Viavi Solutions Inc (VIAV) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Viavi Solutions fourth quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the call over to your host for today's conference, Mr. Bill Ong, Head of Investor Relations. Sir, you may begin.

Thank you, Bridget, and welcome to Viavi Solutions fourth quarter and FY16 year end earnings call. My name is Bill Ong, Head of Investor Relations. Joining me on today's call are 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. 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 except revenue are non-GAAP. We reconcile these non-GAAP results to our preliminary GAAP financials, and discuss their usefulness and limitation in today's earnings release. The release, plus our supplementary slides which includes historical financial tables are available on our website. Finally we are recording today's call, and will make the recording available by 4:30 PM Pacific Time this evening on our website. I would now like to turn the call to Amar.

Thank you, Bill. Our fiscal Q4 revenue of $224.1 million exceeded our guidance midpoint of $220 million. OSP revenue exceeded the guidance range, while NSE was above the guidance midpoint. Revenue was up 2% year-over-year, driven by strong performance in our OSP segment, that offset the decline in NSE.

Our operating income at $30.2 million grew $13.3 million or 78.7% year-over-year. Operating margin of 13.5% was towards the high end of the guidance range, and was up 580 basis points year-over-year, as a result of strong OSP performance and good operating expense management in NSE. Overall Viavi operating expenses declined 7.6% year-over-year or $9.2 million, driven by G&A expense reduction and R&D spend optimization. EPS at $0.10 was at the high end of the guidance range, which is a 150% increase from $0.04 a year ago.

Now moving to the results by business segment. Starting with NSE. NSE revenue at $161.1 million declined 4.8% year-over-year, driven by a 9.4% decline in the SE segment, and a 3.6% decline in the NE segment. The year-on-year SC revenue decline impacted both the enterprise and assurance businesses, with mature products declining at a steeper pace compared to the growth in new products.

NSE gross margins at 64.8% increased 10 basis points year-over-year due to the product mix. NSE's operating margin at 1.5% increased 300 basis points year-over-year as a result of operating expense reductions. The book-to-bill ratio for NE, which is our core instrument business was above 1, while SE had a book-to-bill below 1 primarily due to mature product runoff. As a result, overall NSE book-to-bill ratio was below 1.

Now turning to OSP. OSP revenue at $63 million grew 24.8% from a year ago levels, driven by higher demand in the anti-counterfeiting business. Gross margins at 59.4% increased 360 basis points, and operating margin at 44.1% improved 570 basis points from last year, due to higher revenue, favorable product mix, and higher factory utilization.

Moving to FY16. For the FY16, Viavi's revenue at $906.3 million grew 3.7% from FY15, driven by growth in our anti-counterfeiting business within the OSP segment. NSE revenue declined 3.4% due to steep declines in our mature assurance business. Our core instruments business has stabilized, and was roughly flat year-over-year. Operating margin for Viavi at 12.8% was a 500 basis point improvement versus a year ago.

Net income for the year at $90 million, more than doubled from $44 million a year ago. This resulted in EPS for the year doubling to $0.38 from $0.19 versus prior year. This profit performance was a result of revenue growth in our OSP segment, and operating expense reduction in our NSE segment primarily in G&A and R&D spend optimization. Driving operational efficiency will continue to be an important area of focus in FY17 and beyond.

Today, we also announced that we will be restating our Q1, Q2 and Q3 financial statements to correct an error in our calculation of GAAP-only non-cash income tax expense in a foreign jurisdiction. This was corrected during Q4, and so does not impact full-year FY16 GAAP results being reported today. While the error was not material on a standalone basis for any individual quarter, based on the cumulative effect for the first half of the fiscal year, we determined that the restatement was warranted.

This GAAP tax expense restatement does not impact our previously reported non-GAAP results. On a GAAP basis, FY16 showed a loss from continuing operations before tax of $45.9 million, an improvement from FY15 loss of $105.3 million. FY16 GAAP losses from continuing operations before taxes reflects the impairment of goodwill related to the SE segment, partially offset by investment gains from the sale of Lumentum stock. FY16 GAAP EPS loss from continuing operations of $0.22 was lower than the prior fiscal year, with a GAAP EPS loss from continuing operations of $0.57.

Now turning to the balance sheet, our total cash and short-term investments ending balance was approximately $980 million, which includes the remaining 7.2 million shares in Lumentum valued at $171.3 million. During the quarter, we sold approximately 2 million shares of Lumentum stock with an average selling price of $24.86 per share, resulting in net proceeds of $48.5 million. Our book cost basis on these shares is approximately $8.58 per share. As a result, we realized on GAAP-only P&L, an accounting gain of approximately $31.8 million.

Following the end of FY16, we sold an additional 2.2 million shares, bringing the number of Lumentum shares we sold to date to 6.7 million out of the original 11.7 million shares received in August 2015. Cumulatively, these shares were sold at an average selling price of $24.95 per share, resulting in net proceeds of $166 million.

During FY16, we repurchased a total of 7.3 million Viavi common shares at $44.5 million with an average cost basis of $6.11. This included the repurchase of approximately 1 million shares of Viavi stock under the new share buyback program announced in February 2016. We will continue to be opportunistic to monetize our Lumentum share position, and actively pursue the repurchase of our own stock.

Our GAAP operating cash flow from operations for the quarter was $17.9 million. At the end of FY16, we took a goodwill impairment charge on the SE segment of $91.4 million before tax. This was a result of annual impairment testing of our goodwill, and an ongoing assessment of our SE business. At the end of FY16, goodwill of $152.1 million is comprised of NE at $143.8 million, OSP at $8.3 million, and SE at zero.

Now turning to our guidance. We expect first quarter of FY17 revenue to be in the range of $201 million to $217 million, operating margin at 11.4% plus or minus 1%, and EPS to be $0.06 to $0.08. We expect NSE revenue to be at $153 million plus or minus $6 million, with operating margin at 1% plus or minus1%. We expect OSP revenue to be at $56 million plus or minus $2 million, with operating margin at 40% plus or minus1%.

Our tax expense is expected to be about $4.5 million. We expect other income and expenses to be a net expense of $2.5 million, and our share count to be approximately 238 million shares. Now I'll turn the call over to Oleg.

Thank you, Amar. Viavi's overall results were above the midpoint of our guidance range, with OSP exceeding the guidance range, and NSE coming in within the range. Network enablement or NE had a revenue decline of 3.6% from a year ago.

While we continued to see strength in fiber test instruments to support the 100 gig metro deployment and fiber-to-the home expansion, access in ethernet copper with weaker versus a year ago. Cable was down slightly from a year ago, as the industry prepares to shift to DOCSIS 3.1 later this calendar year. We expect the cable upgrade cycle to have a gradual ramp over the next several years.

Service enablement or SE remains challenging, as revenue declined 9.4% a year-on-year. Service maintenance contracts continue to decline, as mature products within SE fell double-digit percentages from a year ago levels. The new growth products, which include our data center products grew low single-digits percentages.

The carrier CapEx spending during the quarter and the first half of the calendar year remained below the expectations, and it is uncertain if the second half of the year will be stronger, which would be necessary in order for carrier CapEx projections to stay on plan for the full fiscal year. As a result, we remain cautious on our near-term Outlook for the NSE business.

The OSP segment delivered its second-highest revenue quarter at $63 million, on the continued strength in our anti-counterfeiting business. We also saw a revenue strength in our optical coating products for consumer, industrial, and government applications, compared to a year ago level.

While the growth drivers for the anti-counterfeiting business are expected to remain intact in the long-term, we expect the demand to pull back in FY17 from 2016 levels, as currency reprinting and banknote redesign return to normal run rates. At the present time, our near-term visibility indicates a sequential decrease in demand for the first and second quarters, as inventories and supply chain adjust to steady-state demand. We expect OSP revenue in Q2 to be below fiscal Q1 levels, with a recovery in the second half of FY17 to Q1 or above levels.

In closing, during the FY16, Viavi has achieved a number of milestones. We successfully completed the spin-off of Lumentum, achieved significant OpEx reductions, achieved substantial increase in profitability, despite modest growth in revenue, and initiated further comprehensive restructuring and business strategy review to continue driving longer-term growth and profitability.

As we look ahead to FY17, we plan to continue to reduce our business complexity, improve our operational efficiencies, and selectively invest in our core and growth businesses to drive a profitable and sustainable long-term business model. Please join us next month that our Analyst Day event, where we'll provide at further detail around our business strategy.

I would like to thank our employees for their hard work to achieve these milestones, as well as express our thanks to our customers and shareholders in their support of Viavi. I will now turn the call over to Bill.

Thank you, Oleg. I want to highlight the following upcoming investor relations events. We will be participating in Morgan Stanley and MKM Partners Silicon Valley Bus Tour held at our Milpitas corporate office on August 29 and 30, respectively. Our Analyst Day event be held at our Milpitas campus takes place on September 15. Bridget, let's begin the question and answer session? We ask everyone to limit their question to one question and one follow-up.

(Operator Instructions)

Patrick Newton, Stifel.

Good afternoon, Oleg and Amar. Thank you for taking my question. Oleg, can you remind us again, the different strategic options that you are weighing pertaining to the SE portion of your business, and then perhaps which method of solution you are leaning to at this point?

Well, I think Patrick, I think we have not made any of our plans public. We are, obviously in process of reviewing the business. And I am not so sure, by strategic options, you mean divestiture, because it's often the language. The answer is no at this time.

What we are reviewing is the relative level of investment, the long-term prospects of that business, and whether or not within a reasonable time, this is a business that we can achieve. Obviously, once we finalize our review, then we'll have a spectrum of options at our disposal, ranging from resizing of the business, refocusing on a maybe a smaller or different sub segment, or obviously doing the divestiture. So at this point in time, it's too premature to talk about it.

Great. And then, I guess, for Oleg or Amar pertaining to OSP, can you help us understand what is along the operating margin to achieve such impressive levels? And then, should we think as revenue dips down into fiscal 2Q, that 40% Op margin is still achievable?

You broke up. Could you repeat your first part of the question?

I'm sorry. What's allowing the Op margin to stay at such impressive levels for OSP? And then, even in 2Q as--?

Sorry. So that's --I will answer that question. So as you may know our OSP business has a significant manufacturing base, right? So it's actually one business where our fixed cost is real, and to the extent every dollar of revenue that you can pump out of those assets, it increases the absorption of the cost. So that pushes up the operating levels. So it's truly driven by the operating scale.

So but again just to add to Oleg's comment, in 2016 just to build on what he said, we had unusually higher volumes and very high demand, so our operating margins as we exited 2016 was 41.5% for OSP. We don't expect that level to continue. So it has -- obviously lower than that, we will give you additional color during the analyst day. But needless to say, that we will drive higher factory efficiencies in that model, as well as higher OpEx efficiencies, but it won't be as high as 41.5%.

Great. Thank you for taking my questions. Good luck.

Michael Genovese. MKM Partners.

Thanks very much.

Looks like you had some nice sequential improvement in Europe. Could you talk about what drove that?

So I think it was the improvements in Europe is mainly driven by our core instrument business. We also saw Europe actually, even on a year-on-year basis in our NSE business -- so we're talking about NSE business here, in our NSE business we also grew on a year-on-year basis in Europe. So it was mainly driven by our core instrument business.

Fiber was particularly strong. As you see the trend from fiber-to-home, as well as fiber build-out for backhaul for wireless, we see our fiber products both on the field as well as lab site, actually had a good demand. And that's what actually drove the strength in Europe, as well as in some other parts of the world.

Great. And then, a similar question for SE gross margins. Was it mix within those businesses that drove that margin, that gross margin improvement, or was there something else there?

Yes. So if you look at the gross margins on a year-on-year basis it was flat. But you're absolutely right, sequentially the gross margins improved from Q3 to Q4. And if you recall in Q4 we did mention that as we go drive the acceptance of our solutions, in one of our -- at one of our large customers, we had a huge [inaudible] hardware component that actually depressed the margins.

Now that was one-time, as we indicated to you. So excluding that, you saw the operating margins, they went back to its normal sort of range. So that's what happened in the SE business. That's why you see a good jump in operating margins from Q3 to Q4.

Great. Thanks a lot, Amar.

Thank you.

Dmitry Netis, William Blair.

Great. Thanks for taking my question. I have two questions. One, maybe start with the carrier CapEx overview Oleg that you gave. You said it came below expectations. You're cautious in your near-term outlook, although judging by what the spending patterns may look like in the second half, from those carriers that communicated their, or reaffirmed their guidance, it is -- seemed to be pointing up. So can you reconcile your comment versus what's really happening with the carriers out there, in how they guided for the year?

Well, thank you, Dmitry.

Carriers have given guidance for the first half, for the year, and so far they've missed it, right? They all -- well, they've came in last, which I think every CEO probably pats himself on the back. They have generated cash, spent less money, and my results look better. And it doesn't hurt to reaffirm my spending in case I need to spend, so I'm just playing catch-up.

So I think I'm just taking a more conservative approach, before I go and spend any money. I'll have to assume that they're going to be running leaner, trying to squeeze more out of what they've got as so far been the case thus far this year, or maybe rolling out things a little bit slower.

So to the extent they really do live up to their guidance and spend the money, it will be a very pleasant upside. And for us it will be a welcome upside to our business and projections. But we're planning our business on a more cautious spend by carriers. And as such, we are keeping very close eyes on our operating expenses. And obviously to the extent, they do spend the money, we'll benefit from it.

Are you more cautious on the telcos, the cable, or kind of taking them into one single bundle as a whole?

Well, I think it's both.

I mean, they all kind of watch each other -- it's almost a badge of honor these days, it looks like I under spend my CapEx, right? Which I think we all know it can only go on for so long, and ultimately you have to spend some money.

And Dmitry, just to add to that. This is Amar here. So we also have network equipment manufacturers as one of our customers, and if you see their earnings announcement, you will see the softness of spending even there too, right? So we've been cautious from both the service provider, and as Oleg mentioned, as well as the network equipment manufacturer. And as Oleg mentioned, if we see the improvements, we'll go capture it, but like to plan cautiously and execute aggressively there.

I mean, the reality is for us, it's just a prudent strategy given that our NSE business is fully outsourced. We don't need to plan or put ahead of time, manufacturing capacity. Our capacity comes to us on demand, and we have very good, and very flexible supply chain management. So to the extent, the demand is greater, we can turn it around on a dime. But my experience has been is, plan for the low-end on the OpEx, and execute, and be able to execute your supply chain on the higher end of demand.

Great. And then, very good.

And on the -- just the sales productivity, I know, Oleg, you've been doing some optimization, some resetting of the quotas and driving business outside of the US, China, Europe. Clearly, Europe picked up, so you had a nice tailwind there.

But talk about that sales productivity, is that metric improving? Are you happy with where it's going, at least the trajectory of that metric? And then also on the channel traction, anything to speak to on that front? You've been eight months now, with that channel program. Anything that's pleasing or not pleasing, as far as that goes?

Okay. So sales is a very important topic in this Company. As I've ran multiple companies from manufacturing to R&D intensive to Viavi. And in case of Viavi, the single biggest component of our cost structure is our sales and marketing. So clearly, getting a good return on your sales and marketing dollars is a big way to drive your operating margins improvement and overall profitability.

So in many ways, sales is a very critical element for the Company. So you've got to look at it cautiously, so you don't have unintended consequences. But as we look at it, and we are -- it's still a work very much in process, we see a very different level of productivity by regions and by different accounts.

And clearly, as we look through it, several things come to mind. One is, how do we set our quotas? How do we reward our best performing employees? But also are we being smart about how we go to market? Are we doing everything -- are we doing more direct than we should, or should we in some smaller accounts rely more on our channel partners?

So it really comes down to the cost of service that we put in, in order to derive the revenue. So we are in process of -- we finalized the analysis, and we're in process of crafting the strategy for our sales productivity improvement. And by the way, we're going to do exactly the same thing for every part of the Company, it's not just sales. I always prefer to start at -- from the customer interface, to make sure that you align the Company and performance, all the way to the customer needs.

So our sales is just the first element in our equation, will be followed by R&D, and product line management, and lastly, the operations. So we are very much in process on that. And to your question on the channels, channels are a very important element in that overall strategy. Because this is a highly fragmented field, and as you know there's lots of smaller carriers -- and one of the great opportunities for us is to reach those smaller carriers and service providers more efficiently. And that means relying on our channel partners to execute, and that's putting in place, the support network, training, collateral, and various other elements to make them successful.

We're now in the eighth month of our velocity program, and we're seeing positive results. There's obviously been glitches in getting going. I mean, it takes longer than you always assume. But the program is now showing positive results, and we continue to tweak it, and align it to drive a greater volume of business through the channel partners. And as we review our current account strategy, to the extent we have marginal accounts, where it's not profitable for us to go direct, we'll seek to offload them to our channel partners, and give them additional incentive to drive Viavi product.

Great. One quick housekeeping, on SE what was the split between legacy and growth?

So the -- (multiple speakers)

It's about 75, 25 --?

Yes. So the SE legacy and growth legacy overall split, as we exited FY16 is 40%, legacy or mature, we want to call it mature, and 60% growth. So that's the rough split.

All right. So pretty much what it was last quarter, right?

Yes, it's a similar split, because the rate of the decline has remained the same. And so, if you recall it was last year in 2015, it was exactly the opposite, 60/40. Now it's 40/60.

Very good. Thank you. Keep up the good work, gentlemen.

Thank you.

Rod Hall, JPMorgan.

Thank you for taking my question. I just wanted to clarify your response to that last question. Are you talking the 40/60 split, is that for the full year, or is that for the quarter just ended? Can you just clarify that?

It's roughly -- it's for the full year, right, talk about the full-year 40/60, but it's (multiple speakers)

Right.(multiple speakers) But quarter on quarter, given the kind of declines in legacy that Oleg talked about --we, I mean, clearly, the split has deteriorated in favor of the growth products, right?

It is. It is again, this is -- this has some, still some tail to it, the mature product. It did improve, in the sense of growth products did improve on a sequential basis, as well as on a year-on-year basis.

So just to give you a little bit more color, the growth business which has for the enterprise and the assurance piece, did grow double-digit for the full year. For FY16, it did grow double digit, whereas the mature business declined double-digit. And so, overall, the business was declining, because the mature business was a bigger mix of the growth business, when we started the year. And that's now shifting. Does that help?

Okay, great. Thanks. Yes, thanks for the clarification.

And then. I wanted to ask you, we've had other people talking about the Verizon strike, and sort of one-off impacts or delays. Did you see any impact in NSE specifically as a result of that, or was it fairly immaterial to you? And then, I just had one more follow-up.

Yes I think, just my view and obviously some of our salespeople may -- they may indicate that we may might have had a little impact, but largely, it was largely immaterial, because a lot of our sales are -- go through the sales force, and some of them are contractors who service Verizon network. So we did not see much impact on the more field side instruments. Now there were some delays on the higher end, high-performance product. But I would say generally, we were not as heavily impacted (multiple speakers)

Okay, and --

And they were already in our Q4 --

Yes. And when we guided you, we already -- if you recall, we had already mentioned it, and we had baked it into our forecast, the impact. And it came in, as Oleg mentioned, in line with our expectation.

Okay, okay I didn't catch that. So thank you.

And then, the last thing, your European performance seems to be counter to what we've heard elsewhere. So Europe seems to be generally weak from a carrier point of view. But you guys have had a good quarter.

So I was just trying to understand, do you -- Oleg, when you talk about your caution on carrier CapEx, are you disproportionately cautious on Europe? Or are you equally cautious across all the regions you're exposed to? Can you just help us understand how you're thinking about that?

So we have a very strong position in North America. So as a result, we are more impacted by fluctuations in North America, because we have pretty high share with all of the major carriers. And to the extent, things go up, and down, it does impact us.

In Europe, we're significantly lower, I'd say positioned in terms of market presence. So in many ways, by putting more focus on, we are able to offset any fluctuations through share gain. And as I mentioned earlier, we are reviewing our sales strategy, and how we go to market, and Europe is one of the areas that is getting significantly greater attention. So to some extent, we, it's easier to move the needle in areas where you're relatively a smaller player. And so, to the extent they may have, overall trend may be down, but by us picking up share, we are -- we can look better than the market.

And just to --

Great. Okay, thank you.

Can I just, to clarify one thing, which is a very important point, we have NSE and OSP, NSE also grew to Oleg's point, and what he saw. OSP also grew in Europe, because that's where you're seeing the growth in our OSP revenue overall. Europe did grow.

That's right.

Okay. Thank you.

James Kisner, Jefferies.

Thank you. So just for my first question here, I want to dive into service enablement again. And I'm just wondering if you could talk a little more specifically about which products in SE that you think have the most promise of driving growth going forward? Which products have the highest bookings growth, or are the most promising? Thanks.

Well. I think in generally, at least -- in the end, all products grow to the cycles, right? As you go deployment, you have a high growth. And as things become -- a technology becomes a little more mature, it slows down, and then just waits til the next cycle. So at least in the near-term, anything optical, I think is going to be by far a stronger -- will have a stronger momentum in terms of growth, than anything relating to copper I would say.

So clearly, there's a lot of build out with our Metro 100 gig. We all heard about it. I mean, we've seen the results from a lot of the module manufacturers, and it's clearly creating a lot of pull and a lot of growth.

The other area that we are seeing, coming onto the horizon is the DOCSIS 3.1 deployment. And that is -- there is a bit of a lag, because the first thing the service providers do, is deploy their core of the network, under the backend of the network. And we seeing pretty good results with Arris and others that are selling into that market.

Once that is deployed, and we expect that to be coming to an end more or less, they're going to start rolling out the upgrades to the field. And that's where a lot of our opportunities come in. So we expect towards the end of the year, the cable products to start picking up. And that cycle is not a very fast and sharp and short cycle. It's more of a gradual, kind of multi-year upgrade cycle. So that's kind of the second thing we are looking at.

And the third element is, as we see more and more copper getting replaced with fiber, such as pushing fiber all the way to the antenna, to the home. We're seeing healthy demand for a lot of our fiber inspection equipment to ensure -- avoiding damaging equipment when you make a connectivity of fiber to the home, or fiber to the antenna, and things like that.

Okay, just to clarify that the answer, it sounded to me that answer applied mostly to network enablement products. SE I was wondering about sort of -- maybe I'm wrong about that, but I was thinking of like Arieso location intelligence, and you haven't talked about PacketPortal in a long time, perhaps that's sort of -- ?

So on that thing, it's a -- usually you see the biggest demand is whenever the network gets upgraded, because then people rethink what is their current assurance or their location intelligence solution. So I think there, we're seeing clearly, a lot of people looking to do anything with the edge. There is much more opportunities that we are seeing in terms of potential leads on the edge of the network, of wireless edge.

Less so on the core, because core upgrades happen far more infrequently. And once you are kind of committed to a particular platform, it's very difficult to penetrate or dislodge it. But I think most of our opportunities that we are seeing are on the edge. And once you win those, later as the customers upgrade the core, we come in with our solution into the core. But so in that respect, Arieso is clearly the technology, where we are seeing continuous interest and demand.

Okay, great.

And just, I want to sneak one more in here. So Oleg, you've been there a while now. The NOLs have been a big topic with investors. You've increasingly got more cash on the balance sheet. Do you have any updated thoughts on M&A, are you guys actively seeking acquisition targets? Thanks.

Well, I mean, the cash is not burning a hole in my pocket, and there's many ways -- things we can do with cash. And we always have to assess opportunities; does a M&A create value for shareholders or destroy it? And also we have to take opportunities. We can use that cash for stock buybacks or retiring some of the debt. So in that respect, we clearly want to do the thing that give -- makes the most impact to our overall value of the Company.

So clearly, the acquisitions are interesting but -- and we have our short list. But at this point, we do not see anything that is actionable enough, that will meaningfully the needle. And in case of buybacks and retiring debt, clearly the market has been having a great run. So we've been very opportunistic in selling Lumentum stock. The company is doing really well, and we wish them to continue to do well, because it benefits us tremendously. To the extent, the winds shift the other way, clearly, we'll be more aggressive and active buyer of the Viavi stock.

Thank you very much.

Richard Shannon, Craig-Hallum.

Well, hello. Thank you for taking my questions. My first one is on your NE business. I may have missed some of your comments about some of the moving parts, by vertical market within there, but I think you had talked about stabilization in that business. Can you talk about the -- what the reasons why there, is it improvement internally in terms of sales execution, or just more of a mix of some of the end markets you may have discussed here? Can you help us understand what's going on there?

Well, I think, historically NSE business was predominantly NE business, selling core instruments, right? And at least the way I understand the history -- as the company became more and more focused on developing and acquiring more software businesses, we had quite an attrition in our sales force, among the instrumentation sales force, and we brought in more of the solution sales talent.

So the mix of sales people on the street, and the focus have shifted somewhat away from the instruments. And as a result, we've seen some headwinds in our instruments sales, and think to an extent, that we might have lost some share.

What we are trying to do, is to do some rebalancing, so to say swing the pendulum backwards, not all the way I mean, because we have a very nice SE business that we continue to invest. But the reality is, instrumentation business is a very profitable, and it's a sustainable business. And we need to put more money into that, to really drive the sales, and aggressively take back market share.

So that's really what we're doing, is just purely rebalancing investment from -- into the areas where we are currently generating a lot of profits. And we see a lot of opportunities for taking back share, while at the same time being prudent about not over investing into our software solutions on the sales side, because of the much longer design-in cycles. And you could spend a lot of money, and really have very little revenue to show for it for a while, until you get customer acceptance. So we're trying to be more be more balanced in our approach, how we allocate resources.

Okay. That's helpful.

I'm sure we'll hear more about that next month at your Analyst event. My second, quick follow-up question, you've had a few of them on your SE business. And you gave us a split there between legacy and growth. I think you said overall in the SE business, your book-to-bill was less than 1 in the quarter. Is it fair to assume that within the growth area of SE that book-to-bill is above 1, or can you characterize it in any way?

So yes. I think the SE book-to-bill was less than 1, because you saw the mature business run off, and so that's impacting our bookings there. And the growth share of the business, especially on the assurance side in Q4, the bookings did well. In fact, it did a little bit better than what we had expected. Again, also remember these are lumpy, right? So in a one quarter, we can get a lot of deals, in the other quarter, we see some of the deals getting pushed out. So specifically, in Q4, the technology that Oleg was talking about, the location intelligence technology which is Arieso did well.

Okay. Great. I appreciate all the detail. That's all for me. Thank you.

Meta Marshall, Morgan Stanley.

Hi, thanks for taking my question. I wanted to dig into the data center business. And you said it had been up high single-digits in the first half of the year. And just wanted to see if you thought that could accelerate in the second half of the year, as some of these data center upgrades take place?

And the second is, on the legacy side of the business, it being down double-digits this year, is that something where you still expect it to decline double-digits next year? Or you think that it can reach a level of stabilization and maybe be mid single-digits down?

Thanks.

I think I'll start, and let Amar chime in. I think, when we said single-digits, we said -- we talked about our total software business, which includes our data center, right? So there is two elements; there's the network software, and then there's a data center software, right? So can you restate which part of the -- you're interested in, because there are two segments?

Just the business you would do with data centers in general, and whether you think the fact -- with their 25 gig upgrades later on in the year that, that could be an accelerator for that piece of the business?

Well, I think, anytime there is an upgrade, or standard change or shift to a new technology, we always welcome it, because it means people need to buy more of the performance management and monitoring, both instruments and software.

So it's hard for me to predict to what extent we're going to benefit from it, but anytime you have anything different than status quo, it usually benefits us on the revenue line.

On the second question, I believe the second question is around the mature piece, and what our outlook is for the mature in 2017? Again I won't go into the details, because we're not guiding for the full year, but just to give you some color, it, we expect it to continue to decline double-digit. I think we have line of sight, of it declining double-digit. We believe the growth piece of the business will increase double-digit to offset some of it.

But overall, I think you will see our SE business slightly declining. However, our core instrument business, and Oleg mentioned about the focus in core instrument, and how we are defending the core, and going after increasing our market share, should slightly grow, given some of the trends in fiber and optical, as well as in the Metro 100 gig build out, that should all -- should play very well to our strengths.

Great. And if I could just ask one more question.

In the past, Oleg, you had talked about the NE business kind of taking more of a project-based approach, or working a little bit more with customers on smaller projects up front. And I just wanted to know if that is still the strategy going forward, or in effort to make that sales force more productive, if you're moving away from that? Thanks.

I think you may be thinking -- for NSE in general, one of the -- let me make sure I understand -- so it's dealing, working with some of the customers, you probably -- do you mean customers as service providers, or network equipment manufacturers?

Well, you had talked about in the past, the NE business, that it had been increasingly competitive, of people kind of offering more price disruptive prices in the industry. And so, you were trying to compete by taking more customized approaches, and working on project basis. And I just wanted to know if that seems to be a more hands-on process since -- whether they're trying to make the sales force more efficient, or going with a channel approach will contrast that? Thanks.

Yes, I mean, maybe it was probably somebody before me, because I mean, we do -- the only things I know we work with our customers is on, sell through more customer solutions, where we partner with a leading OEMs like network equipment manufacturers, where we embed our solutions into it. And that gives us obviously, differentiation, but it also gives us additional marketing and sales muscle on the street.

On the NE products, instrumentation, we do work closely with service providers, where we -- a lot of them have certain features that they like to embed. So what we do in our design, is we design a general platform with an ability to give them options that we can integrate into a platform. So I think maybe that was a discussion, I was saying, is our goal is to go to a fewer platforms that are more easily customizable.

So we can add value and differentiate from the off-the-shelf fixed products that may be out there. And give the customer something that is highly compelling, gives them additional functionality that they demand, yet at a reasonable cost, since we are leveraging multiple platforms. I think, I hope that answers your question, but that's generally what we are looking at.

Okay, great. Thanks.

Thank you. I'm not showing any further questions. So I'll now turn the call back over to Bill Ong for closing remarks.

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

Ladies and gentlemen, this does conclude the program, and you may now disconnect. Everyone have a great day.