Viavi Solutions Inc (VIAV) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Viavi Solutions first-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded. I will now introduce your host for today's conference: Bill Ong, Senior Director, Investor Relations. Please go ahead, sir.

Thank you, Ashley. Welcome to Viavi Solutions's fiscal first-quarter 2016 earnings call. My name is Bill Ong, Senior Director of Investor Relations. Joining me today are Rick Belluzzo, Chairman of the Board and Interim CEO; and Amar Maletira, our new CFO. Paul McNab, our Chief Marketing and Strategy Officer, will also join us for the Q&A.

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 the actual results to differ materially from current expectations.

We encourage you to review our most recent SEC filings, particularly the risk factors described in those filings. The forward-looking statements, including guidance we provide during this call, are valid only as of today. Viavi undertakes no obligation to update these statements.

Please also note that unless we state otherwise, all results 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.

I also want to point out that corporate-allocated costs are now included in the segment operating margin results discussed on this call. The release, supplementary slides, and historical financial tables are available on our website. Finally, we are recording today's call and will make recording available by 4:30 PM Pacific Time this evening on our website.

I would now like to turn the call over to Rick.

Thank you, Bill, and thank you to all of you for joining us today. I am pleased with the Viavi results that we are announcing today for both businesses, OSP and NSE. While we continue to have a lot of work ahead of us, we made significant progress in Q1. Viavi's fiscal first-quarter revenue, operating margin, and EPS met or exceeded the high end of our guidance range. We had a number of notable exceptions during the quarter, and we are on course in executing our long-term strategy to expand profitability.

Let me begin with OSP, which had a stellar quarter, with record revenue and profitability that drove earnings upside in the quarter. Strong demand for anti-counterfeiting products was driven by large banknote volume increases, which we expect to continue in fiscal Q2. More on this later in the call.

While Q1 is typically a challenging quarter for NSE, we delivered improvements in most areas, including year-on-year bookings growth, up 10.3%, our first double-digit percentage growth quarter since fiscal Q3 of 2014. We also achieved significant expense reductions over last year's levels.

Our network enablement segment, or NE, is demonstrating signs of stabilization, which has been a top priority. The rate of year-on-year performance decline has slowed in fiscal Q1, down 3.2% from the double-digit level we experienced last quarter. NE saw a business pickup from some of our major North American service providers as well as increasing wireline instrument growth from a major NEM customer.

Our service enablement segment, or SE, showed a 29.1% sequential revenue increase, although it was down 5.1% year-on-year. As these growth product mix versus legacy product mix for deferred revenue plus backlog continues to improve, with just better than a 60%/40% ratio as compared to just better than a 50%/50% mix a year ago.

We have expanded our footprint in Latin America with a strategic booking win for our xSIGHT product solution, building on our differentiated approach to service assurance. We are currently engaged with three NEMs as they integrate our solution in their CEM, or customer experience management, deployment at some of the leading service providers worldwide.

While the SE business tends to be lumpy, we are seeing significant activity around our new solutions. And we are delivering early wins which speak to the strong potential of our SE offerings.

We are making positive changes in the organization as we pursue our mission to improve profitability. The separation into two public companies afforded us the opportunity to transition from the old JDSU name. And we have further capitalized on this opportunity to advance changes on many fronts. We are bringing a fresh set of eyes to day-to-day running of the business, both at the senior management and at the Board level.

Our CEO search is ongoing. We believe that the near- and intermediate-term strategy that we have implemented are decisions any transformational CEO would take as we focus on improving Company profitability and market share growth. We don't have a firm deadline to have a new CEO in place, as we're being very diligent in identifying the right fit while still maintaining a sense of urgency to complete the search.

We've also announced two new Board members, Mr. Donald Colvin and Mr. Tor Braham, who have been -- who we believe will add valuable perspective to the Viavi Board. Along with the current Board members, both will be nominated for election at our upcoming annual shareholder meeting on November 17. Both Donald and Tor serve on the Company's Corporate Development Committee, which is tasked with reviewing Viavi's business; capital allocation; and various corporate strategies, including maximizing the use of NOLs to enhance shareholder value.

As Interim CEO, I am focused not only on making an immediate impact on the business, but also establishing the direction for our intermediate-term business strategy that I believe an incoming CEO would implement. We have pursued several near-term objectives, including improved revenue performance through sales and marketing actions, driving better investment alignment with our longer-term strategy, and taking actions that will improve our expense structure.

All of these steps are designed to improve our near-term performance and position as well as achieve our growth goals. I want to emphasize that I believe the Viavi NSE strategy is compelling and leverages our core strength in network test and measurement with new and disruptive software-oriented solutions.

Our first order of business is to realign NSE's operating expense structure, which is currently unacceptable against any benchmark. We will strive to take out complexity and associated costs. We are aligning our R&D investments with areas that provide the greatest ROI for Viavi. We are investing in sales and marketing to support our revenue growth initiatives and build a go-to-market model that leverages our product portfolio. Through business process simplification, our goal for the G&A infrastructure is to become more efficient.

Second, we must reverse the declining revenue trend. This has been partly macro service provider spend driven, but we believe that most of the weakness has been because of our model. Revenue from our top five NE customers was up 40% from year-ago levels. However, the rest of our NE customer base was down 13% from year-ago levels, and we intend to work on revenue diversification across a broader set of customers and extending our global reach.

We have a renewed focus on evolving our sales and marketing program to deliver more revenue in a cost efficient manner. To that end, this week we launched our new channel program, Velocity. This new program will allow us to optimize the use of direct or partner sales, depending on application and sales volume. It will also expand our reach into new market segments.

At the same time we intend to also expand our capability to sell and deliver solutions. We have a strong and differentiated product solutions portfolio that customers embrace, as evidenced by our healthy growth margins.

For OSP we intend to continue growing our profitable anti-counterfeiting business, which could also benefit from our NOLs. We have been developing other markets in government, healthcare, and consumer applications that leverage our optical coding expertise with anticipated profit growth that can come, again, for further use of our NOLs.

M&A has been an important strategy for NSE revenue and profit growth. Right now we are primarily focused on getting our internal house in order, which we need to do to maximize the benefit of any acquisitions. That said, we will continue to be opportunistic relative to strategic fit with our NSE solutions platform and OSE business, as well as the potential for greater profit drop-through to further utilize our NOLs.

Our super distributor model has utilized NOLs over the years by bringing more than $100 million in profit and cash from overseas operations to the US. In addition, we structured the Lumentum separation so that it has utilized more than $1 billion in NOLs and allowed Lumentum a lower cash effective tax rate. As we consider future strategies in the operations and structure of NSE and OSP, we expect NOLs to play a significant role in optimizing profitability. Overall, the strategic decisions that we make in NSE and OSP will drive optimal use of our NOLs.

While we face a few challenges, the opportunities in the markets we serve are significant. And we're off to a positive start in what we expect to be a transformational fiscal year. I would like now to express thanks to all of our employees; our business partners; and, of course, our shareholders.

Now let me turn the call over to Amar, our CFO, who joined Viavi on September 9. His strong operation and financial execution experience will be a valuable asset to the Company. So, Amar?

Thank you, Rick. I am pleased to be part of the team and see a lot of potential in Viavi to grow top line as well as opportunities to improve profit performance. So before I get into our results, I would like to briefly comment on the separation.

During our fiscal first quarter of 2016, we successfully completed the separation of our Communications and Commercial Optical Products, or CCOP, and the WaveReady business on August 1, 2015, with the spinoff of Lumentum and the renaming of JDSU to Viavi Solutions. CCOP and WaveReady are treated as discontinued operations; and therefore our financial focus going forward is the Viavi business, which consists of both our network service enablement or NSE business and optical security products and performance or OSP business.

Now, turning to our performance in the quarter, even with the incredible work required to complete the separation, we remained focused on executing our plan. Revenue of $229.7 million exceeded our guidance revenue range of $204 million to $220 million, and both NSE and OSP exceeded guidance as a result of better execution.

Revenue was up 6.7% year-over-year despite currency headwinds of roughly 4 percentage points. The revenue growth was primarily driven by strong performance in our OSP business.

Our operating income at $28.7 million grew $15.7 million or 120.8% year-over-year. Operating margin of 12.5% exceeded our guidance of 7.5% to 10.5% and was up 650 basis points year-over-year as a result of strong performance in OSP and solid operating expense management.

Operating expenses were down 6.1% year-over-year, primarily driven by reduction in our G&A expenses. We plan to continue driving higher OpEx savings over time as we optimize NSE's expense structure and reinvest some of the savings into our revenue growth initiatives. Both the NSE and OSP business segments delivered operating margin results about the midpoint of the guidance range for these businesses.

Our tax expense of $5.7 million is higher than JDSU's historical fiscal-year 2015 quarterly average expense of about $3.8 million. This is primarily due to higher first-quarter profit in tax jurisdictions that NOLs don't apply and also due to the loss of some tax credits that shifted to Lumentum post-spin. Despite the higher-than-expected tax expense, we delivered earnings-per-share of $0.08 at the high end of our guidance range of $0.04 to $0.08.

Now moving to results by segments, starting with NSE: while revenue of $165.5 million declined 3.8% year-over-year, it wasabove the high end of our guidance range due to good execution in both the NE and SE segments. NSE gross margins were at a healthy rate of 65.9%, up 120 basis points sequentially, but down 110 basis points year-over-year due to product mix.

We continue to look for ways to drive efficiencies in our operations. NSE's operating margin of 1.5% was better than the guidance range of 2% to 6% operating margin loss. The better margin performance compared to guidance was due to operating leverage from higher revenue.

Operating margin expanded 230 basis points year-over-year due to solid OpEx management in this business, as we continued to focus on optimizing operating expenses to align with revenue. In the longer-term, this should create meaningful operating leverage as we start growing the top line.

NE revenue at $117.6 million declined 3.2% from $121.5 million in the fiscal first-quarter 2015. Revenue declines in our wireline field instruments, specifically in cable, were mostly offset by solid growth in both lab and wireless field instruments. We saw signs of stabilization in the NE business, as the year-over-year revenue decline this quarter was much more muted compared to the double-digit decline in fiscal Q4 2015.

Strong bookings performance in the wireline and wireless instrument business within NE resulted in a double-digit growth in bookings year-over-year. NE posted gross margins of 64.4%, down 160 basis points from a year ago, primarily due to mix.

SE revenue at $47.9 million declined 5.1% from $50.5 million, while gross margins at 69.7% increased 40 basis points from a year ago. The steep revenue decline in the legacy business in assurance and wireless segments were partially offset by good performance in our growth areas, such as Location Intelligence within wireless and our Network Instruments in the enterprise space.

NE had a book-to-bill ratio above 1, while SE was below 1, resulting in an overall book-to-bill ratio for NSE at roughly 1. This was largely attributed to a push-out of deals in the assurance and location intelligence within SE. These deals in SE have longer opportunity decision cycles compared to our instrument business.

Now, turning to our OSP business: fiscal Q1 revenue at $64.2 million was an all-time record quarter for our OSP business. Revenue exceeded the high end of our guidance and grew 48.3% from a year ago levels of $43.3 million. The revenue upside was attributed to the anticounterfeiting business, driven by increased banknote printing volume as well as an uptick in our government business. Recall the year-ago lower revenue base was attributed to the exit of some discontinued products.

Gross margins at 57.6% was up 430 basis points year-over-year. Operating margins at 41% was at the high end of our guidance range and was up 800 basis points year-over-year. This margin expansion was a result of favorable product mix and operating leverage on higher revenue.

Now turning to the balance sheet, our total cash and short-term investments ending balance was $903 million, which includes our 19.9% Lumentum equity investment, valued at $184 million. Operating cash flow was $7.7 million, and this included one-time cash payment for spin-related activities. We expect some cash payments for spin-related activities to continue into Q2.

At our September 2014 analyst day event, we set a net $50 million annual cost-savings target for JDSU as a result of separation. Viavi remains on track to achieve the annual OpEx savings target exiting fiscal 2016, and we are targeting even more savings in the longer-term as we simplify and automate. We are making progress, as evidenced by our operating margin expansion this quarter.

With regards to our capital allocation strategy, we have a healthy balance sheet that is expected to strengthen as we improve NSE's operational performance. Given our current cash position, along with NOLs to shield profits, we have sufficient cash to cover our $650 million in convertible debt. We announced in late September that we will recommence our share repurchase and utilize the $40 million remaining balance of the total $100 million authorized share repurchasing plan initially announced in May 2014.

Now, turning to our guidance, we expect fiscal second-quarter revenue to be in the range of $212 million to $228 million; operating margin at 10.5%, plus or minus 1%; and EPS to be $0.06 to $0.08. We expect NSE revenue to be $157 million to $169 million, with operating margins at 2%, plus or minus 1%.

For OSP we expect revenue to be $55 million to $59 million, with operating margin at 35.5%, plus or minus 1%. Similar to a year ago, we are not expecting any meaningful budget flush benefiting the NSE business, as customer purchase decisions are spread out across the year. We would note that Q2 will be a shorter quarter compared to fiscal Q1.

Absence of the extra fiscal week in Q1, NSE revenue guidance would have been sequentially up. OSP benefited from some large volume banknote printing demand in fiscal Q1, and some of it is extending into Q2. However, based in our guidance, OSP revenue in Q2 will be lower compared to Q1.

Looking ahead beyond Q2, we expect to have a normal revenue run rate in the anticounterfeiting business, along with improving growth in the consumer electronics segment, resulting in the low to mid-$50 million quarterly revenue run rate. Our tax expense is expected to be between $4.5 million to $5 million in Q2, due to the same drivers we saw in Q1.

So in closing, there is work to be done to improve profit performance and drive revenue growth. We believe the actions we have taken and expect to take will drive increased shareholder value.

I look forward to meeting many of you at various investor events and meetings. With that, I will now turn the call over to Bill to begin the Q&A session. Over to Bill.

Thank you, Amar. I would like to ask everyone to limit the discussion to one question and one follow-up. Ashley, let's begin the question-and-answer session.

(Operator Instructions) Patrick Newton, Stifel.

Thank you for taking my questions. Rick and Amar, welcome to the team. Jumping right in, Rick, you alluded to the structure of -- especially on the expense side -- of your NSE business is unacceptable and, obviously, too high. And I think that is something most of the Street would echo.

But I'm curious if you could help us dive into that -- and perhaps this is a little bit premature, but what is the right way to think about the correct expense ratio for the NSE business? Is there a publicly-traded entity that you intend to mirror from a cost structure perspective? And if we look at OpEx, is there lower-hanging fruit on the sales side or the R&D side? Because you seem to imply that there was some cost-cutting initiatives that could impact both line items.

Yes, so, we have done pretty thorough benchmarking. You can think about some of our competitors or people in the industry with a range of operating expense structures and gross margin structures based on the software content of their product offerings. So we have kind of laid those out. We have studied those, and then we have evaluated where we fit -- you know, what our target is that we need to get to over a period -- let's say 12- to 18-month period of time.

So, we are not ready. At an analyst meeting we will be specific about what those goals are, but within that we feel that we are most soft on G&A. That's an area where we will have the most areas of improvement. And then we are somewhat off on R&D, which we think we achieved by getting focused on the right segments to align with our strategy.

And sales and marketing has been a little bit of an offset, because, frankly, we have a lot of work to do right now to build our sales and marketing capability. And so while we think there is opportunity for improvement, it is secondary to the other areas. And then we also -- as we move to and SE-oriented business with more software content, even though there is a deferred revenue impact, there is a longer-term trend towards higher margin.

So we have lined all this out, and that results in near-term work to get our cost structure down, again, mostly around G&A as well as some R&D work that we are still doing as a result of the $50 million announcement we made before and other optimizations that we will make across how we -- you know, we are driving our product strategy. We have had a lot of silos. We are driving that into a more end-to-end, more consolidated platform so we can gain more efficiency as well out of our R&D investment.

So I didn't give you specific numbers there, but we really see ourselves getting to a point where we can get back to growth; the segments we are in are growing; and that we can get into profit margins starting in high single digits eventually to double digits. And you can do the math of what kind of operating structure we need to achieve to do that.

Perfect. That's helpful. And I guess, just shifting gears, I wanted to talk about your largest NE customer. Obviously, there has been some distraction with recent mergers. And I guess now with that noise kind of dying down, I think you alluded to some strength in the September quarter from this customer. And then you had an overall book-to-bill of greater than 1 in NE.

With these particular customers, are you seeing any more clarity into orders or any potentially pent-up demand? And then on the potential for a budget flush, I am curious: you alluded to, Amar, in your presentation that it is more that purchasing decisions are on an annual basis. Are you implying that the budget flush is a thing of the past? Or you have somewhat of a conservative outlook into the December quarter?

Yes, let me just start about -- you know, we didn't make a message about a particularly large customer. I would just say that I think things -- I mean, my statement is that things are improving somewhat. But as we said in our results, our top customers, our revenue from our top customers has improved. And so we believe that that is the case. And so -- I don't know what more to say about it. I think we are positive about it.

We would also say that we believe there is a lot of trends in the market around broadband, and wireless, and higher performance at 100 gig -- and we go through a whole list of things that we think will continue to result in more infrastructure development and purchasing of our products. And we believe that the outlook for the market is pretty good relative to the last couple of years.

And one thing I will add to that, Patrick, is that you probably saw a recent announcement with our Velocity channel program, where we will see accelerated expansion of our NE business outside of not just the top one, but the top five North American service providers and is relevant to the enterprise, too. So, we do think there is opportunity there.

And from the technology perspective that Rick was talking about, we do see signs from very good upside on our fiber lab instruments and fiber-optic production line tests with our NEM partners that there's strong growth in 100 GigE deployment coming forward, as well potentially as G.Fast on the access side and DOCSIS on the cable side.

So we do think the opportunity is good for us from leveraging all of that through our channel globally.

So, Patrick, thanks for the question. This is Amar here, and look forward to meeting you. So regarding budget flush, if you look at what happened last year, we didn't really see any budget flush. So we are not expecting any budget flush. I think it is prudent to plan that way.

There is some flush that will come in that will be -- we will see how that all pans out, but at this moment in time we are not expecting -- we're not anticipating or expecting any budget flush.

Thank you for taking my questions. Good luck.

Mark Sue, RBC Capital Markets.

I understand the benchmarking to get the cost structure relative to your peers. However, there is a prevailing view that the obvious solutions, NE and SE are somewhat stale relative to competitors. And your service providers have all the purchasing power. So shouldn't the near-term focus actually be doubling down on R&D, increasing spending in product development, and not cutting R&D to placate near-term investors?

I think we are trying to balance that. I don't want to make it sound like cost cutting is the only strategy we have, because it clearly is not. We are investing in some of the segments that we believe provide opportunity in a significant way. So I really don't believe that that we should be just reducing our expenses.

But I would say that we do need to make more and more strategic choices of how we spend our money to get the most area of opportunity. And if you look through our entire portfolio, we see things that we believe we are differentiated in. We don't -- we believe that we are -- you know, have superior architectures and approaches to some of the problems that people have. And we want to go after those and play them hard.

And we will invest to do that, but I also believe we have to make trade-offs. And so that's what you have to do in a company like this. You have got to make bets, and you have got to decide how to cover those bets, and we intend to do both of those aggressively.

And one thing I would say to that as well, Amar, if that's okay, is to Rick's point on the R&D side, we are moving increasingly to a self-funding model, where we've got cash outflow coming from our NE business and investments to be made in our SE business, increasingly as we combine those to a platform. So the NE savings we make on the G&A side, that -- and Rick mentioned -- flows through to bottom line. And that's the balance we're trying to get.

Okay. That's helpful, gentlemen. And then SE -- the bookings dynamic there -- was that really related to push-outs? And why would that be? Does that imply the solutions are still being debated or considered, or is it a matter of deployment complexity? Anything you can help us understand -- kind of how you are seeing SE and how we should think about it longer-term?

Yes, I think -- you know, I have to say, since my short time here as CEO, and as I have dug through everything we have, I'm very excited about our portfolio in SE. Some of the solutions we bring and the approaches we bring are very well received by our customers. Having said that, we have very long campaigns to win these businesses. Our funnel and the number of opportunities we have in SE is very, very strong. And I guess what is challenging, of course, is just to close them.

There is competition, but it is limited. There aren't that many players in some of that segments that we see as being the most potential. But to me it's mostly getting through the proof-of-concepts and all the other steps that you have to take to be able to close these opportunities.

That's helpful. Thank you and good luck to you.

I mentioned the Latin America win in the script, for example, because it is -- we are seeing those wins. The smaller the service provider is, almost -- it is less of a campaign. That we are seeing those wins and believe those will continue to leverage out into some larger opportunities.

And one thing we should also mention is the enterprise, of course. And that was book/ship business. And so we saw very high double-digit growth, faster than the network performance, monitoring, and diagnostics market that we compete in. So we grew far more than the market in that space as you see the migration from private to public.

We're also actually exploiting the migration from 16 gig to 32 gig on the fiber channel side, as well as the maturation of the gen three PCIe market, so the enterprise side is doing very well. And the good thing is, Mark, it is book/ship. No rev rec issues there.

Understood. Thank you, gentlemen.

Alex Henderson, Needham.

This is Josh Buchalter on behalf of Alex. Thank you for taking my question and congratulations on the good result. Within the NSE group, I wanted to ask about what kind of steps you're taking for the revenue diversification. And maybe -- can you help us understand why there was such strong growth in the top five customers, but the decline in the outside the top five? Thank you.

Yes, I would be happy to address that. Historically as a company we have done very well with the large service providers. We have been very well positioned there and always have been less well positioned globally, less well positioned with some of the smaller opportunities in the industry.

So we think that's not the best place to be. We certainly intend to continue to be strong with the large service providers, but the market is becoming more and more distributed. Some of the large providers are looking to contractors to provide some of their testing capability. That means we have to sell in smaller chunks, more growth in Asia, and so on.

So we believe that that is the shift that we have to make. I would further say that when we went through some of our cost reductions before, we had headcount reductions in sales, and those were often made what I would call at more of the edge of the market than in the core strength that we had in service provider. So that's kind of the history.

And we saw the revenue result of that. So what we are doing today is we have turned back a bit of the headcount on the sales force. We are actually rebuilding and, in fact, moving back up from where we were a month or two ago in our sales count deployment.

We have introduced this Velocity program. We really have not had a complete channel program in the Company. And so that's something we believe is really critical to expand our reach and to move into different segments. We are looking at some of the developing markets, where pricing is more aggressive, at how we can repackage our offering and how we can deliver more cost-competitive solutions so we can win more there.

We have done some resource shifts to the sales force from our product groups. I could go on and on. Our building -- our lead gen capability. We are pushing and have been pushing in recent months on many levers to be able to get the NE business back to a stable if not growth opportunity, which is what we think is consistent with the marketplace.

And so we are really all over that, because that's where we are going to get the most immediate revenue improvement. While we want to build bookings in SE, we know that in many cases it takes longer to see that revenue. So that's the big opportunity. We are focused on that, working very aggressively to put in place what I would call a more complete go-to-market capability that goes beyond big service providers into various segments, into various geographies, to smaller size customers.

And I would also say that's part of our cost reduction strategy as well. Because we really need to turn over a lot of the processing of our business to partners who can do it more efficiently than we can in some of the smaller purchase quantities.

And one thing I will add to that: this Velocity program is a big deal. And to Rick's point, North America was up high single digits and China was up very high double digits off a much smaller base. But, frankly, EMEA was down double digits; Asia-Pac was down high single digits; and LATAM was down high single digits. And so we do believe there's a lot of upside, particularly on our NE business, to take through channel. So we have, as I'm sure you read on the press release this morning, a very extensive program to make up the gains -- the losses that we had in those other regions.

Thank you, that's very helpful. And then lastly for me, given what's going on with the NOLs, how should we think about modeling the tax rate going forward? It's been somewhat lumpy. Thank you.

So, I think the tax rate, that's why we are giving a specific guidance, Josh, on the tax rate. Based on what you saw in Q1, I think you should model the same tax rate from Q2 to Q4.

Great. Thank you and congratulations again.

Rod Hall, JPMorgan.

Thanks for the question, guys. I guess I wanted to go back to the OpEx commentary. Like I think some of the prior questioners had mentioned, most of the market believes that the OpEx needs to come down, particularly in the NSE business.

I'm just wondering why you guys aren't quantifying anything today? Is it because, Rick, you have only had a couple months here to take a look at that business, and you're just still analyzing things? Or do you think that you need to wait until a permanent CEO is named, and then at that point let that person determine just how aggressive they want to get on cost cuts? I'm just trying to understand why no quantification today, and then when might we expect some sort of quantification? And then I have a follow-up.

Okay. Well, we discussed this; we do have a model. We have a model that we are pursuing internally. And we have a very extensive program where we are going through individual parts of our business to really get to the core reasons why we are more complex and why our expense structure is what it is.

And so I don't want you to get any impression that we are not pursuing this aggressively. We have a model that is, we think, sufficiently aggressive, and we are pursuing it. We discussed when to talk about that publicly. We decided that an analyst day kind of environment would be the best environment to do that. And, yes, certainly a CEO -- we would like a new CEO to be on board to embrace that or do a different one.

But that is a factor that I think also plays into the view that we should wait until we put that together. But I would just say, again, that we are very clear on what has to be done. We have very clear goals. We are pursuing them. And we believe, as I said before, that it gets us -- our goal is to get to high single-digit types of operating income within the next 18 months. And so you can do the math with -- assuming fairly flat gross margin over that time period, maybe some slight increase, and see the work that we have to do. But we will be more clear on it. But we just said we need to get past some of these other points before we do that.

Okay. And then I just -- on a follow-up, I just wanted to check -- the OSP margins have been running really well the last couple of quarters. Just wondering if you guys could comment on the sustainability of those margins. I know you have had a lot of big currency deals going. Does that continue? Or how should we be thinking about those margins looking forward?

So, Rod, this is Amar here. I look forward to meeting you sometime soon. So on the OSP margins, our margins of 41% in Q1 was mainly driven by A, a favorable product mix -- when you have anticounterfeiting business growing, it usually comes in it at a very high margin; and number two is a very high operating leverage on this incremental revenue.

What I would suggest is if you are thinking about how to model it, I think we have provided 35.5% as our Q2 guidance, plus or minus 1. I think you should focus on that. I don't think we will be getting to 41%. And this was -- as I said, Q1 was an all-time record quarter, both on revenue and profit. And you should not expect that to repeat.

Okay, so just take the 35.5% out into the future -- not much fluctuation from that is the way we should be thinking about it?

Well, I'm actually not guiding for the second half, but I think that something that you should consider for Q2, at least, and then see how your model looks.

Okay. Thanks, Amar.

James Kisner, Jefferies LLC.

I would like to start with a housekeeping question. I believe you guys said that the December quarter is shorter -- I guess is a shorter quarter. I was wondering how much you're kind of -- can you quantify the revenue and expense impacts from that, and just overall clarify the shorter quarter comments?

So, and I think the math can be very simple there, right? It's 14 versus 13 weeks quarter. But let me just give you some color here. So when we provided the guidance for Q1, we had already contemplated this was going to be a 14 week quarter. So that was not a surprise.

Now, when you think about Q2 -- from Q1 to Q2, you definitely need to start thinking about, hey, one week less of book and ship, right? So if I exclude that, you will see that our revenues for our NSE business actually sequentially goes up from Q1 to Q2.

So you can do a rough math on that. We were $165.5 million in Q1. It is a 14 week quarter, and you can do roughly the math on the impact for one week. Does that help?

Yes. How much of the business is book and ship at this point? Or maybe you could talk about -- is there portion that is VMI of NSE?

I didn't follow the last part of the question. I'm sorry.

I was wondering how much of the business is really, truly book-and-ship and exposed number of days in the quarter. Is it -- and I guess I thought a related question might be: how much of that is in vendor managed inventory at this point, if any?

Yes, we don't really have anything in vendor managed inventory, so it is not that. I think it is -- when you have an extra week, you know, cut-offs are easier. You have an extra few days, but you also have more things to ship. I think that's why we talked more about book-to-ship, because that extra week is mostly an advantage around shipping more products, so does have an impact.

Okay. And just on channel development, I'm just curious if you can at least talk at least conceptually if not quantitatively about the investments that you're making the channel. Is there is a period of time where those investments are pretty dilutive, and a point at which in time you think that your channel development will be accretive? Just talk about those investments that you are making in the channel and the nature of those.

Yes, I will make a comment. Paul might be able to add to it. I don't think it is just the nature of the channel. I don't think of it as being very dilutive. I think the revenue upside -- we will see benefit very, very quickly. And the investment has been underway now for months as we put together all the IT, infrastructure, and the programs and all the other elements.

And so a lot of the investment has been made. And we think that from here forward it is going to be -- it is going to have a positive impact. That would be my judgment. I don't know if we have a number of our investment there. I don't --?

On the big investment -- and it is not really an investment -- we have a $3 million contra-revenue MDF that we have in place. But by and large it is driven from a three-tier channel architecture, where we go from -- at the top we have the leads, and then premier, then authorized partners. And we fund based on that on an MDF. So it is essentially a self-funding model, essentially.

Thanks very much.

James Faucette, Morgan Stanley.

This is Meta Marshall for James. A quick question on just -- you know, if you could speak to any kind of dyssynergies that you are seeing now that you guys are split from Lumentum, particularly as you try to expand your customer base? And then just a housekeeping question: I was under the impression that you were going to make a cash transfer to Lumentum which doesn't appear to have taken place. Is that still planned in the next quarter, or is the dynamic of that changing? Thanks.

Yes, let me take the second question first. So we did do the cash transfer, and that's done. That's already reflected in our cash flow and short-term investment of $903 million. So we did complete the cash transfer.

Okay, great.

And I would say do not -- I am not aware, I have not found any or seen any dyssynergies that concern me or that are even notable. So I think that the way we have structured the Company and doing the spin really allows us to get more efficient, to have a more homogeneous kind of business management model for running the Company. And so I haven't seen dyssynergies that have caught my attention. So I think we are -- we can become a more efficient and more effective, I believe, today more than we could before the spin.

Great, thank you.

Jorge Rivas, Craig-Hallum.

Thank you guys for taking my question. So I want to dig in a little bit on the areas of growth in your SE segment. So first, on Location Intelligence, wondering if what drove the growth was actually uptick on demand through -- maybe you were able to accelerate your VSOEs.

And along the same lines, on the Network Iinstruments side of the business, I know in the past there were some execution issues that probably caused some share losses, but it seems like enterprise did well in the quarter. So I wonder if you can provide some color as well on Network Instruments and what exactly drove growth in the quarter?

Okay, so, let me start off with the enterprise, and then I will go into the Llocation Intelligence. So on the enterprise side we increased and improved our sales coverage model. That helped an awful lot. And we believe the Velocity channel program will take that globally, so we think that works very well.

So we did grow high single -- high double digits on the enterprise side? We did see on our SNT business, our storage network test business, some decline on that side of the business. But overall we did see, as I said, growth of 15%.

On some of our product line, as Rick said, we are increasingly moving towards a virtualized model that allows us to make increased penetration cloud. And we have seen some slight uptick on that side, but that's where a major growth opportunity is.

So we are making major inroads in the -- what we call the network performance monitoring and diagnostics segment on the enterprise. On the LI side part of the business, we are seeing major growth there from the mobile operators addressing their burgeoning demand for LTE, hotspots growth there -- and as well VoLTE as well.

And so we have seen extremely high double-digit growth from a revenue year-on-year perspective on the LI side of that business, so that's been very positive. We have seen that in growth in North America. Mainly we have seen a lot of growth there. A lot of growth in LATAM as well. So did I answer your question?

Yes, so it sounds like it is more from uptick and demand that you are seeing on LI, more broad-based, right? But I was just wondering -- I believe last quarter it was mentioned that you guys were looking to isolate a little bit of VSOEs for your larger customers?

Yes, sorry. I forgot to mention the VSOE. So, yes, the VSOE -- it's a top one. We are making progress on that. As Rick said, our funnel is very strong. Obviously you have to go through acceptance. It is a lumpy business. So we did have a major acceptance, again, from a top-five North American service provider. So we are getting acceptance. We feel our pool of customers is strong. So we do believe we will get VSOE; we just have to work through the acceptance issues.

Okay, great. Thanks a lot. That's all for me.

That does end the Q&A session for today. I would like to turn the call back over to management for any further remarks.

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

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a wonderful day.