Viavi Solutions Inc (VIAV) 2025 Q2 法說會逐字稿

Well, good day, everyone and welcome to the Viavi Solutions fiscal second-quarter 2025 earnings call. Just a reminder. This call is being recorded.

I would now like to hand the call over to Ms. Vibhuti Nayar. Please go ahead, ma'am.

Thank you, Lisa. Good afternoon, everyone, and welcome to Viavi Solutions fiscal second quarter 2025 earnings call. My name is Vibhuti Nayar, Head of Investor Relations for Viavi Solutions. With me on today's call is Oleg Khaykin, our President and CEO; and Ilan Daskal, our CFO.

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

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

Please also note that unless we state otherwise, all results discussed on this call, except revenue, are non-GAAP. We reconcile these non-GAAP results to our preliminary GAAP financials and discuss their usefulness and limitations in today's earnings release. The release as well as our supplemental earnings slides, which include historical financial tables, are available on Viavi's website at www.investor.viavisolutions.com.

Finally, we are recording today's call, and we will make the recording available on our website by 4:30 PM Pacific Time this evening.

With that, I would like to turn the call over to Ilan. Ilan?

Thank you, Vibhuti. Good afternoon, everyone. Now I would like to review the results of the second quarter of fiscal year 2025. Net revenue for the quarter was $270.8 million, which is above the high end of our guidance range of $255 million to $265 million. Revenue was up 13.7% sequentially and on a year over year basis was up 6.4%.

Operating margin for the second fiscal quarter was 14.9%, significantly above the high end of our guidance range of 11.4% to 13.4%. Operating margin increased 490 basis points from the prior quarter and on a year over year basis was up 170 basis points.

EPS at $0.13 was also above the high end of our guidance range of $0.09 to $0.11 and was up $0.07 sequentially. On a year over year basis, EPS was up $0.02.

Moving on to our Q2 results by business segment. NSE revenue for the second fiscal quarter came in at $199.9 million, which was above the high end of our guidance range of $184 million to $192 million. This was mainly driven by strong order pace from service providers and NEMs for field instruments in addition to the recovery across many of our product segments. On a year over year basis, NSE revenue was up 11.3%.

NE revenue for the quarter was $179 million, which is up 15.1% year over year as a result of strong demand by service providers and NEMs for both lab and field instruments.

SE revenue was $20.9 million and declined 13.3% from the same period last year, driven mainly by enterprise customers' conservative spend.

NSE gross margin for the quarter was 64.8%, which is 140 basis points higher on a year over year basis. NE gross margin was 64.5%, which is an increase of 200 basis points from the same period last year as a result of higher volume and product mix. SE gross margin was 67.5%, which is a decrease of 140 basis points from the same period last year due to lower revenue.

NSE's operating margin for the quarter was 8.7%, which is a 510 basis point increase on a year over year basis and came in significantly above our guidance range of 3.8% to 5.8% driven by higher gross margin fall through.

OSP revenue for the second fiscal quarter came in at $70.9 million, which is slightly below the low end of our guidance range of $71 million to $73 million. On a year over year basis, revenue was down 5.3%, primarily due to weaker demand for 3D sensing products.

OSP gross margin was 50.6%, down 150 basis points from the same period last year and was primarily driven by lower volume and product mix. OSP's operating margin was 32.4%, which is a decrease of 400 basis points on a year over year basis as a result of lower gross margin fall-through.

Moving on to the balance sheet and cash flow. Total cash and short-term investments at the end of Q2 was $512.8 million compared to $497.9 million in the first quarter of fiscal 2025. Cash flow from operating activities for the quarter was $44.7 million versus $20.4 million in the same period last year.

CapEx for the quarter was $8.2 million versus $5.8 million in the same period last year. During the quarter, we did not purchase any shares of our stock as we prioritized our capital allocation towards M&A with the acquisition of Inertial Labs.

Fully diluted share count for the quarter was 224.8 million shares, up from 223.5 million shares in the prior year and versus 224 million shares in our guidance for the second fiscal quarter.

Moving on to our third fiscal quarter guidance. For NSE, we are expecting a stronger seasonality trend across most segments. For OSP, we expect softer demand for 3D sensing products. We anticipate demand for anti-counterfeiting products to start stabilizing as the end customers continue to work down their inventories.

For the third fiscal quarter of 2025, we expect revenue in the range of $276 million and $288 million. Operating margin is expected to be about 14% plus or minus 100 basis points and EPS to be between $0.10 and $0.13. We expect NSE revenue to be approximately $207 million, plus or minus $5 million, with an operating margin of 7% plus or minus 100 basis points.

Our revenue guidance for NSE includes a high single-digit million from Inertial Labs, which is in line with our previous communication of $50 million annual revenue run rate. OSP revenue is expected to be approximately $75 million, plus or minus $1 million, with an operating margin of 33%, plus or minus 100 basis points.

Our tax expenses for the third quarter are expected to be around $9 million, plus or minus $500,000, as a result of jurisdictional mix. We expect other income and expenses to reflect a higher net expense of approximately $4.2 million as a result of lower interest on cash on hand used for the Inertial Labs transaction. Lastly, the share count is expected to be around 226.1 million shares.

With that, I will turn the call over to Oleg. Oleg?

Thank you, Ilan. During the December quarter, our revenue and EPS came above the higher end of our guidance range. As we mentioned in prior call, many of NSE traditional end markets have stabilized and are showing signs of gradual recovery as we enter calendar '25.

Now let's look in more detail at each of our businesses, starting with NSE. NSE revenue in fiscal Q2 grew year over year, driven by recovery in growth across many of our product segments. We expect this momentum to continue through the remainder of fiscal '25. A bit more color on individual product segments.

Fiber field saw solid demand from service providers in NEMs, particularly in fiber monitoring systems in support of fiber network build-out. We expect this momentum to continue. As we mentioned in our prior call, we are also seeing signs of stabilization and green shoots in our wireless business, driven mostly by the resumption of 5G deployment in North America. We expect the gradual recovery to continue during the first half of calendar '25.

Fiber, lab and production demand was up significantly in the December quarter, driven by growth in lab, fiber and optical transport. We also shipped our first 1.6 terabit fiber product and saw continued demand for our 800-gig products, which should drive significant growth for the remainder of fiscal '25.

Our aerospace and defense business segment continued its robust year-on-year growth, driven by growth in our mission-critical products, including communications, avionics and PNT, which stands for positioning, navigation and timing.

Earlier this week, we closed the acquisition of Inertial Labs, which strengthens Viavi's position in the PNT space by complementing our industry-leading resilient timing technology with positioning and navigation solutions. Our expanded PNT portfolio positions us well in the high-growth markets such as alternative navigation and autonomous air, land and sea vehicles.

Lastly, SE was down year on year, primarily driven by lower enterprise customer spend. Looking ahead for NSE, we expect a seasonally stronger Q3 across the broad base of our product portfolio, with continued recovery momentum for the remainder of fiscal '25.

Now turning to OSP. During the fiscal second quarter, OSP declined on a year over year basis, primarily due to lower demand for 3D sensing products. We expect fiscal Q3 to be roughly flat year over year, characterized by seasonally weaker 3D sensing. We continue to monitor inventory levels of anti-counterfeiting products. And we currently expect to reach demand-supply equilibrium within the next two quarters.

To summarize our near-term outlook, we expect Q3 to be seasonally stronger and recover momentum to continue through the rest of fiscal '25.

In conclusion, I would like to welcome employees of Inertial Labs to Viavi and thank the Viavi team for managing through the challenging environment over the past two years. Lastly, I would like to thank our customers and shareholders for their continued support.

With that, I will now turn it back to the operator for the Q&A.

(Operator Instructions)

Ruben Roy, Stifel.

Thank you for letting me ask some questions. Oleg, nice to see the turn as you sort of highlighted on the last call, I guess, if we could drill down into some of the moving parts here, starting with the field demand for fiber monitoring. Can you talk a little bit about that? Is that still mostly telco service providers? Or are you starting to see some hyperscalers get involved with fiber monitoring?

Well, it's a combination. I mean, clearly, on a broad base, it's the telcos because as they build out their fiber networks, I mean, it's just really the volumes game, right? Because there are so many telcos and so many of them are building out fiber, but also there is cable providers, but they're also building out fiber.

So clearly, that's driving. But the new segment emerging is really the hyperscalers who are kind of not your father's data center operators, they're actually putting very sophisticated fiber monitoring interfaces onto their data centers to monitor all the fiber going in and going out of their network.

And part of it is really protecting the billions of dollars they are putting into those data centers and making sure that the connectivity, latency and performance of their fiber interconnect is on par with the performance inside the data center. And that is a new phenomenon because traditionally, data center operators really didn't care, they just took whatever the connection they got.

And today, I would say the hyperscalers have gotten extremely well educated on the performance and strength and weaknesses of the traditional fiber connections they've been getting and they're taking it -- they're taking matter into their own hands and actually paying and deploying this thing, so they can hold any of their service providers accountable for the service level agreements that they are signing with them.

Interesting. Thank you. And then on the lab side, congrats on the 1.6T shipment. But if we look at 800 gig, can you talk about your visibility there? Clearly, you're talking about momentum through the end of fiscal '25. But kind of how you're thinking about that business, the 800 gig shipments throughout the rest of the calendar year? And can you give us a little bit of an idea of how big you think that could get as part of the NE business?

Well, the reason I say fiscal because we generally don't like to go beyond one, at most two quarters. I mean clearly, 800 gig is the workhorse that everybody is buying today and the volume is growing pretty rapidly. 1.6 terabit is really what is entering the R&D labs that semis, NEMs and module developers. And that's probably going to be hitting production maybe towards the end of the calendar year.

So we think the 800 gig will be the volume driver for this year, calendar year and the 1.6 starting to maybe gain momentum towards the end. And there's still 400 gig shipping as well. So -- and that's across the Board, I'd say, traditional semis module developers and NEMs.

And then on top of it, we are seeing very strong demand from module builders, the factories, production testing in Asia that is largely in support of the kind of, I'd say, 400 gig and 800 gig per dumpling actually, growing 800 gig module demand to support the AI data center infrastructure.

Great. Thank you. Oleg, if I could just sneak one in for Ilan on the comment around capital allocation and M&A with the Inertial acquisition and successful closure. Maybe you can just give us an update on what your appetite for further M&A might be going forward? Is there still room for additional M&A as you look out into calendar '25? Or how are you thinking about capital allocation here?

Yeah. Thanks, Ruben, for the question. So obviously, M&A continues to be part of our overall capital allocation model. We believe that we have more bandwidth to kind of raise additional funding if we kind of find the right opportunity for us.

We are very kind of focused in terms of our EPS growth for the short, mid and long term, and that's a major driver for us in our decision-making process. And it's less about the funding, more about the specific opportunity and the EPS specifically.

Yeah. And I'd say if we look at our M&A potential target funnel, nobody is in there. There is a bunch of PowerPoint presentations. All of the deals that we are considering and evaluating are highly profitable with the margin profile that is accretive to our overall thing.

Clearly, in the end, the price, there's got to be the right price because one thing we are very cognizant is the -- we have multiple options how to deploy our cash, and we believe in paying the right price for the right deal.

Great. Thanks guys.

Thanks, Ruben.

Andrew Spinola, UBS.

All right. Thank you. I was wondering if we could talk about the upside in the quarter and wondering if -- when you look at it, how much of it came from your cyclical uptick in your SP businesses? And I'm talking specifically about NSE versus maybe how much of the contribution came from sort of your secular growth drivers in some of the other businesses?

Well, so I mean, it's a good question, Andrew. So I mean, the -- I would say, maybe -- I would say, probably a third to half kind of came in from the kind of tide that rises all the boats, the service provider started to come back, crossing the Ts, dotting the Is, the fiber spend.

We actually saw very interesting wise, the green shoot in wireless was buying wireless field instruments, which basically tells you right away, somebody is planning to start doing major 5G deployment restart in the next two quarters.

So that is what I would call a gradual recovery and continued recovery. And the rest came really from our diversification efforts into fiber lab and production, the aerospace and defense segments where we've seen really good revenue growth and a substantial margin expansion that the volume was driven in both of those segments.

Got it. And I guess just a follow-on to that. I think I'm trying to understand, obviously, the AI demand is driving some pretty substantial growth rates in some of the end markets that you serve. I'm trying to correlate that with your fiber lab business to try to understand what's the potential upside in that business?

How much of that 50% of your growth in this quarter that came from secular came from fiber lab? And just anything you can do to help me understand, how big that business is that's exposed to maybe 30%, 40% growth rates? And how big can it get?

Well, so there's two segments to that business. One is we sell advanced test equipment to the developers. So if you are developing next-generation chipsets or processor, the 400, 800 gig, 1.6 terabit bandwidth, you need those tools to aid you in the development and debugging. If you're developing modules, you need those -- that equipment. And if you're developing systems, you need that equipment.

And then there is a whole other market. So I'd say this one, I mean it's growing -- I mean I wouldn't be surprised if it doubles or triples over the next three to four years because what's different here is when the telecoms were driving migration node to node. It would be about six years -- six to eight years between going, let's say, 100 gig to 400 gig, 400 gig to 800 gig.

Now today, the really evolution of technology nodes is not driven by telecom, it's driven by datacom. So as a result, you're seeing every two, three years, there is a new technology node. So your product cycles are just as big and they're happening much faster. So seeing that business doubling, tripling is fairly realistic.

And then there is a whole other part is the production piece. So again, when you were doing telecom, you only deployed so many modules. Well, when you're putting fiber optic modules in the data centers, you have orders of magnitude more modules. So the demand for spectrum analyzer, power meters and fiber, the inspection, all these kind of things, that is purely a function of how many units need to be shipped.

And what was interesting is, when it was a 400 gig, we did not see much demand because a lot of it was bought by the -- or installed by telecom service providers. And when their business tanked about two years ago, all of that capacity shifted to hyperscalers.

Well, as you know, bringing out 800 gig and then over the -- just over the horizon 1.6 terabits, well, it's the data center operators who are driving the deployment of that production capacity. And that's happening at a much faster turnover pace instead of like kind of a six year horizon, over two, three year horizon. So again, there is a doubling or tripling -- I mean, whichever the volume growth you're going to see.

So we are very positive on that business. And then the third element here, traditionally, we played in the kind of Layer 1, Layer 0. And now we're going to Layer 2 to Layer 7. So we're also expanding the market that we're addressing within all of these applications. So we feel that business unit will be a major growth driver for us in years to come.

Thank you.

Ryan Koontz, Needham & Company.

Great, thanks and terrific color on different product areas, Oleg. I wanted to drill down on wireless if we could. This is a pretty quick rebound here, and we've heard some -- recently some pretty optimistic signals from Ericsson, Nokia as well that are pretty aligned.

But if you drill down there, do you think in terms of the operators, is this driven by capacity additions via small cells or rebanding of spectrum? Or is it new services around the 5G core? Anything you can share there on the wireless front?

So I mean -- so actually that correlates very well with the -- what you heard from Ericsson and so on. But before you -- so you get maybe orders or indication that there is going to be a restart of 5G deployment. What we saw, I mean, is the placement for field instruments. So that's usually the first thing you do because you got to equip all of your techs with equipment before you kick off the campaign.

And what I believe is happening, it's really all about cost, cost, cost, and it's really accelerating conversion of a 4G spectrum to 5G spectrum because it's our understanding you're seeing anywhere between 90% to 80% drop in cost per bit when you convert the spectrum. And if you want to grow the available bandwidth to your customer base, one of the cheapest things to do is just accelerate conversion of 4G into 5G.

And the instruments that we are seeing, and if I look at the what kind of software downloads and codes and use cases that we provision with those instruments, it indicates to me it's a lot more about retarget -- reclassifying spectrum from 4G to 5G.

And it also kind of feeds our belief that millimeter wave is pretty challenging to do on a mass scale. And the easiest way to create bandwidth is really repurposing your 0 to 7 gigahertz spectrum. That's just our view of this thing.

Yeah. That's great.

And then by the way, North American phenomenon only. And I believe the Europeans will jump on it as well because they have exactly the same problem. They're all under massive cost pressure and that is one of the easiest ways to lower cost of your bandwidth.

Yeah. Great point. Just a quick follow-up if I could, around your acquisition of Inertial Labs. How do you see that product fitting into your portfolio? Is it very much a stand-alone business unit? Is there much adjacency or synergy with the rest of your commercial activities? And maybe just -- you've had a couple of weeks at the helm there. And how do you -- what's been the feedback on?

Well, we just closed this deal two days ago, but we've been obviously working with them for a while. So this has been a conscious diversification for us to be less reliant on the highly volatile telecom service provider and taking our -- if I look at our core competencies, it's really communications, engineering, algorithms, advanced -- truly advanced system design.

And when we looked at our skill set and say, well, where is the [richer postures] using this know-how? Well, it's aerospace and defense. And the technology we have is actually generations ahead of what the traditional mil, aero players service the market with today. And we think, hey, we can take it, and we really could leapfrog pretty much everybody in that space.

And we've shown it with our resilient timing, actually, our -- and these products are unlike the traditional book, ship business in the test and measurement, while it's a very attractive margin business. You have to -- every quarter, your big chunk of it is a book, ship business. Whereas the -- what we're talking about here in aerospace and defense, PNT, it's a design win-driven business.

Once you win module, subsystem or a product inside a larger system with a Tier 1 OEMs, you're done. And when they go into production, they just pull all their business. So it's a much lower cost of growing revenue and profitability from point of view of go-to-market. So you're still leveraging your engineering know-how and competence but at a much lower go-to-market.

And I think longer term that gives us a very nice operating margin expansion and the gross margin expansion. And with the -- so we acquired Jackson Labs a couple of years ago, we acquired the T in PNT. With the acquisition of Inertial Labs we added P and T, positioning and -- P and N, positioning and navigation.

So now we can effectively deliver the whole alternative navigation modular system to any system integrator out there. And in particular, the high-growth drones and alternative navigation solutions demand is where we are playing into.

That's great. Thanks so much for that color.

Meta Marshall, Morgan Stanley.

Great. Thanks and congrats on the quarter. Maybe just as a first question, you had been kind of more optimistic about seeing some of this demand kind of return in fiscal Q3 or calendar Q1. So was this -- you just started to see some of those orders earlier than expected or starting to see it stronger than you expected. And then maybe the second question is just kind of the recovery path that you see for the SE business and some of that business returning. Thanks

Sure. So I mean -- so I was looking and kind of measuring temperature of even starting in the summer and really September quarter just the tone of the likes of AT&T, Verizon, T-Mobile and all the other operators has been shifting towards, hey, we're going to increase build-outs of our fiber. And what we saw is run for the hills has kind of become a market share grab shift mindset within those operators.

And then it was really the first inkling that, hey, we're going to start seeing things finally turning around after two years. And then these kind of dialogues that started in September quarter and they accelerated into December quarter. And of course, now you see it's pretty much, again, has become a competitive play where nobody wants to be left behind.

I mean you saw T-Mobile is getting into fiber. Verizon is getting back into fiber. AT&T is accelerating fiber builds. Well, MSOs, the cable operators are looking at it and said, hey, wait a second, they're coming after my bread and butter, which is broadband. So they are now being forced to start doing at least something in the interim before DOCSIS 4.0 shows up. And of course, by doing all of that, the wireless was not far behind.

So when we saw the change in all these kind of dynamics happening, we said, okay, that's the beginning of the change in the mindset that we are seeing with service providers. But we didn't see the money yet materializing.

And then in the Q3 -- in the fiscal Q2, which is December quarter, we saw people putting money where their mouth was. And it continuing into Q3, which is normally we generally see as a weaker quarter because everybody doesn't set their budgets until the end of February. Well, that's continuing into this quarter.

So the mere fact that we're not seeing the seasonal dip in the service provider. It continues to move. It's clearly telling us it's not a onetime blip. And one thing was really kind of the last thing is we were kind of doom and gloom up until about September on the wireless space. We don't think much is going to happen until middle of next year.

Well, the indication that people starting placing significant orders for wireless field instruments, you only do that if you are one to two quarters away from doing a mass deployment or restarting your 5G. And we also know what kind of software download you have in those instruments. And that pretty much gives you a clear indication of what kind of work people are planning to do.

So in that respect, we feel -- and I will just emphasize, it's North American. I mean we're not talking yet about Europe, and it's North America, I'm feeling much more optimistic on the North American landscape. And if I look at traditionally, Europeans were about three to six months behind, and I do think it will spread to Europe, probably by the middle of the year. So we'll provide kind of the next wave of recovery. So that's on the NEMs.

On SE, well, it's a story of good news and maybe good news but not so good news, right? So the good news is our AIOps is absolutely everybody and their brother wants it and there's a lot of interest. The not so good news, it's taking time to get through the teething pain and deploy it and be able to deliver all the use cases that customers want.

So as a result, there is a disconnect between the velocity of engagement and how quickly we can turn it into the revenue. I think throughout this year, we will resolve most of these kind of early teething pains and catch up on the development of all the use cases. And we feel this is going to be a major driver for the SE business unit growth.

The second part on there is the private network. So that business is doing really well, kind of especially private, mission-critical networks. It's growing off of a small base, but it's doing very well, and we're seeing a lot of -- both kind of industrial and sovereign interest in building their private security networks.

And the third piece is the enterprise, and I think that is the piece that I think is, I mean, with exception of maybe security, the rest of it is not spending as much money. So I think that will be probably the last piece to recover in that business.

But we do think calendar '25 will be the year where this business -- I mean they already turned the corner from point of view of technology development and redeveloping product portfolio. The next step for them is to start putting points on the board by growing quarter on quarter.

Great. Thanks.

Tim Savageaux, Northland Capital Markets.

Hey, good afternoon. And congrats on the results from me as well. And you touched on some of this, but I'll maybe see if I can fill in some blanks here. In terms of the carrier strength, and I note your US -- North America revenue was quite strong sequentially in the quarter.

And you kind of touched on it. The strength there in fiber monitoring and carriers being principally US based, just want to confirm that. And also whether that's really concentrated with the real big guys, the AT&Ts and Verizons of the world or if you're seeing any broader base to that strength in the US in fiber access and fiber field?

Well, the fiber monitoring, ironically, is the countries outside of US are the big user of fiber monitoring. They always believed in monitoring their fiber network. In North America, we are now seeing some, I would say, Tier 1 players are starting to consider. They're rolling it out in several markets. And if that trend catches on, it's going to be a significant boost to growth in that business.

But also in North America, it's really the hyperscaler. It's the who is who in the big social media, AI and all that. They are viewing fiber monitoring as an integral part of building out. If you're going to spend hundreds of billions of dollars building out data centers, you should spend at least $100 million to make sure that they are connected to something that works.

And they are finding that the weak link is the interconnect between the data centers. It's the -- because they usually use a third party to connect all the data centers. And there is already very quick bifurcation between those who can and those who can't. And there is some really next-generation fiber service providers who are really putting in state-of-the-art fiber links where you can monitor even dark fiber.

So you can turn it on at a drop of a hat and provide the SLA agreement that is needed. And then of course, there's the -- your father's fiber network, who is like, okay. We'll send the truck and we'll connect and that's just not what those players require.

So we actually view it as a -- the smart money and the smart engineers are deploying it. Of course, it's self-serving. We believe they should be doing it, but it's also putting a major investment in quality of service and quality of performance that the networks are able to deliver.

So I think North America is in the early stages of deploying where we do see North America is also fiber monitoring, it's really more handheld than -- they use fiber monitoring when they build out networks, but then they kind of leave it along. But we believe, you should be using it when you build it out and then also when you're managing it because it actually enables you to automate and reduce the cost of managing the network.

Okay. Great. And then you did see a bit of an uptick in Europe, at least sequentially in the quarter as well. You've indicated you really haven't seen the carriers come back and I guess that's both fiber field and wireless. So should we assume that's network equipment manufacturers driving that or any other factors?

So clearly, Europe is pretty strong for us with NEMs, although a big chunk of it is wireless NEMs, and they have not been that strong. I mean we hope that the recovery in the field, wireless, maybe in one, two quarters as they start shipping equipment into the networks, the infrastructure test equipment will also pick up.

And of course, the fiber NEMs in Europe are quite strong. And Europe, there's a run rate demand that is fairly consistent. But we know that generally, Europe is about one to two quarters behind the US. I mean they -- when US went into tailspin September of '22, Europe probably took about one or two quarters behind.

So we think by the middle of the year, I think Europe should start picking up as well. And there, it's very much all about continuation of deploying fiber and 5G. And if that happens, that kind of would be a second wind to our field instrumentation telecom business that would come in because Europe is, I mean, equally big to the North American market.

Got it. And last one for me. And in terms of the discussion about seasonality, and I think what you're saying is you're seeing better than seasonal. So backing out Inertial, it looks like your NE segment would be flattish to maybe down a very little bit where you might normally see, I don't know what some -- maybe a mid-single digit, low to mid-single-digit seasonal decline typically, and you're not sort of seeing that this year given the recovery in demand. Is that basically right?

Yeah, that's basically right. Although I wouldn't even say a decline, I think it's flat to maybe even single digit -- I mean low single-digit growth. And then on top of it, you had Inertial Labs. So that's why we feel -- I mean the mix changes within that revenue.

I mean that's why -- I mean some of the margin -- I mean even though top line is flat to maybe slightly even up, the margins are a little weaker because of the mix, there is -- in some segments, there is a lower margin profile than what we did in December.

And I would say also, first quarter is when we accrue most of our statutory expenses for the year. So that's clearly, I'd say, the biggest drag, but also some of the mix will be different. So volumetrically, I mean we feel NSE is going to see pretty strong -- well, I would say, a seasonally strong Q3 because generally, we drop anywhere between 5% to, maybe even sometimes, 10% Q2 and Q3. And here, we are flat to slightly even maybe up.

Great. Thanks very much.

Mehdi Hosseini, Susquehanna.

Bastien filling in for Mehdi. Oleg, it looks like the 3D sensing is being weaker this quarter, but it is seasonally stronger in the second half. Could you touch maybe on what you're seeing in terms of ASP and dynamics? And where does that go from there? How much contributes to your OSP guide of $75 million in the third quarter of '25? Thank you.

So usually, if you look at the 3D sensing, the September and December quarters are bigger and the March and June are smaller. So I would say when we say seasonally weaker, I mean we had more demand in the September quarter and some of it might have been pulled in from the December quarter. Plus there is also some annual ASP reduction that kind of lowered the revenue, but the volumes were pretty healthy.

So on the second half of the fiscal year, it's pretty much in line with seasonality in 3D sensing. I mean that's -- there just fundamentally fewer units being built in the second half than first half. And on the -- I think on $75 million, we kind of always break up core business and the 3D sensing.

I think we have a pretty healthy anti-counterfeiting and industrial business and that more than offset the decline in the 3D sensing. And -- but we're also doing one thing, I don't know if Ilan mentioned it, is we are actually taking proactive measures to lower our internal inventories.

So we are shipping anti-counterfeiting demand from our inventories. So even though the volumes go up, we are not running the factories at full bore. So we're not picking up the extra absorption. So -- as a result, we'll end up with lower inventories, we'll free up more cash, but we are not picking up maybe another 1 percentage points, 2 percentage points, 3 percentage points of operating profit that we would do otherwise.

It's a conscious measure to really accelerate demand, supply balancing because we're seeing also channel inventories are declining, and we want to get it to by the middle of the year that we are now and supply, demand balancing becomes much easier to forecast and plan our production after that.

Yeah. The inventory balance is a slight headwind to margin, but we consciously took that approach.

Cash is cash.

Yeah.

That is very helpful. Thank you.

And everyone, at this time, there are no further questions. I'd like to hand the call back to Ms. Vibhuti Nayar for any additional or closing remarks.

Thank you, Lisa. This concludes our earnings call for today. Thank you for joining everyone. Have a good afternoon.

Once again, everyone, that does conclude today's conference. Thank you for your participation. You may now disconnect.