measurement, simply sort of a spinoff of provide chain impacts on buyer demand.

    After which perhaps only a second query. Are any of the constraints that you just’re seeing one thing that may you are having to pay extra for that gear? Are there any worth modifications that you just assume you may have to cross on or relative capability that you just assume you may must cross on a few of these worth modifications?

    Oleg Khaykin — President and Chief Government Officer

    Certain. So I believe the primary query concerning the — how they spend. I imply, it is essentially, they’ve plans. Numerous what drives our spend is fiber plant enlargement and deployment and the 5G deployment. And all of that’s you may construct out, activate, optimize, troubleshoot with out the devices. So you’ll want to equip your technicians or building crews with all of the devices. In order that’s a part of the demand. And the opposite one is enhancing the reliability of the community and efficiency of community. That one is sort of extra, I’d say, heavier demand on the gear that sits contained in the community, proper?

    So I believe on there, it is simply a part of their simply basic technique, build-out plans, they usually’ve been speaking to us for a number of quarters, and now it is materializing. So it isn’t a flash within the pan some would say, proper? By way of the elements, I inform you, I believe we have been in all probability higher than most of our opponents with the ability to get elements. But in addition to be truthful, it is so much simpler to pay — to get — we do not want that a lot quantity to fulfill our demand, as a result of our gross margins on our merchandise are pretty excessive. So even after we pay a major premium on our elements, the web affect will not be that nice on the margins or the pricing. And we’ve been passing on elevated prices like price of logistics and numerous surcharges.

    However extra importantly, we have additionally been systemically implementing during the last a number of quarters, worth will increase, which, in some instances, already began going into impact very early, however actually will kick in starting of the calendar 12 months. And it very intently matches what we’re seeing on the semiconductor house. I imply you are seeing throughout the board 10% to twenty% worth will increase on semi elements in all probability beginning, I’d say, in earnest starting of January. So we figured we have to be forward of that and get all our contracts and get all the shopper pricing adjusted sooner slightly than later.

    That is why despite the fact that we had important expedite charges and surcharges and premiums to safe these elements, we’re not getting them simply because we’ve a pleasant smile and say fairly please. We truly pay fairly a bit of cash to get our unfair share of elements, however we’ve additionally been speaking that we’ll cross these elevated prices to our clients. And to date, we’ve not had a single buyer that declined to take the enterprise. And so they’re seeing the identical factor that costs are going up throughout the board.

    Meta Marshall — Morgan Stanley — Analyst

    Nice, that is tremendous useful Thanks a lot.

    Oleg Khaykin — President and Chief Government Officer

    Certain.

    Operator

    And subsequent, we’ll hear from Richard Shannon of Craig-Hallum.

    Richard Shannon — Craig-Hallum — Analyst

    So, thanks guys for taking my questions. Head over the subject of your 5G subject devices. Oleg, I believe you made a quick comment within the ready part on how that is going forward. You mentioned issues are shifting alongside properly right here within the early stage. Perhaps should you can sort of characterize the speed of success the place it sort of leads you to share relative to your expectations as you actually beginning to sort of do R&D into this space a few years in the past and might you give us some coloration there, that may be nice, please.

    Oleg Khaykin — President and Chief Government Officer

    Certain. So I imply, what we’re seeing proper now could be the preliminary deployment. Our individuals are beginning to transcend the engineering or the NAM subject technicians placing up the pilot initiatives. So it is beginning. And in a method, I am very truly very glad that it is solely simply beginning, and it is comparatively sluggish, as a result of I couldn’t ship if they honestly place full orders, I could not ship 1000’s of models immediately, even when I needed to. So in a method, it is sort of lucky that a few of the deployments get delayed, and we’re within the early phases, and we’ve sufficient materials to help it.

    However we additionally see that as issues speed up, we’ll want considerably extra materials that in all probability is not going to actually be obtainable till, I would say, February of subsequent calendar 12 months. So in that respect, we have had sufficient materials in inventory to sort of get all people going. They’re certainly not they’re all getting what they need, nevertheless it’s sufficient to maintain them locked in into Viavi take a look at move, Viavi methodology and sufficient to get all people educated and prepped for the accelerated rollout.

    Richard Shannon — Craig-Hallum — Analyst

    Okay. That is truthful coloration. I respect that. My second query is shortly on cable TV. It is problem for probably the most a part of the previous few years have not highlighted that a lot. I believe there was a second quarter in a row that you’ve got. I suppose perhaps you may give us some coloration inside the FC enterprise, how huge of a contributor that’s? And the way sustainable do you see the upswing right here in cable TV?

    Oleg Khaykin — President and Chief Government Officer

    So the cable. So it isn’t — we’re nonetheless clearly promoting a few of the handheld devices, nevertheless it’s considerably down, as a result of DOCSIS 3.1 was deployed already for fairly some time. And it is actually extra of a substitute and perhaps some further issues we’re offering. The subsequent, I would say, huge wave might be with DOCSIS 4.0, nevertheless it’s in all probability a few years out. However we’re nonetheless promoting fairly a bit of apparatus. However what’s actually driving cable for us, it is probably not copper per se, it is fiber, OK? As a result of more and more, Cable firms are now not cable. They’re fiber operators. And an increasing number of what we’re shifting towards is that they’re shopping for quite a lot of our fiber gear, just about in step with the telcos and wi-fi carriers.

    And what’s much more attention-grabbing as they push fiber deeper and deeper into the community, they’re dropping visibility of all of the totally different segments of their community, as a result of earlier than you had copper and also you had these amplifiers they usually supplied suggestions and visibility. Now as you substitute all of it with fiber and you’ve got a number of node splits, you’ll want to begin to monitor fiber plant. So we’re truly seeing cable firms turning into huge consumers of our fiber monitoring gear the place you monitor lots of of traces of fiber over a big space and you set this stuff throughout their community to supply visibility and monitoring of their fiber efficiency.

    So I believe in a short time, the distinguishing issue between telcos, wi-fi carriers and cable have gotten an increasing number of diminished and they’re turning into predominantly fiber clients, however a unique taste of fiber cap, however the platform may be very related throughout all three.

    Richard Shannon — Craig-Hallum — Analyst

    Okay, that is nice perspective Oleg. Thanks. That is all from me.

    Oleg Khaykin — President and Chief Government Officer

    And one factor I’d add additionally, many cable firms are additionally entering into the 5G, they’re provisioning sort of infrastructure. So they’re additionally shopping for 5G gear from us, which may be very counterintuitive, clearly..

    Richard Shannon — Craig-Hallum — Analyst

    Thanks.

    Operator

    And gents, it seems we’ve no additional questions immediately. Mr. Ong, I will flip the decision again over to you for any closing feedback.

    Invoice Ong — Investor Relations

    Thanks, Paul. This concludes our earnings name for immediately. Thanks, everybody.

    Operator

    [Operator Closing Remarks]

    Period: 52 minutes

    Name members:

    Invoice Ong — Investor Relations

    Henk Derksen — Government Vice President and Chief Monetary Officer

    Oleg Khaykin — President and Chief Government Officer

    Alex Henderson — Needham and Firm — Analyst

    Samik Chatterjee — JPMorgan — Analyst

    Mehdi Hosseini — SFG — Analyst

    Michael Genovese — WestPark Capital — Analyst

    Tim Savageaux — Northland Capital Markets — Analyst

    Meta Marshall — Morgan Stanley — Analyst

    Richard Shannon — Craig-Hallum — Analyst

    Extra VIAV evaluation

    All earnings name transcripts


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