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Edited Transcript of VIAV earnings conference call or presentation 15-Aug-19 8:30pm GMT

Q4 2019 Viavi Solutions Inc Earnings Call

MILPITAS Aug 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Viavi Solutions Inc earnings conference call or presentation Thursday, August 15, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Amar Maletira

Viavi Solutions Inc. - Executive VP & CFO

* Oleg Khaykin

Viavi Solutions Inc. - President, CEO & Director

* William Ong

Viavi Solutions Inc. - Senior Director of Finance & IR

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Conference Call Participants

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* Alexander Henderson

Needham & Company, LLC, Research Division - Senior Analyst

* John Warren Marchetti

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst

* Joseph Lima Cardoso

JP Morgan Chase & Co, Research Division - Analyst

* Jun Zhang

Rosenblatt Securities Inc., Research Division - MD & Senior Research Analyst

* Ku Kang

B. Riley FBR, Inc., Research Division - Senior Analyst of Optical Components

* Meta A. Marshall

Morgan Stanley, Research Division - VP

* Michael Edward Genovese

MKM Partners LLC, Research Division - MD and Senior Analyst

* Richard Cutts Shannon

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Timothy Paul Savageaux

Northland Capital Markets, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Viavi Solutions Fiscal Fourth Quarter Earnings Call. (Operator Instructions) Bill Ong, Head of Investor Relations. You may begin your conference.

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William Ong, Viavi Solutions Inc. - Senior Director of Finance & IR [2]

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Thank you, Julianne. Welcome to Viavi Solutions Fourth Quarter Fiscal Year 2019 Earnings call. My name is Bill Ong, Head of Investor Relations. Joining on today's call, Oleg Khaykin, President and CEO; and Amar Maletira, CFO.

Please note, this call will include forward-looking statements about the company's financial performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from current expectations and estimations.

We encourage you to review our most recent annual report and SEC filings, particularly the Risk Factors described in those filings. The forward-looking statements, including guidance 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 except revenue are non-GAAP. We reconcile these non-GAAP results to our preliminary GAAP financials and discuss their usefulness and limitations in today's earnings release.

The release, plus our supplemental earnings slides which include historical financial tables, are available on Viavi's website.

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 Amar.

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Amar Maletira, Viavi Solutions Inc. - Executive VP & CFO [3]

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Thank you, Bill. Viavi's revenue at $289.7 million grew 11.1% year-on-year and exceeded our revenue guidance range. NSE revenue at $221.4 million was above the midpoint of revenue guidance, driven by revenue upside in fiber and wireless products. OSP revenue at $68.3 million exceeded the guidance range due to upside from our core OSP as well as our 3D sensing products.

Viavi's operating margin at 17.6% exceeded the high end of our guidance and was up 460 basis points year-on-year. EPS at $0.17 exceeded the guidance range and increased $0.05 or 41.7% from a year ago.

Now moving to our reported Q4 results by business segment, starting with NSE. NSE revenue at $221.4 million grew 6.7% year-on-year. Within NSE, NE revenue at $197.3 million grew 10.2% from the year-ago levels, driven by strong performance in both fiber and wireless test products across field and lab market segments.

SE revenue at $24.1 million declined 15.4% from a year ago levels, driven primarily from the expected runoff of our mature Assurance products and from a decline in datacenter products due to weaker demand from our datacenter customers.

NSE gross margins at 65.7% increased 370 basis points year-on-year, primarily due to higher overhead cost absorption from higher revenue volumes as well as gross margin improvements in our growth products within SE. NSE's operating margin at 13.4% increased 420 basis points from a year ago levels, reflecting the gross margin improvements and the favorable operating leverage in our OpEx structure at higher revenue volumes.

NSE's book-to-bill ratio was above 1. In any given quarter, our NSE business is primarily a book-ship business. Since we provide specific quarterly revenue guidance for NSE, we believe that the quarterly book-to-bill ratio metric, which we currently report, is redundant. Hence, we will stop reporting this metric starting in fiscal Q1 2020.

Now turning to OSP. OSP revenue at $68.3 million increased 28.4% year-on-year, driven by the 3-D sensing and anticounterfeiting product revenue.

OSP's gross margin at 49.5% increased 290 basis points due to higher absorption of manufacturing overhead as revenue grew in both core OSP and 3D sensing product lines.

Operating margins at 31% increased 300 basis points, reflecting the higher gross margin levels as -- and was within our guidance range.

Now moving to our fiscal year 2019 performance. Viavi's revenue at $1.13 billion increased 29.1% year-on-year, driven by 27.9% revenue growth in NSE business segment and a 32.6% growth in OSP. NSE revenue growth was driven by a mix of organic growth in our fiber products across both lab and field and inorganic growth from the acquisition of the Wireless and AvComm test and measurement assets.

This was partially offset by declines in our SE business from the expected runoff of the mature product revenue and weaker demand for our datacenter products. OSP's revenue growth was primarily organic, with strength in both 3-D sensing and anticounterfeiting products, led by redesign and reprint volume from major banknotes. Viavi's operating margins at 17.5% expanded 360 basis points year-on-year, driven by the significant improvements of 510 basis points in our NSE operating margins as a result of favorable operating leverage with revenue growth and continued cost management discipline across all functions.

Our operating profit at $197.6 million grew 62.2% or an increase of $75.8 million year-on-year, with $56 million of the growth contributed by NSE and $19.8 million of the growth in OSP.

EPS at $0.68 grew 54.5% or $0.24 year-on-year.

Now turning to the balance sheet. Our total cash and short-term investments ending balance was $526.5 million. Operating cash flow for the quarter was $28.5 million.

In Q4, we repurchased $2.4 million of Viavi stock at an average cost basis of $12.50 per share, including commissions.

Of the $200 million authorized for share buybacks, we have repurchased shares approximately $148.6 million as of the end of fiscal Q4. We will continue to be opportunistic by repurchasing Viavi stock to offset earnings dilution from stock-based compensation.

Now on to our guidance. We expect fiscal first quarter 2020 revenue for Viavi to be approximately $283 million, plus or minus $10 million; operating margin at 16.4%, plus or minus 1%; and EPS to be in the range of $0.14 to $0.16.

We expect NSE revenue to be approximately $208 million, plus or minus $8 million, with operating margins at 10%, plus or minus 1%. We expect OSP revenue to be approximately $75 million, plus or minus $2 million, with operating margin at 34%, plus or minus 1%.

Our tax expense is expected to be approximately 18% to 19%. We expect other income and expenses to reflect a net expense of approximately $2.5 million.

Share count is approximately 237 million shares. The estimated sequential increase in share count primarily reflects the accounting impact to weighted average shares from our existing 2023 and 2024 convertible notes as Viavi's average share price in this quarter-to-date is trading above the conversion price of these notes.

With that, I will turn the call to Oleg.

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [4]

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Thank you, Amar. I'm pleased with our performance during this fiscal fourth quarter. In NSE, the 5G wireless market remains strong and symbiotically pulling along fiber products as service providers upgrade the network infrastructure for higher bandwidth capacity. The strength in both lab and field fiber, independent of 5G, is also being driven by industry's upgrade to 400 gig. Cable demand cyclically declined year-on-year as North American cable providers mostly completed their DOCSIS 3.1 upgrade.

The North American decline was partially offset by strong demand for DOCSIS 3.1 products in other geographies.

The SE business segment remained weak this quarter, driven by weaker spending by enterprise datacenter customers.

In OSP, the anticounterfeiting revenue exceeded our expectations, driven by higher banknote reprint volumes. While the business pipeline remains robust, visibility remains limited, and we don't expect to see revenue uptick until sometime in calendar year 2020.

The 3D sensing revenue also exceeded our expectations with strength from both the optical filters and diffusers, largely driven by Android-based smartphone devices.

We expect 3D sensing revenue to continue growing year-on-year. To recap, during the fiscal year 2019, we successfully executed on the Viavi transformation strategy that we have laid out during our September 2016 Analyst Day and have exceeded our non-GAAP profitability targets.

The major highlights include: the NEC business segment achieving double-digit non-GAAP operating margins of 11.9% for the fiscal year 2019; and the OSP 3-D sensing products expanding to multiple customers and multiple product lines with revenue more than doubling from the prior fiscal year.

Lastly, today about 50% of overall Viavi revenue comes from products with strong expected secular growth, namely 5G, fiber and 3D sensing, as compared to fiscal year 2015, where there were -- was minimum secular growth in both NSE and OSP end markets.

In the fiscal year 2020, we are launching the next phase of Viavi's transformation with a greater focus on growth, both organic and inorganic. We expect to continue to leverage major secular growth drivers in 5G wireless, fiber and 3D sensing to achieve higher levels of revenue and profitability.

We invite you to our Analyst Day event on September 12, 2019, in Santa Clara, California, where we are -- will outline our going-forward strategy and goals. There will also be a live webcast of our presentation, and we'll provide more information regarding the next month's events. In conclusion, I would like to thank my Viavi team for the strong performance in fiscal 2019 and express my appreciation to our customers and our shareholders for their support. I will now turn the call over to Bill.

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William Ong, Viavi Solutions Inc. - Senior Director of Finance & IR [5]

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Thank you, Oleg. Julianne, let's begin the question-and-answer session. We ask everyone to limit the discussion to one question and one follow-up.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from John Marchetti from Stifel.

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John Warren Marchetti, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [2]

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Oleg, I was wondering if you could talk a little bit more about the Cobham business or the lab test business in 5G? Obviously, that's been a driver of growth, certainly through this last fiscal year. Just curious how you see that playing out as we're going into fiscal '20? And if you can comment at all about sort of existing customers and their contribution versus maybe new customers coming on?

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [3]

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Yes. Thank you. So obviously, this -- that business has performed well above our expectations and pretty much exceeded all our own business projections when we were doing this deal. So it's -- as usually the case, the acquired company never performs better than -- the best they ever perform is the day you look at their first PowerPoint deck. In this case, it's been a nice exception and it's done much better than even our upside scenario was.

That said, we expect that business to continue to be strong this year, although probably growing at a lower rate. And -- but we're also going to start seeing substitution between the protocol testing to more of a capacity testing. So as our customers start shifting gears from development to production, the configuration of this test will be more of a production focus and a bit less of a development focus, but we still expect development to be a major part of the sales going forward.

Furthermore, what we are doing, we are leveraging our very strong position in the labs to develop and launch a comprehensive -- a rough portfolio of products for the field.

And we have set the road map -- about 1.5 years ago, as we were contemplating this acquisition and a lot of those products are coming out in the second half of this calendar year. So basically, first half of our fiscal year.

So in that way, it's not just the Cobham wireless business that's positioning us for strong outlook this year and a continued growth, but also we're placing significant emphasis to use that position to build out a meaningful wireless instrumentation -- field instrumentation business where we are -- have very little today.

So in that respect we are looking to change the profile of Viavi from being a primarily wireline field instrumentation to being wireline and wireless field instrumentation business.

So hopefully, that helps. And obviously, we continue to add other product lines and extensions to the Cobham business to expand our TAM within each of our customers.

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Amar Maletira, Viavi Solutions Inc. - Executive VP & CFO [4]

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So if I could -- John, I'll just take this opportunity to give you a quick update on the -- I know your the question was around the revenue side, but I'll quickly give an update on the synergies -- on the cost synergies of this business. We were waiting till the end of fiscal '19 to give you guys an update. So if you recall, for the 2 assets that we acquired, the AvComm asset and the Wireless asset,

we had estimated cost synergies of anywhere between $15 million to $20 million over a 3-year period. And as of end of our Q4, which is 18 months into -- roughly about 15 to 18 months into the deal, we have actually actioned between $15 million to $20 million of cost synergies.

2/3 of those synergies are actually already reflected in our fiscal '19 results. So in addition to going and driving top line growth, we have also accelerated the cost synergies. We then also reinvested some of the cost synergies back into the business to drive further growth in this -- in the wireless lab business as well as the lab-to-field initiative for the next 2 to 3 years. So some of it is reinvested back into the business.

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John Warren Marchetti, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [5]

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Great. And then, maybe just as a follow-up, Amar. You mentioned in the guidance the higher share count as a result of some of the anti-dilutive measures of the converts.

How do we think about that maybe on a little bit of a longer-term basis? Is there a way that we can sort of model that based on every dollar above the strike price or something like that? How do we look, just sort of beyond even just the next quarter or 2, to think about this over the longer term given that now it looks like that's going to be in the money moving forward?

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Amar Maletira, Viavi Solutions Inc. - Executive VP & CFO [6]

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Yes. So it's a very good question, actually. So let me give you a little bit of additional color here, more than what I mentioned in my prepared remark, on how to think about this. Now I will start with the fiscal Q1 guidance of 237 million shares.

And if you see sequentially, it's grown by 4.5 million shares. One thing that you've got to keep in mind is typically our share count increases sequentially from fiscal Q1, which is the September quarter, to our fiscal -- from fiscal Q4 to fiscal Q1, which is the September quarter, due to vesting of equity awards as well as the annual grant. So that happens every year, right.

So there's some element of that already factored in that 237 million. What we do is we go and buy back shares and offset that dilution. In addition to that, coming to your specific questions, what we have seen is since the share price, if you look at the average share price this quarter till date, it is at about $14.24. And it's higher than the $13.22 and the $13.94. Those are the 2 conversion prices for the 2 converts we have. So our stock price is very much in the money. And so there's about 3.5 million shares that got added because of the accounting impact of these converts being in the money.

So for every dollar increase above the average of, say, $13.50, and if you just take $1 increase from there, you should think about adding about 3 million shares to the share count. Now to put things in context, what it really means is that the EPS dilution is less than $0.005. It's about $0.003. So if you then convert it into how much of additional operating profit we need to offset that, it's about $500,000 to $700,000. So for -- in our models, we actually go and drive the operating profit dollars because we know this -- we don't know where the stock price will be, but we always factor that in our operating model. Does that help you?

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John Warren Marchetti, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [7]

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Very much so.

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Operator [8]

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Your next return comes from Alex Henderson from Needham.

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Alexander Henderson, Needham & Company, LLC, Research Division - Senior Analyst [9]

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You have 2 pretty interesting announcements that came out a little bit later in time that we were unable to ask you a lot of questions of because you were in your quiet period. Could you talk a little bit about the China Mobile deal that you announced and the Samsung deal that you announced? And kind of give us some bigger than a breadbox, smaller than a slice kind of calculus?

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [10]

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Well, I think some of those things kind of came out -- we didn't think it was such a big deal, but I guess it turned out to be a lot bigger deal. And we just kind of thought that everybody knew where our presence was. So goes to show that it's probably a good occasionally -- to toot your own horn. I mean clearly -- I mean the first one is, we have been a partner with China Mobile on the network splicing and a number of other fiber standards, but we've also obviously been working with them on testing 5G,

and as I said, when we -- when you start originally, you sell a lot your system emulation, system testing gear, into the equipment manufacturers. But the moment the products are shipping -- I mean one thing we don't talk much about is the next level of customers that come in are usually the service providers with their own labs, where they want to test and evaluate all the vendors' equipment,

although the volumes of sales to service providers are significantly lower because they don't need as many test standards.

That nevertheless is an important element as it allows us to get into the -- from the OEM labs into service provider labs and subsequently into their field equipment.

So in that respect, we felt that our collaboration went just significantly beyond just purely a one-off sale. There, we're actually doing a lot more with the carrier in evaluating various -- performance of various equipment and standards.

And as such, we were happy when they were more than welcome to do a press release with us. In case of Samsung, I mean it is a significant customer of ours. I mean they were -- at this point we pretty much have every major base station manufacturer, or we have majority share,

with the exception, I would say, of Huawei. Huawei is very much today an internal solution. And aside from Huawei, we are the strongest -- have the strongest position in the testing labs across all our wireless infrastructure.

So I think there Samsung was the last OEM for us to capture, and we did. And I think that was the press release.

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Alexander Henderson, Needham & Company, LLC, Research Division - Senior Analyst [11]

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So bigger than a breadbox or smaller than a slice? Any sizing on that?

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [12]

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Well, depends how big is the breadbox or the slice. It's significant. Let's put it that way.

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Alexander Henderson, Needham & Company, LLC, Research Division - Senior Analyst [13]

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Okay. One last question, if I could. Could you tell us whether the 3D sensing grew on a quarter-to-quarter basis?

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Amar Maletira, Viavi Solutions Inc. - Executive VP & CFO [14]

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So 3D sensing did grow on a quarter-to-quarter basis. From fiscal Q3 '19, to fiscal Q4 '19. Yes, it did grow sequentially.

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [15]

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Yes. And as I said in my prepared remarks, it was predominantly -- I mean the June quarter is, depending on the standard you are supporting, it's a transition quarter for one and not so much for the other. So it was primarily driven by the Android devices in Asia.

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Operator [16]

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Your next question comes from Michael Genovese from MKM Partners.

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Michael Edward Genovese, MKM Partners LLC, Research Division - MD and Senior Analyst [17]

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Oleg, you mentioned in your prepared remarks 3D sensing more than doubled year-over-year. I think it -- it looks like to me like it nearly tripled, maybe up about 170%. Can you give us some help on how to think about this for the next year? And I think you just mentioned that it was primarily driven by Android, so can you just generally talk about the other ecosystem, seasonality in the back half of this calendar year?

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [18]

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Well, I think the -- it's -- actually, I think it is a little bit more than doubled, right? Because I think what did we say, last -- it's more than doubled.

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Amar Maletira, Viavi Solutions Inc. - Executive VP & CFO [19]

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So, yes. So we -- more than doubled, exactly. So we -- so I'll give you a little bit more color and then Oleg can take it from there. So we said roughly about $65 million, plus or minus, would be the full year. And we landed actually close to about $70 million in 3D sensing. So it's more than doubled, to Oleg's point.

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [20]

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Close to -- because I think it's $25 million.

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Amar Maletira, Viavi Solutions Inc. - Executive VP & CFO [21]

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$28 million, yes.

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [22]

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$28 million. Yes, so we're just being modest. You're right. It's much more than doubled.

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Michael Edward Genovese, MKM Partners LLC, Research Division - MD and Senior Analyst [23]

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Right. How do we think about it for the year? Like what kind of guideposts can you give us to model it for the year? But also for the next 2 quarters, the -- do you expect strength out of the both ecosystems?

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [24]

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Well, I mean -- so here's a thing. I think clearly, it's going to grow. In terms of the amount of growth, I have to be a bit cautious here because I don't know how much of the de-Americanization of supply chain in China is going to impact us ultimately.

I mean clearly, we have the best technology, the best price performance, the best demonstrated ability to supply and deliver and support our customers.

If it all purely comes down to competitive metrics and the best provider wins, then we clearly should do extremely well.

But we also have to be -- I'm being -- I'm hedging my bets and being a bit more cautious in terms of the -- some of the attempts, I would say, in Asian supply chain to reduce the reliance on American company. So we don't have an issue with the supply, but I think it's -- one thing I cannot predict is the political winds. And that's why we are being cautious, but in any case we expect strong growth this year. Just how much it's going to grow is really going to be a function of where some of those trade winds are going to blow.

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Michael Edward Genovese, MKM Partners LLC, Research Division - MD and Senior Analyst [25]

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Okay. I just want to follow-up on this same topic because from listening to one of the VCSEL players, it seems like the -- I'm trying not to say the name, but the non-Android big customer, it seems like they've virtually pulled forward a little bit into the June quarter, maybe some early [building] this year. And you're coming up strength in Android. I'm wondering if you also saw strength in the iOS in the quarter?

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [26]

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So remember I think you have to really take into account your lead times. If you're providing VCSEL, your lead time is probably closer to 3 months to get the product through the fab into assembly and so on. For us the lead time is a couple of weeks. So the orders that you -- if you are a OEM, you would place orders much sooner with the semiconductor vendor and you'd preplace your orders much later with the, let's say, optical vendor.

I actually prefer our situation more, because ultimately our orders are much closer to the actual demand. So we have a much lower risk of overbuilding inventory, and we can respond very quickly to the ups and downs in the demand with -- and avoid overbuilding inventory.

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Michael Edward Genovese, MKM Partners LLC, Research Division - MD and Senior Analyst [27]

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And if I could just ask one more. It's good to see, in NE, it looks like you have pretty balanced strength between wireline and wireless test. I think you've got some questions on wireless. Could you just talk about sort of the drivers on wireline right now? So which regions? What type of customers you're seeing a good demand out of?

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [28]

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So on wireline, as I mentioned, I mean the -- this year fiber's been extremely strong, right,

and I would say the biggest strength we've seen is in the lab and production. This whole conversion to 400 gig and a lot of the R&D in 800 gig is driving a lot of lab and production requirements. So I think lab is driven by just everybody developing from semiconductors to modules to testing the OEM gear at 400 gig and advanced development on 800 gig. And in production there's a very strong demand for ROADM modules, and obviously, that's driving demand for the production test equipment.

So I'd say in fiber, that is probably where I would say in the past 12 months where the fiber has been the strongest. Then further, once all these things are happening, with the 5G preparation, although it's probably on -- just in the early stages, but it -- also pushing a 400 gig upgrade of the fiber-optic networks.

We're also seeing healthy demand for field fiber testing, especially in Europe and in Asia. And as a whole new set of fiber-optic networks being laid out Pacific, Transatlantic soil so -- and national networks, we're also seeing healthy demand for our advanced fiber monitoring solutions, which is a big combination of software and hardware that monitors the whole fiber network.

So I would say the biggest driver in fiber is lab and production. The next one, I would say, is optical network monitoring solutions and the next one is the installation and field equipment. As a lot of that infrastructure gets deployed, we expect to see, down the line, more demand for the kind of installer and construction fiber tools as they start doing the end customer connections.

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Amar Maletira, Viavi Solutions Inc. - Executive VP & CFO [29]

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And from a regional growth perspective, Mike, you talked about NSE grew 6.7% and NE actually grew 10.1%, which was 100% organic growth. And actually NE grew in all the regions: Americas, Europe and APJ, including China.

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [30]

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So relatively modest demand by North American customers. We're seeing a lot of other customers are pulling demand.

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Operator [31]

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Your next question comes from Samik Chatterjee from JPMorgan.

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Amar Maletira, Viavi Solutions Inc. - Executive VP & CFO [32]

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Samik? I think there may be a problem.

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Joseph Lima Cardoso, JP Morgan Chase & Co, Research Division - Analyst [33]

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Sorry, guys, can you hear me now?

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [34]

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Yes, we can hear you.

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Joseph Lima Cardoso, JP Morgan Chase & Co, Research Division - Analyst [35]

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Yes. Sorry, my headset must have died on me. This is Joe Cardoso on for Samik. Sorry about that. So just to dig into my first question. Can you tell us what you're seeing in terms of demand from service provider customers, specifically from a telecom and cable perspective? And then within that, can you touch on what you spoke to last quarter about cable hitting stable level? Are we there yet? And if not, when do you expect us to reach the stable level?

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [36]

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So I think -- you've got a bit, geographically, right, so I would say Europe and Asia, the service provider demand is -- I would qualify it as healthy. Latin America is healthy. North American is better than it was a year ago but still far below the levels of the past, although we see sporadic urgent requirements here and there for products as the need becomes acute. That said, I would qualify it as no longer accept as dire as it was about a year ago and it's, I'd say, gradually improving. The good news for us is we are no longer as heavily reliant on major North American players for our revenue and growth. And any time they turn on the spigot, it clearly comes for us as a nice upside.

In terms of the cable, so as I said earlier, North American operators by and large have completed their purchases for upgrade to DOCSIS 3.1 last year. And I would say they continue to buy equipment on the kind of maintenance replacement level. But we are now starting to see obviously deployments happening for DOCSIS 3.1 in Europe and Latin American. So there, we saw fairly strong demand for DOCSIS 3.1. That said, those regions are not as big as North America for cable, so it's not enough to offset the decline in North America. But I think you for the next couple of years we see cable to be more of a kind of steady Eddie demand until the next standard, which will be the duplex upgrade of the network coming down in about 2 to 3 years, maybe 3 years, I don't want to jump the gun.

Now that said, we are seeing different opportunities in cable providers that are driving some of our demand today. They may not be as big as the field installation, but they nevertheless present very good opportunities. This comes down to network monitoring and increasingly fiber, I mean, something that was not the case in the past. Today, if you look at any of the cable providers, I mean, cable is becoming a misnomer to call them. I mean they're really fundamentally fiber networks with a little bit of coax at the very end. As a result, we actually see good opportunities longer term to do a lot more fiber and fiber monitoring, selling to cable providers.

And with some of them, they're also looking at 5G spectrum and have a good opportunity to become wireless service providers. So I think that's my outlook on the cable companies over the next couple of years. I think there's a lot of metamorphosis going on in the cable space.

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Joseph Lima Cardoso, JP Morgan Chase & Co, Research Division - Analyst [37]

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And then my second question relates to the recent tension between the U.S. and China. A lot of the network equipment suppliers this earnings season kind of highlighted weakness in the quarter and then going into next quarter. So I just wanted to get your take on what you guys are seeing from your customers in the region and then if you guys are baking any conservatism into your first quarter guidance.

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [38]

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Well, on the NSE side, we have fairly limited exposure to China. We mainly sell lab gear. And in our case, given where it's geographically developed and built, it's not as -- we're not as exposed to the import sanctions into China as some of our North American peers because the equipment we sell is predominantly originated and designed outside of North America. Now where we do have exposure to China is on some of the supply chain where we buy equipment. And provided there's North American tariffs in importation of these products, North America obviously gives us some exposure. That said, our supply chain is fairly diverse, and we can easily shift products from one geography to another. And we've been mitigating that potential risk for the last couple of years. So in a way for us, it's really noise.

The only area where I do have concern is our 3D sensing. So even though we are manufacturing in China and our products are developed there, it's really more of a backlash against the American supply chain versus the specifically import restrictions. And that is the only thing I'm thinking of right now, and clearly, we have to take it with a healthy dose of pragmatism.

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Amar Maletira, Viavi Solutions Inc. - Executive VP & CFO [39]

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And we have factored some of it already in our Q1 guidance.

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [40]

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It's reflected in our guidance, exactly.

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Operator [41]

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Your next question comes from Tim Savageaux from Northland Capital Markets.

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Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [42]

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Oleg, I wonder if you could give us some maybe similar medium-term commentary to what you just did on cable on the 5G side. And I know you mentioned pretty broad geographic strength in network enablement. I imagine that applies to 5G as well, mostly with your equipment OEMs. But I'm wondering if you can comment on kind of end market network deployment dynamics across various regions, whether you see that kind of the same as last quarter, accelerating, decelerating. A lot of the activity is focused on Asia. Do you have any comments on kind of the deployment progress among carriers across regions, North America and Europe as well?

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [43]

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Sure. So I would look at it -- for deployments, it's a bit of akin to the highway 3 lane -- highway 3 lanes in each direction, right? So you've got the -- your fast lane, that's very much China. I mean they are at full speed ahead, and they're deploying network, and they are experimenting with every flavor of 5G there is. Then I would say there is the medium-speed lane, and that's -- actually, I'll even put Korea in the high-speed lane as well, I mean they're moving pretty fast.

The second lane, I would put Japan and North America, where there is lots of trials. In case of Japan, they're looking to do some deployments in high-density areas ahead of the Olympics. But these deployments and trials have different flavors. Whereas Japan is heavily focused on consumer, I mean in North America, it's a combination consumer, fixed wireless as well as private 5G network. So everybody is experimenting with different flavors of 5G to see which one would have the best economic rationale to deploy. And I think the economic rationale varies between China, Korea, Japan and North America.

And then there is, I would call, the first lane, kind of the slow lane. I will put Europe in that space where they are just doing isolated trials or doing a lot of planning. And I'd imagine Europe will be starting -- we're going to start to see more of it happening in the next 12 months. So I'd say that's kind of our view on where things are taking place.

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Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [44]

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Great. If I can follow up also on NE, but focused on the gross margin side. You saw some pretty significant, at least year-on-year -- and I guess those also completely organic -- increases in gross margin. Could you talk in more detail in terms of the drivers there? Mix, I know you mentioned synergies, but I imagine that that takes place as much on the operating expense or operating leverage line. If you could specifically address the drivers for the gross margin increases in NE in the quarter and maybe the sustainability of those.

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [45]

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So I'll start and then I'll turn it over to Amar to provide you more color. So if you think about gross margin, a couple of things drive it. I mean first and foremost, there is mix. So when we talk about stronger growth in lab and production, those products fundamentally come at a higher gross margin. In terms of the margin profile, the closer you get to the consumer, the lower the margin, but the volumes are much higher. The more you get into the lab, the margins are much higher, but the volumes are lower.

So if we look at where we've had very strong demand, we had a lot of strong demand in lab and production. It's a much more customized environment. And it's a lot of customer-specific requirements that we implement in our equipment, and thus the margins are higher. Since those businesses have grew the strongest in fiscal '19, that obviously gave you some uplift in the gross margin mix.

The next one is volume. Our revenue has gone up significantly. Our manufacturing operations remain fairly flat. So the cost of manufacturing overhead, the supply chain management, procurement, manufacturing, engineering, all these other things is fairly fixed. So whether we ship $600 million of revenue, $700 million, $800 million, $900 million, or $1 billion, it scales almost perfectly with the revenue. And as such, the percentage of the drag on the standard margin becomes smaller and smaller. So I would say that's kind of the second-biggest kicker.

And of course, the last one is some of the synergies did come out of manufacturing in terms of both better material cost but also rationalization of some of the functions where we absorbed or undertook the functions previously done at locations and centralized it in our manufacturing organization. So I think this kind of qualitatively is the way to describe -- define the variance in margins. Amar?

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Amar Maletira, Viavi Solutions Inc. - Executive VP & CFO [46]

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No, I think you covered it all.

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [47]

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Yes. I think I provided all the color there is.

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Operator [48]

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Your next question comes from Richard Shannon from Craig-Hallum.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [49]

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I'd actually like to follow up on one of the first questions asked regarding the Cobham -- the acquired businesses including Cobham. And I think your answer is referring specifically to that in 5G and that you're -- you saw a strong year, better than expected and still growth in this current fiscal year but not as high. Wondering if you can extend that discussion to the other segments within any -- or maybe just any collectively about growth in this year versus last.

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Amar Maletira, Viavi Solutions Inc. - Executive VP & CFO [50]

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So I can just -- so Richard, I think we will -- we have this Analyst Day on September 12, and we'll give you more color on the full year guide as well as with the key drivers as well as for the next 3 years. So that's the plan. But at a high level, we do expect NE to continue to grow year-on-year driven by both fiber and wireless.

We also expect SE to actually -- after multiple years of decline, we expect SE to be flattish this year with the mature Assurance business actually continuing to go down. So for example, the mature Assurance business was roughly 16% of the SE mix in fiscal '19. We expect that to grow to roughly about 10%. So there will be continuous decline in the mature Assurance products, even in fiscal '20, but that will be offset for the first time by the growth in our growth businesses. So NE, continuing to grow and SE actually decline -- SE remaining flat. So overall, NSE is expected to grow year-on-year.

On the OSP side, 3D sensing will grow double digits. Again, we will give more color in the next 2 or 3 weeks. And the core OSP business, at least for first half -- again, as you know, the visibility on that business is also limited -- so first half, we do not expect any key redesigns. So we're assuming that the first half, the core OSP business will be roughly in the $50 million plus or minus, the baseline revenue. And we're expecting in calendar 2020 some of the reprint volumes to kick in. We don't know whether that's going to be in the first half of calendar '20 or the second half, but that's how we are modeling.

So 3-D sensing business growing, core OSP business sort of flattish to decline and overall slight growth in our OSP business and growth in the NSE business. So that's the overall color. We will give you more details when we meet in 2, 3 weeks.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [51]

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Okay. Sounds good. I look forward to more detail. And maybe just a follow-up on the fiber side here. It wasn't clear to me in your discussion on one of the other questions about 400 gig and 800 gig whether that was addressing more datacom or telecom, maybe if you could be more specific there. And then are there any -- are there differing trends between those 2 separate markets?

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [52]

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Yes. I mean the 400 gig, when we talk about ROADM, it's predominantly, I think, telecom thing. But there's also quite a bit of datacom interconnect between the data centers, PAM4 and things like that. So that's the same products going to testing semiconductor devices and modules in production, as well as developing these products. So I mean it's pretty much the same set of products. But I think also, we are seeing in the near term -- I mean, there's already a lot of thinking going on, upgrading metro networks to 400 gig. That's obviously going to drive some demand for 400 gig products as well. Talking about the 800, it's very much a lab -- really bleeding-edge R&D.

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Operator [53]

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Your next question comes from Meta Marshall from Morgan Stanley.

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Meta A. Marshall, Morgan Stanley, Research Division - VP [54]

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I wanted to -- just on the fiber commentary, is the strength there kind of from one carrier that is switching from laying fiber to connecting it, or is it more widespread? And additionally, you've noted over the past couple of quarters that maybe some telcos were deciding whether that kind of last feet or the last couple of feet should be something like G.fast or whether it would be fiber. And just kind of any changes you've seen in the dynamic there or any trends with G.fast we should be mindful of.

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [55]

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Yes. So when we talk about the kind of more field fiber, which is the operators doing fiber, it varies by geography. If you look at Asia, a lot of it is really building out new networks, whether it's trans-Pacific fiber or national fiber network, things of that nature. So it's big systems with a lot of monitoring and kind of higher-end equipment. If we're talking about Europe, there you're probably seeing a bit more of the connecting -- customers connecting buildings and installation and things of that nature or more like kind of last several miles. And Latin America is probably more like Europe in that respect. North America, I think it's mainly, I would say, metro networks.

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Meta A. Marshall, Morgan Stanley, Research Division - VP [56]

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Got it. And then any changes on G.fast and kind of any adoption there? Is that primarily just for kind of last mile, or -- I know it had had more legs in Europe than North America. Any change to that?

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [57]

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So I mean clearly, cable is the biggest one in the U.S., and I have covered that already. On G.fast, we do see demand, pretty nice demand in Europe. So it's still there. I mean I don't know -- I don't think there's going to be probably one or more generations at most, maybe one more generation of G.fast after that. But it's -- clearly, fiber is getting deeper and deeper in network. So I would say Europe is primarily, depending on the country, between G.fast or fiber to the curb. And we're seeing probably longer term more and more going towards fiber. But I think G.fast is still a pretty healthy market in Europe for us.

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Operator [58]

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Your next question comes from Jun Zhang from Rosenblatt Securities.

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Jun Zhang, Rosenblatt Securities Inc., Research Division - MD & Senior Research Analyst [59]

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So I just wanted to get some color about -- you mentioned you have a very strong growth in 3D sensing from Android market. And is that the growth more coming from the filter side or the diffuser product? And also do you see any impact from the ban on Huawei so far?

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [60]

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So I think clearly, diffusers, we -- when we acquired RPC, they already had a designed-in pipeline that was extensive, and it's ramping very nicely. And by and large, they do provide the best technology and the best performance. We're also seeing demand on the filter side, but that's probably where I have more concern about de-Americanization of supply chain. That said, I mean we are exploring various other means of either being a -- providing some licenses to some of the people to outright doing manufacturing for them and then let them do the back-end singulation and supplying various module manufacturers. And so I think that's probably -- I would say on filters is the area where I would -- where I'm being more conservative about.

Now the other thing is that when we look at these things, there's also a number of players deciding to delay 3D sensing, period. And we had a strong traction with those players. So I think in the end, in China, it's basically Huawei today. And I think Apple and Vivo are kind of kicking the can down the road until the supply chain is more mature. I mean clearly, this is one of the things we're watching, but we'll see how it plays out given all the negotiations that are going on. But we have other ways of monetizing our filter technology.

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Jun Zhang, Rosenblatt Securities Inc., Research Division - MD & Senior Research Analyst [61]

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Okay. Cool. But you mentioned there is some redesign of 3D sensing for calendar 2020. Do you see any of the role you can play -- you can potentially play a role in the back camera module in the calendar 2020, I mean, from your -- the major client?

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [62]

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Are you talking about the -- like world-facing camera?

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Jun Zhang, Rosenblatt Securities Inc., Research Division - MD & Senior Research Analyst [63]

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Yes, that's right.

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [64]

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Well I mean, we are pretty much in all the major designs, so I mean we are the technology leader. And I think we know that if they go to production, we will do very well. It's really a matter of timing. But one of the other things we are hoping for is there's been also talk at some point in time more and more time-of-flight products coming out, and that will actually play very well to our favor. It would allow us to also potentially supply our diffuser products into these modules whereby today we are fairly -- we are absent in the structured light for the diffuser product.

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Jun Zhang, Rosenblatt Securities Inc., Research Division - MD & Senior Research Analyst [65]

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Okay. What's the difference if I compare ASP between the diffuser and filters?

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [66]

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You're talking about difference in ASP?

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Jun Zhang, Rosenblatt Securities Inc., Research Division - MD & Senior Research Analyst [67]

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Yes.

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [68]

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Well, we don't provide that information. I'm sure you can get it from your sources.

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Operator [69]

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Your next question came from Dave Kang from B. Riley FBR.

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Ku Kang, B. Riley FBR, Inc., Research Division - Senior Analyst of Optical Components [70]

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Just a couple of questions on your fiscal '20 outlook. You expect north -- not north, NE growth of double digits. Any more color, maybe use 10% over/under? And also on 3DS, you expect double-digit growth. So if Huawei is the main one and if you are concerned about them internalizing, then primarily the growth will come from the North American customer?

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Amar Maletira, Viavi Solutions Inc. - Executive VP & CFO [71]

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So let me just correct you. I never said NE will grow double digit. I said overall NE will grow, SE will be flat, and we'll give more color on what the NSE growth will be. Typically, this business is -- over long term, NSE is a low single-digit grower, right? But there will be some quarters -- for example, this quarter in fiscal Q4 that we repeated -- we just reported, we grew 10%. We expect our fiscal Q1 to be also a strong quarter for NE. So overall, NE for the full year will still be low a single-digit grower with SE actually remaining sort of flattish. Okay? So that's is the commentary on NSE.

Now with regard to 3D sensing, we are going in with the view that -- as we have done in the past -- that when we see upside, then we will come and give you the upside. And that's what we have done in fiscal '19. We increased our estimates when we saw the upside coming in. So we went from $55 million to $60 million to $60 million to $65 million, and then now we said we landed around $70 million. So we are going to take a similar approach even in fiscal '20 when we provide the guidance because, as Oleg mentioned, there's a lot of uncertainties and we don't want to put the cart before the horse here. And so we will give you more color when we meet in 2 or 3 weeks. But we will not change the way we guide is what I wanted to tell you.

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Ku Kang, B. Riley FBR, Inc., Research Division - Senior Analyst of Optical Components [72]

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Got it. What was the mix between -- you said most of the sequential growth in the fourth quarter was Android. What was the mix between iOS versus Android?

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Amar Maletira, Viavi Solutions Inc. - Executive VP & CFO [73]

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We don't give that information. But most of the growth was Android, but there was also a little bit of growth in even iOS. So it was a mix of growth between iOS -- sequentially between iOS and Android, but more so on the Android side. And we don't share that mix.

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Ku Kang, B. Riley FBR, Inc., Research Division - Senior Analyst of Optical Components [74]

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Got it. And my last question is on CapEx. What was it? And then how should we think about this fiscal year?

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Amar Maletira, Viavi Solutions Inc. - Executive VP & CFO [75]

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Yes. So the CapEx was roughly $45 million for the full year. So we landed about 4% of our revenue roughly. You should expect us to be within 3% and 5% of our revenue going forward. The CapEx, the mix of CapEx will change. In the last -- in the past periods, we used to put a lot of investments on the OSP side to go and build the capacity for 3D sensing. I think what you will see is us now shift the CapEx towards growth areas in NSE. We are feeling comfortable in investing in the wireless side, so we will make investment in wireless CapEx to go drive productivity of the R&D teams. And so the CapEx will shift between, say, OSP into NSE. And also, we're also implementing and upgrading our IT systems here. We've been working on this for the past 1.5 years. And so you will see some CapEx even on the corporate side. But overall, CapEx will be between 3% to 5% of revenue.

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Operator [76]

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We have a follow-up question from Alex Henderson from Needham.

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Alexander Henderson, Needham & Company, LLC, Research Division - Senior Analyst [77]

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So just wanted to ask a question related to the architectural deployment on 5G. It seems like most of what's being deployed right now is 4G backbone, 4G backhaul, but 5G in the towers. So mostly around the build around the towers. Does that have an impact on your relative positioning in terms of the timing of the spend? Or is that more a function of impacting the routing and switching and optical [guides] that are in that backhaul piece that are still using the 4G backbone?

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Oleg Khaykin, Viavi Solutions Inc. - President, CEO & Director [78]

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So what you're describing -- I mean clearly what's being done today is a not stand-alone implementation as it goes kind of overlaid on 4G. And I think in the foreseeable future, that's going to be the main deployment. That said, in many ways where the 5G has is actually going to run fiber all the way to the antenna. So at least between base station and antenna, you're going to need more fiber than you have before. And you're right, it is largely leveraging the 4G backhaul. But even that backhaul in some cases needs to be upgraded to a higher bandwidth if you really want to add additional services. So in fact, I mean this is why I said the 5G sales into the lab will continue to be very strong, because today it's all predominantly not stand-alone, but there's also a lot of different flavors of it being required depending on implementation. And longer term, people are going to be looking at pure 5G networks. So the reality here is for many years to come, 5G standards are going to continue to evolve and new development will need to take place. And that's why we are bullish on our 5G lab presence.

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Alexander Henderson, Needham & Company, LLC, Research Division - Senior Analyst [79]

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And if I can just get a clarification. I thought you were talking about the NE growing higher than low single digits with the SE piece flat. And so did you mean that the blended NSE was going to grow low single digits when you guys spoke a moment ago?

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Amar Maletira, Viavi Solutions Inc. - Executive VP & CFO [80]

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So let me just again state, so what we are seeing here is, Alex, in Q1 we will be a double-digit grower in NE business. And we [do] the same double-digit growth in our fiscal Q4 that we recently reported. For this full year, we have to be anywhere between low to mid-single-digit grower overall for NE for the full year, right, and SE being flattish to slight growth. So overall, NSE should be low to mid-single-digit growth for fiscal year '20.

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Alexander Henderson, Needham & Company, LLC, Research Division - Senior Analyst [81]

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Does that imply that the back half is fairly flat in NE?

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Amar Maletira, Viavi Solutions Inc. - Executive VP & CFO [82]

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No, it's -- yes, yes. It might be flat at this point in time based on the visibility that we have. We're assuming it is flattish because remember we have very strong Q4 of fiscal '19, right? The recently reported quarter was quite strong, growing about 10-plus percent. So we are assuming that the back half, to your point, you're absolutely right, we're assuming the back half will be flattish. As we move into the year, we will get more visibility. But we do know that the -- as Oleg mentioned, that we will see traction both in fiber and wireless. And at this point in time, we have visibility to fiscal Q1, a little visibility to fiscal Q2. So I will give you more color on how things will shape up in the second half when we meet.

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Operator [83]

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

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Amar Maletira, Viavi Solutions Inc. - Executive VP & CFO [84]

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

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Operator [85]

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This concludes today's conference call. You may now disconnect.