Viavi Solutions Inc (VIAV) 2018 Q1 法說會逐字稿

Good afternoon. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Viavi Solutions Fiscal First Quarter 2018 Financial Results Conference Call. (Operator Instructions) Thank you. Bill Ong, Head of Investor Relations, you may begin your conference.

Thank you, Julianne. Welcome to Viavi Solutions First Quarter Fiscal Year 2018 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 limitations in today's earnings release.

The release, plus our supplementary slides which include historical financial tables, are available on our website. Finally, we are recording today's call, and we'll make the recording available by 4:30 p.m. Pacific Time this evening on the website.

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

Thank you, Bill. Fiscal Q1 results exceeded the high end of guidance as revenue of $195.2 million topped our guidance range of $173 million to $193 million. NSE revenue was better-than-expected, primarily driven by strength in our field test instruments partially offset by weakness in our lab and production products. Compared to our expectations, we also saw some upside in OSP's anticounterfeiting revenue. Viavi revenue declined 7.4% year-on-year with a 9.2% decline from NSE and a 2.5% decline in OSP. We are pleased with our expense management. Operating expenses at $93.1 million, declined 9.4% from a year ago levels of $102.8 million. As a result, despite lower revenue levels, we achieved overall operating margins of 15.1% which is an expansion of 210 basis points from prior year's operating margin of 13%.

EPS at $0.11 grew $0.02 or 22.2% year-over-year and exceeded our guidance range of $0.06 to $0.09.

Now moving to our Q1 results by business segment, starting with NSE. NSE revenue at $140.8 million exceeded the guidance range of $122 million to $138 million where NE revenue declined 5.7% while SE revenue fell 20.3% from a year ago.

NSE gross margins at 64.7% improved 100 basis points from last year as SE gross margins of 70.7% improved 1,220 basis points partially offset by a decline of 220 basis points in NE gross margins at 63.1%. The improvement in SE's gross margin was the result of higher acceptances of our Assurance solutions this quarter and a favorable revenue mix as we discontinued unprofitable product lines through the SE restructuring announced in January, 2017.

NSE operating expenses in the quarter was $83.9 million, a reduction of 11.3% from a year ago at $94.6 million. This OpEx reduction is a result of executing SE restructuring and exceeding the annualized savings target of $35 million. As we stated in previous earnings call, we have an ongoing funnel of productivity and efficiency initiatives within NSE designed to reduce expenses beyond this realized SE restructuring related savings. In our fiscal Q1, NSE's book-to-bill ratio was below 1.

Now turning to OSP, revenue of $54.4 million, down 2.5% year-on-year, reached the high end of our guidance of $51 million to $55 million driven by a better-than-expected demand in our anticounterfeiting products. There was no meaningful 3D sensing revenue in our fiscal Q1. Gross margin at 57.7% increased 110 basis points related to favorable product mix. Operating margin of 40.8% declined by 110 basis points from last year due to incremental startup costs related to 3D sensing products that continues to ramp in fiscal Q2.

Now turning to the balance sheet, our total cash and short-term investments ending balance was approximately $1.23 billion with total net cash of $307.6 million. Operating cash flow for the quarter was $11 million. In Q1, we repurchased $9.2 million of Viavi's stock at a cost basis of $10 per share including commissions. Of the $150 million authorized share buyback, we have repurchased shares worth approximately $105.7 million as of the end of fiscal Q1.

With regards to our original $650 million 2033 convertible notes that is puttable and callable in August 2018, we have repurchased a total of $186.5 million in notional amounts by the end of fiscal Q1. Our remaining 2033 convertible notes balance is $463.5 million. Our total outstanding debt of $923.5 million includes the recent $460 million 2024 note. We'll continue to be opportunistic in repurchasing our Viavi stock and retiring our 2033 convertible note.

Now to our guidance. We expect fiscal second quarter 2018 revenue for Viavi to be in the range of $175 million to $195 million; operating margin at 10.3%, plus or minus 1%; and EPS to be $0.06 to $0.08. We expect NSE revenue to be at $140 million, plus or minus $8 million; with operating margin at 4%, plus or minus 1%.

For OSP at a macro level, fiscal Q2 is expected to be the trough quarter for anticounterfeiting products. As we stated last quarter, we expect lower demand in first half fiscal 2018 followed by an expected demand recovery in the second half. We are maintaining our 3D Sensing revenue guidance for fiscal year 2018 between $35 million to $45 million with significant portion of the revenue recognized in the second half of fiscal 2018.

In early October, Sonoma County in Northern California, including Santa Rosa, experienced devastating wildfires. Fortunately, our OSP facility at Santa Rosa, while near an evacuation zone, was undamaged, but experienced production stoppage. This potential impact from the Sonoma County wildfires, coupled with the expected lower volumes in our anticounterfeiting business and 3D Sensing revenue ramp will pressure OSP's operating margin in fiscal Q2. Hence, we expect OSP's revenue for fiscal Q2 to be at $45 million, plus or minus $2 million, and operating margin at 30% plus or minus 1%. We expect OSP's revenue and operating margin to recover in fiscal Q3.

Our tax expense for fiscal second quarter is expected to be approximately $3.5 million. We expect other income and expenses to reflect a net expense of approximately $0.5 million and our share count to be approximately 233 million shares.

In closing, using the midpoint of our fiscal Q2 EPS guidance, along with the solid fiscal Q1 EPS performance of $0.11, fiscal first half 2018 EPS is expected to be at a midpoint of $0.18. With an expected OSP revenue and margin recovery in fiscal Q3 and Q4, we expect fiscal second half 2018 EPS to be higher than the expected EPS in our fiscal first half 2018.

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

Thank you, Amar. We exceeded our EPS guidance range as both NSE and OSP came in above expectations resulting in better than expected operating margins performance at 15.1%. For NSE, field instruments saw revenue strength both year-on-year and sequentially. Our cable product was a major revenue driver. Cable strength was driven by DOCSIS 3.1 deployment that we expect to continue in the near future. G.fast DSL deployment, however, is lagging DOCSIS 3.1. We expect a pickup in deployment of G.fast in calendar 2018.

Fiber saw a revenue pickup sequentially but was down from a year ago levels. Lab and production was noticeably weak, down significantly from a year ago levels as continued China slowdown negatively impacted our optical components customers.

The SE business was off about 20% from a year ago levels as a result of the discontinuation of unprofitable product lines and the declining mature products. The remaining SE business is a higher quality of revenues and gross margin from a year ago.

Moving on to OSP, revenue for anticounterfeiting products was higher than expected in Q1, driven by improved customer demand. We expect our anticounterfeiting products to follow seasonal cadence with a weaker second half in the calendar year as our customers rebalance and optimize their inventory followed by an expected recovery in demand in the first half of calendar 2018. We started production of 3D sensing filters in fiscal Q1 and continued to ramp into fiscal Q2. That said, the projected revenues from 3D sensing in fiscal Q2 is expected to be offset by declines in the anticounterfeiting products.

The October wildfires in Sonoma County has disrupted our Santa Rosa operations for about one week. I would like to express my appreciation and gratitude to our Santa Rosa operations team for their remarkable resilience in dealing with the wildfires and the professionalism they demonstrated in quickly resuming the operations.

In conclusion, I would like to thank the Viavi team for delivering a strong quarter and express my appreciation to our customers and shareholders for their support.

I will now turn the call over to Bill.

Thank you, Oleg. This quarter, we'll be participating at the William Blair Investor Event at our San Jose office on December 12. Please note in September we relocated our corporate headquarters from Milpitas to San Jose, California. Julianne, let's begin the question-and-answer session. We ask everyone to limit discussion to one question and one follow-up.

(Operator Instructions) Michael Genovese, MKM Partners.

Oleg, could you just provide some additional color on NE coming in better than you expected? And when in the quarter did it become clear that it was trending better and how do you expect it to play out over the next couple of quarters on the demand side?

Sure. I think you've got to deconstruct the NE, right? Within it, we had some better than expected, and really I would say the strength was driven predominantly by the cable operators and more aggressive deployment of DOCSIS 3.1. That truly is what kind of moved the needle. But also, we saw much stronger strength in metro and fiber products. The field instruments fiber products. Now one particular though, however, and that was mainly in North America. As I said, cable operators kind of led the charge. On the service provider, it was a mixed bag, kind of normal as expected performance from one of the major customers, much weaker than expected demand from another. Europe, Asia, Latin America performed as expected so there was no big surprise for us there. Now one area which was notably weak was the 11 production and it is really driven by the slowdown in fiber optic module production in Asia. That obviously took away some of the upside that we saw in the cable space. The other area of relative weakness was G.fast products. I think there is a lot of expectations around getting the deployment going and it seems to be taking a much slower ramp up than expected which is likely going to manifest itself sometime in 2018. So it just gives you an idea how strong the cable and some of the metro fiber products performed last quarter that more than offset relative weakness in other categories. In terms of the outlook, I think we expect our NE business to continue to be fairly solid going into this quarter. I would not go as far as saying we're seeing a lot of budget flush, but I think it's kind of honest to goodness I would say pent up demand and finally some operators taking steps to upgrade their networks and roll our new standards. I think there are still I would say a couple of big nuggets, I'd say they'd probably be in the next year, namely the G.fast and upgrades to the fiber optic network, fiber to the home type. This is the area we still don't see much progress even though we have committed wins, but clearly the customers are not moving as fast as we were expecting. So that kind of gives you the color. In terms of the rest of the world, we are seeing some positive signs of improvements in Latin America. Brazil seems to be coming out of the nuclear winter to some extent after having a number of major economic issues. And we feel the rest of the world is looking pretty reasonable and to the extent the fiber optic players start getting recovered from the downturn, we'll see a pickup in our 11 production. So I think going into the second quarter we feel reasonably good about any and next calendar year, Q1 is seasonally weak for us, but we'll see how it goes. At this point it's too early to call.

Sounds pretty good and I appreciate all that really good color on the market. Just secondly, on 3D Sensing, has anything changed since your last report? Is there anything worth calling out different from 3 months ago? And when we think about modeling the December quarter, would it be single-digit millions or would it be into the double-digit millions for 3D?

I'm not going to comment on quantities or the dynamics. The only thing I will say, our ramp and forecast has not changed in the last 13 months. Just as we predicted last September, it's rolling out and ramping exactly as we expected. I know there's been a lot of fluctuations and ups and downs from a number of people. What we are seeing is exactly as we expected and it's coming in as we expected.

Dmitry Netis, William Blair.

I'm going to stay on the 3D question, 3D Sensing question if I may. A lot of confusion as far as the rev rec goes between you versus some of the other players that supply the VCSEL into the large customer, let's just call it iPhone 10 that's shipping, we all know that you are part of that design. So can you refresh our memory or can you give us a sense of what is that rev rec? What does it look like and are you bound by specific contractual obligations that requires to kind of recognize the revenue 30 days after the phone ships or do you recognize the revenue when you shipped into the module manufacturer? I mean how does this all work? I know you gave us some perspective last quarter, but there's plenty of confusion out there to try to sort of separate the weed from chafe here. So thank you.

Sure. I'll let Amar explain exactly the accounting behind it, but before I do that, first of all, let me comment. You mentioned iPhone 10. I don't want us to -- everything we talk about, I'm not going to acknowledge or comment on which product it is in. Clearly we are ramping and I just want to make sure we abide by the NDA with our customers. I'll turn over to Amar to give you the accounting explanation how this thing works.

So Dmitry, let me give you a very high level overview of how revenue recognition works in a typical book/ship business. It all depends on where the product is in its lifecycle. So for any product that any company books and ships and recognizes revenue, the customer generally has a right to inspect the product, test it and reject it within a specific period of time. Now if the product has been in the market for some time, companies ship the product, recognize revenues, if the payment is certain. However, every company at a total product line level will book some reserve for a certain amount of revenues for warranty support, for replacements, for rejections, so on and so forth. Now in the case of any brand new products, in this case with the 3D sensing filters we are talking about, there is no history of rejection, etc. That does not imply that we are having any issues. In fact, we are tracking to plan from a product quality perspective. But this is a brand new product that we are trying to ship into the customer. So initially, until such time we develop a track record and a history of the replacements or rejections as a result of inspections, we will basically defer the revenue until the end of the specified inspection period. Once we determine the history, maybe in a quarter or so, then we will go back to a normal book/ship revenue recognition for any product. So that's what it is. It is as simple as that. There is nothing special about how we recognize versus other companies too. It is just that we are introducing a brand new product for which we do not have a history.

Okay. And that contract covers you for how long? The lifetime of this specific customer deployment or --

No, it is a specified period and I will not get into the specifics of the contract. It is for a specified number of days and it is not for the lifetime or for the entire year. It's a specified number of days to allow the customers to inspect, to test and to reject. And this is with any product we ship.

At this point we have kind of an early ramp in Q1 and now production in Q2. I mean by next quarter we should have a decent history looking back in the beginning of the ramp in Q1 and kind of steady state production in Q2. And at that point we'll be able to adjust our policy how we book and what percentage of revenue we book as the reserve. Probably around Q3, depending how the history plays out.

I see, that's very helpful. So once the evidence --

And also keep in mind, unlike others in the supply chain, we don't have the kind of lead times the others have. So we are almost 3 to 4, 5, 6 weeks --

We are just in time.

Just in time. So the history is developing right now. For some other companies, their history may have already developed.

So for example, if you have a lead time of 3 to 6 months, you start building products way in advance. And by the time the kind of production starts, your customer already has had plenty of time to inspect and reject the product, so you have a history at the time within the particular quarter. With us, we have a very short lead time and we started production relatively late in the cycle.

Got it. That's very helpful. I think there is kind of a thought that if the evidence history is there, then lead times might come down quite significantly and you'll be able to rev rec that part much sooner on shipments.

Yes, as soon as we ship. Exactly right.

Got it. All right, my second question and then I'll step off the line, is on the NSE side of the equation. It sounds like you're guiding second quarter to be roughly flat which is likely a good use in this CapEx constrained environment. However, you did mention book to bill below 1. So just how do you interpret that, vis-a-vis maybe NE and SE? Is that specific to a certain segment? Do you expect SE to continue to decline in the December quarter? And any showing of strength or maybe being flat here quarter-over-quarter? If you could give some color there. And then maybe if I could flip the DOCSIS 3.1 comment, there seems to be an indication from some of the component vendors, semiconductor vendors that are shipping into this DOCSIS 3.1 deployment that it's seeing a bit of an air pocket heading into the end of the year just according to our service. You did not see it. Could it be that there is just simply a timing of how you deploy instrumentation and test instruments versus the actual network equipment in the network? Are you seeing any slowdown of DOCSIS 3.1?

Why don't you take the first part and then I'll take the DOCSIS question.

Let me go ahead and give you some color on our guidance. So when you look at all our NSE guidance, it's roughly flat on a sequential basis. Now you have to really dissect NSE into NE and SE to understand how we are guiding. So if you look at -- and again, we are not splitting the guidance and I'm not going to give you a specific guidance on NE and SE, but I'll give you enough color. So at the midpoint of any guidance implies a sort of low single-digit sequential growth. Now typically, NE gross mid to high single digits sequentially in Q2. However, we are being prudent in our guidance here by A, assuming minimal project flush in December quarter, and that's what Oleg mentioned earlier. And B, also recognizing the fact that NE had one of the strongest sequential performances in the September quarter. It grew 6.5% sequentially compared to a typical seasonality where it actually declines double digit. And that goes to the fact saying we are seeing momentum in our cable DOCSIS 3.1 products, we are seeing momentum sequentially in fiber, in metro. So there is a broad range of products that we are starting to see momentum in the field instrument side. So if there is a budget flush and if the momentum in the field instrument demand continues, with some stabilization in our lab and production test instruments, we should see some upside to the midpoint of our revenue guidance for NSE. So that is point number one. On the SE side, again, you've got to dissect between Assurance and the data center business. So all our SE we are assuming will decline about mid to high single digits sequentially. Because we have a mature product within the Assurance piece that continues to decline. And on the data center piece, which is more network visibility or packet capture products, we expect that to sequentially grow. So when you start dissecting our guidance, you will see NE is prudent, conservative given the momentum we have seen, but we need to see that a couple of more quarters to start seeing, making sure it becomes a trend. And on the SE side, is just for the fact that the mature products are declining sequentially and that's something which is already out there. So that's how we look at the NSE guidance. Does that help, Dmitry?

Very helpful, thank you.

Okay, so let me talk about DOCSIS. When you're doing the deployment, first you buy the headend equipment, right? Well that's already happened. Then you buy a lot of the setup boxes. So a lot of these things happens well before you buy instrumentation. Once you have the headend equipment installed, all the infrastructure installed and you have an ample inventory of modems to ship, that's when you start buying the equipment. So in the way, and really, just keep in mind, when we talk about tests, you're talking about tens of thousands of units. When you're talking about the deployment and modems and other things, you're talking about millions of units. So in that respect, the amount of chip sets that we buy is a tiny fraction of the total. So you really cannot -- it's a rounding error for a lot of the semi companies that supply the DOCSIS modems.

Okay, so it's actually reverse from kind of my original thinking. I got you. Then the chips that you buy, it's a much smaller kind of number obviously than the chips that go into modems. But the question is, the chips that go into the modems, are you seeing any indication of any slowdown from the buildout of the DOCSIS 3.1 and some of the major customers, say Comcast and Charter?

We've actually seen the equipment procurement accelerating between Q4 to Q1 and it's looking pretty good. But I imagine they have already bought all the modems or placed orders for modems a while back. I mean what they are doing now is they are actively rolling out the service. But they must already have a whole inventory of products sitting on the shelf to do it.

Patrick Newton, Stifel.

I wanted to jump in on OSP and specifically the anticounterfeiting side. So you did reiterate that second half trend should improve post this fiscal 2Q guide. Previously you've been a little bit more specific and I think excluding 3D sensing you had talked to kind of a high $50s million quarterly run rate in the second half of fiscal 2018. So I'm curious if there's any changes to that forecast. Then drilling down on the 2Q outlook, can you help us understand why it's so soft? I think assuming that there's some 3D sensing revenue built into that midpoint of $45 million, this looks like the lowest revenue level for OSP since probably the 2007 timeframe. So what's going on in this business?

So let me first take the guidance for the second half, Patrick. So we do expect, as we have talked in the past, we do expect a rebound in second half in both revenue and operating margins for OSP. And given the volumes in the 3DS filters in second half and the rebound in demand in anticounterfeiting, and I'm not going to dissect 3DS and anticounterfeiting, but we have given enough of color to let you guys know that out of $35 million to $45 million in 3DS, significant portion of that is going to be in second half. So what we are expecting in second half from an OSP perspective is the revenue to be roughly around 30% higher compared to first half. So if you do the math, you will see that it's sort of at a very high level around mid-$60 million range on a quarterly average in Q3 and Q4. So it's somewhat consistent. Now the mix within that, since we have limited visibility into the anticounterfeiting business at this point in time, the mix within that we will come and give you more color on that towards the end of -- when we announce our earnings in Q2. Does that help?

And I would say, remember, when you talk about our anticounterfeiting business, there is really two layers that you look in the business. There is kind of steady state replacement, the reprints that you are doing. Then there is the periodic waves of new redesigns and major economies doing their major printing. In the last couple of years, we had several major macro campaigns by major economies printing a lot of new notes with new designs. Some of these waves are coming to an end and the new waves, I mean Central bankers don't share their exact dates with us when they're going to start on their new currencies, but at this point in time, we have no visibility when the next generation of redesigns or the new printing waves are going to start sometime next year. But generally, there is a seasonality in inventory management and the rebalancing that kind of coincides with a calendar yearend between us and our major customer, and they do very active inventory management and rebalancing in the fourth calendar quarter every year.

So on Q2, just to build on what Oleg said and to your question, you have to consider 3 or 4 factors here, Patrick. So yes, we had said we were expecting low $50s million in terms of total revenue for Q2 and we are guiding $45 million here. Our assumption on 3DS has not changed from the previous sort of color on guidance we provided for Q2. The lower volume is coming from other parts of the business because of higher inventory rebalancing that the customer is doing. And when you look at the margin rate, we have some under absorption in Q2 because of lower volumes, but more importantly, also the Santa Rosa fire for which we had to stop production for a certain period of time. And as the entire community is trying to get back on their feet, there will be loss of some productivity, etc. So we have factored all of those in for our guidance to be at 30% operating margins. That's not the steady state. It will bounce back. And we expect as we exit Q2 and look at full year, we should be in the mid -- and depending again on the mix between 3D sensing revenue and the anticounterfeiting revenue, we should be in the mid 30% plus operating margins for the full year for the OSP business.

Thank you. Those details were great. I guess just shifting to the SE business, I'm trying to get an understanding of where we are in the restructuring process relative to what you gave at your analyst day. You talked about how there's some pruned portions of the portfolio, mature portions and I believe there's some growth products that are embedded in there. So if we think about the $29 million revenue level in September, are we in the process of bottoming here? Or how much -- I guess if we think more intermediate term out in the 2019 timeframe, how should we think about the revenue level of this service enablement business?

So the way, Patrick, we are forecasting and modeling is this business, and if we look at SE as a mix in SE, by the time we exit fiscal year 2018 we should be roughly in the 19%, 20% SE as a mix of NSE. Now starting 2019, we are assuming that the mature products will basically bottom out. Which means then what we have remaining in the portfolio, whether it's on the Assurance side or on the data center side, will be only the growth products. So we should expect growth starting in SE, but that's the expectation. But also keep in mind that we are trying to also delay the run off of the mature products because mature products are at a very high margin. So when the business team on the Assurance side come back with a renewal win on mature products, we are not seeing note of that because that's a very, very high margin and high profit drop. But the expectation is, end of fiscal 2018 it goes to about, SE becomes 20% of the NSE mix. And then from there on in 2019 I think we should start seeing some growth.

Meta Marshall, Morgan Stanley.

I just wanted to ask about the Trilithic acquisition and just whether it kind of helped with some of the cable strength that you saw in the last quarter. And just how it's performing to date, just some commentary there. And then noted the repurchase of some of the convertible, outstanding convertible notes this quarter, and just wanted an update of whether there was any kind of change in strategy there or just still opportunistically buying back the outstanding convert? Thanks.

Trilithic did not have much effect on the quarter. We closed it most of the way through the quarter. And really, most of the cable growth really came out from the old traditional Viavi products

Again, we don't split the revenues for Trilithic but I have given you enough of color last quarter on what the revenue profile is of Trilithic, so it was not much of an impact on the year-on-year growth in the cable business, it was solid anyways. Now what was your next question, was around the buybacks?

Yes, just the strategy around repurchasing the 6.25% convert?

So I think I'm not going to, as I said last quarter, I'm not going to lay out my whole plan on how we are going to buy back. We will be very opportunistic in buying back. If you look at our capital structure and the priorities, that has not changed in how we deploy the capital and how we think about our capital structure. So if you recall, we have a very high gross leverage ratio because we have two converts sitting on our balance sheet, the new one and the old one. And we were opportunistically buying the old one, although I should remind that the net leverage ratio is negative because we have a net cash position. But what we will try and do is we'll be very opportunistic buying back our old converts when we believe it's the right time to do so depending on how the market behaves. But we also have an option come 2018 which is August 15, 2018, we can either call it or it can be put or we can just continue to extend it for the next 5 years. Because that's how the terms are. So I think we have various options here, we will be very opportunistic on how we buy back. We also bought back some shares this quarter, so we will do both based on the share price as well as the bond price.

Got it. If I could sneak in one more question, you mentioned last quarter hitting a milestone of SE being breakeven. I just wanted to get a sense of if that continued this quarter.

Yeah, I think SE, I would say overall profitability continues to improve. As I mentioned last quarter, it was more than breakeven and that trend continued in Q1.

Alex Henderson, Needham & Company. Dave Kang, B. Riley.

This is actually Lee Krull filling in for Dave. Couple of quick questions. I know you kind of ran through OSP, but to the extent you can talk about it, can you remind us if 3D sensing is margin accretive or in line with kind of the overall margin improvement? Just trying to get a sense of is the improvement driven by just the anticounterfeiting, or is there some contribution from 3D sensing as it ramps?

I think if I understand you correctly, you're trying to understand is the 3D sensing, what kind of impact it has on overall company margins, is that the question?

That can be part of it, but it was just more specifically to OSP.

OSP for Q1 of 2018 that we just announced? The year-on-year improvement of 110 bps, is that the question?

No, just generally speaking as 3D sensing ramps.

I think generally as we said I think earlier on the call, the 3D sensing business, which is a consumer business, its gross margins and operating margins are lower than the traditional anticounterfeiting margins, but they are above the overall company margins.

So it will be slightly dilutive to the overall OSP margins, but as you all know, it will be profit accretive.

Okay, then just one more question on 3D sensing. Your 3D sensing counterpart this morning kind of spoke about a second up and coming customer out of Asia. Just kind of curious, do you guys have any update on, I know you guys have one major customer, but is there any other that are in the pipeline or any sort of improved visibility on incremental customers on that front?

I'm not going to comment on which customers specifically we have or don't have. But we are engaged with a lot of companies in that space and they are all at various stages of development. I would not qualify the orders we get, they are really more of a samples orders rather than production, so I'm not sure which opportunity in particular they were referring to, but remember the VCSEL lasers can go into a lot of applications, not only into 3D.

Got it. Then last one for me, I know you talked about G.fast kind of still in the pending phase of kind of starting to grow. Is that M&A driven as a customer pauses? Or is that more of just the technology development and adoption is just not there yet and you're just kind of waiting? Just trying to figure out if as we see some of the large deals close whether that's a catalyst for spending on G.fast or if it's just a matter of adoption?

Well I think it's really more of a function when service providers want to spend some OpEx dollars. Because most of our instrumentation falls under the OpEx category and one of the things some of them are doing there are delaying some of this adoption to manage expense controls. But ultimately they do have to follow through on their plans and at the right time spend the money. So I mean we've seen similar type of delays in DOCSIS. Even though everybody was talking about DOCSIS 3.1, we actually were expecting the ramp to happen in the summer of 2016, it really just took about a year longer. And I would imagine G.fast is following the same pattern.

Dmitry Netis.

Thanks for taking my follow-up. I just wanted to make sure I heard you guys correctly, well Amar, actually. When you talked about the OSP, you said that the second half will be, this is the revenue line I suppose you were referring to, will be 30% from the first half?

Yes, second half over first half revenue is roughly 30%.

Okay, that's what you're expecting. Okay. Then maybe the same question for the network service enablement business. Do you feel like you calibrated or the street calibrated there properly vis-a-vis maybe some of the flush in December and then difficulties in now the March quarter, how should we be expecting the year, or rather the second half to shake out here on the NSE side?

I don't want to give any guidance on the second half, Dmitry on NSE. But listen, we are seeing some traction on the NE side of the business with field instruments. For the first time you are seeing a sequential growth in Q1. We have never seen in NE a sequential growth in many years. But again, we'll have to see how this all pans out, at least for a quarter or two before we can see if the normal seasonality holds or not. But I think we are just assuming that March quarter typically is lower than the December quarter. I don't think so that will change, the March quarter will be lower than December quarter. And typically, we have our June quarter seasonally higher than the March quarter because it's our yearend and also typically people come out of the first calendar quarter budget scenario. And so that's basically how at a very high level, I think you guys should think about it.

You know, we made a lot of restructuring in that business in the past 12 months and I want to see at least several more quarters before we can call it a trend. But I do believe a lot of the new discipline that was put in place on the product marketing, the sales process and things like that are starting to bear fruits. I'll wait a few more quarters until I can comfortably see if it's something that is truly market playing out or if some of it is purely driven by our new discipline in that business.

Just to add a little bit more color, in this quarter, one of our largest customer's spend didn't really bounce back, yet we had very broad improvement in our overall revenue performance. Just to give you some color on that, if that customer's spend bounces back, hopefully it can be better.

Got it, very helpful. And maybe, Oleg, do you have comment on the restructuring? You feel like you've properly calibrated terms of the cost base right now and most of the restructuring to date has been in the SE side of the business. It doesn't sound as if there's any incremental restructuring efforts going on at this moment, right, or inside the NE potential part of the business? You feel comfortable with your cost base and possibly because of the uptick in revenue. Is that the fair assessment or is there something else you want to tell us?

It's a fair assessment from the step function point of view. We announced a major restructuring in SE. So that kind of has played itself out. But remember, we actually have a whole funnel of not the major step functions, but a lot of small step functions that we are optimizing at the G&A and sales and marketing and other levels that are at various stages of implementation as we upgrade our IT systems and as we redesign our legal entities around the world and so on. So we will continue to optimize our G&A and other costs, but at this point with respect to the NE and SE, we've achieved kind of the equilibrium and obviously we're going to see from here how the business goes. But we have a number of opportunities on the sales and G&A that we continue to implement.

Got it. Very helpful. Last one if I may, I'm last anyway it sounds like, on the CPL level 3 transaction, anything to read that that deal has now closed? Can we expect a little bit of pickup or this isn't much of an impact to you guys positive or negative?

CPL level 3?

The Century Link level 3.

Oh, sorry, Century Link. I don't know whether we can offer any color.

Yeah, I generally try not to comment on our customers, but generally I think so far the consolidation in cable industry, while we were nervous initially on, I think we are coming out feeling pretty positive with our end position with all the new consolidated companies.

And also keep in mind we [all tried] at Trilithic which basically brought in support product and, to a point, solutions in cable that now can find new markets outside of North America.

Very good. Any comment on the channel guys? How channel is doing? I know that was a big initiative for you.

I think it's doing as expected, Dmitry. It's helping us. I think we have more work to do there, there's a huge -- I think there's a lot of opportunities ahead of us in channel. But based on our expectation, it's coming in line with our expectation. But I can tell you there is more opportunity there.

Thank you very much. Keep up the good work, guys.

Charles Decoster, Craig Hallum.

Julianne, maybe we'll close it out?

Certainly. I'll turn the call back over to Mr. Ong.

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

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