Viavi Solutions Inc (VIAV) 2018 Q4 法說會逐字稿

Good afternoon. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Viavi Solutions Fiscal Fourth Quarter and Year-End 2018 Financial Results Conference Call. (Operator Instructions)

Bill Ong, Head of Investor Relations, you may begin your conference.

Thank you, Cheryl. Welcome to Viavi Solutions Fourth Quarter and Fiscal Year-End 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 our website.

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

Thank you, Bill. In fiscal Q4, Viavi's revenue exceeded the midpoint of our revenue guidance, while non-GAAP operating margin and non-GAAP EPS exceeded the high end of our guidance range.

Viavi revenue at $264 million grew 33.3% year-on-year, primarily driven by growth in NSE. Our NSE revenue at $210.8 million exceeded the midpoint of our guidance range of $195 million to $215 million, while OSP revenue at $53.2 million exceeded its guidance range of $48 to million $52 million. Operating margin at 14% exceeded the 10.5% to 12.5% guidance range with both NSE and OSP exceeding our expectation. EPS at $0.14 surpassed our $0.08 to $0.12 guidance range and grew by $0.02 compared to a year ago EPS of $0.12.

Now moving to our reported Q4 results by business segment, starting with NSE. NSE revenue at $210.8 million, including the recent AvComm and wireless acquisition, grew 56.7% year-on-year. The combined AvComm and wireless performed better than our expectation in fiscal fourth quarter. Excluding the acquisition, NSE revenue organically grew 8.2%, driven by 7.5% organic growth in NE and 10.5% growth in SE.

NE's growth was a result of strength in cable and fiber field instruments and a strong year-on-year performance in our lab and production test products. Our SE revenue grew from a year-ago levels as a result of double-digit percentage growth in both our data center and growth assurance product lines that was partially offset by the expected declines in the mature assurance products. The revenue mix between the SE's growth products and the declining mature products in fiscal Q4 was 83% versus 17%, respectively.

NSE gross margins at 62.5% declined 210 basis points year-on-year as a result of unfavorable product mix. NSE's operating margins at 10.4% is a record high for this business under Viavi and was up 920 basis points from a year-ago levels, driven by profit improvement in our core NSE business and the operating leverage from the addition of AvComm and wireless business. NSE's book-to-bill ratio was slightly above 1.

Now turning to OSP. OSP revenue at $53.2 million declined 16.4% from a year-ago levels on weak anti-counterfeiting product demand. OSP gross margin at 46.6% declined 1,200 basis points from a year ago due to significantly lower volumes in the anti-counterfeiting business and the under-absorption of manufacturing costs from planned idling of 3D sensing filter capacity. The decline in gross margins resulted in 1,610 basis points decrease year-on-year in operating margins at 28.2%.

Now moving to our fiscal year 2018 performance. Viavi's revenue at $880.4 million increased 8.5% year-on-year, driven by 14.3% revenue growth in the NSE business segment, offset by a 6.1% decrease in OSP. NE revenue grew 21.3% from fiscal year 2017, largely due to organic growth in our field instruments and benefit from acquisitions, partially offset by a revenue decline in our lab and production test products. SE revenue declined 8.4% year-on-year, reflecting the planned SE restructuring implemented in fiscal year 2017, which offset the double-digit percentage growth in our data center product line.

As we executed to our NSE strategic and cost reduction initiatives, we improved NSE's operating margins from 1.3% in fiscal year 2017 to 7.1% in fiscal year 2018.

The OSP business segment declined 6.1% as the growth in the 3D sensing business only partially offset the steep decline in our cyclical anti-counterfeiting business, which saw only steady-state currency reprinting demand and very low major currency redesign volumes in fiscal year 2018. In fiscal year 2018, profit performance continued to improve, and operating margins at 14.2% increased 90 basis points from fiscal year 2017 of 13.3%. EPS also increased from $0.40 to $0.46 year-on-year.

Turning to the balance sheet. Our total cash and short-term investments ending balance was $788 million. Operating cash flow for the quarter was $17.5 million. Of the $200 million authorized share buyback, we have repurchased shares worth approximately $137.4 million as of the end of fiscal Q4.

In Q4, we completed a private exchange of a portion of our 0.625%, 2033 convertible note. Approximately $151.5 million aggregate principal amount of the 2033 notes were exchanged for approximately $155.5 million new 1.75% senior convertible note due in 2023.

Furthermore, due to high demand, we agreed to issue an additional $69.5 million aggregate principal amount of the new 2023 notes for cash. The amount of the new 2023 note is $225 million, and the remaining balance of the original 2033 note is $277 million, which is puttable and callable this month. To complete the overview of our debt structure, we also have the 1%, 2024 note worth $460 million in aggregate principal amount that we issued in March 2017.

Now on to our guidance. We expect fiscal first quarter 2019 revenue for Viavi to be $267 million, plus or minus $10 million; operating margins at 15%, plus or minus 1%; and EPS to be in the range of $0.12 to $0.15. We expect NSE revenue to be at $195 million, plus or minus $8 million; with operating margins at 8%, plus or minus 1%. We expect OSP revenue to be at $72 million, plus or minus $2 million; with operating margins at 34%, plus or minus 1%. We expect 3D sensing revenue for fiscal year 2019 to be at least $50 million with a large majority of the revenue expected to ship in the first half of fiscal 2019.

Our tax expense is expected to be approximately 17% to 18%. We expect the other income and expenses to reflect a net expense of approximately $2 million to $2.5 million. Share count is approximately 230 million shares.

We'd also like to note that Viavi is adopting the new accounting standard called 606, for revenue recognition, effective fiscal year 2019. The majority of the revenue impact due to this new accounting standard is expected to occur in our software-centric SE business segment with an estimated impact to our full fiscal year 2019 revenue to be approximately $8 million to $10 million of reduction in revenue. Please also note that we have taken this new accounting standard into consideration in our fiscal Q1 '19 revenue and EPS guidance.

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

Thank you, Amar. I am pleased with Viavi's execution in the fiscal year 2018. We improved our performance along all key operational metrics and delivered a solid finish for the year with our Q4 EPS at $0.14. Both NSE and OSP delivered revenues and non-GAAP operating margins above the midpoint of our guidance range.

In Q4, NE instruments business, excluding the AvComm and wireless businesses, grew from a year-ago levels led by strength in both fiber and cable as service providers deployed fiber-to-the-home and DOCSIS 3.1, respectively. Lab and production test equipment revenue increased year-on-year for the first time in more than a year, driven by a recovery in demand from our optical modules and network equipment manufacturing customers.

The recently acquired AvComm and wireless businesses, that going forward will be part of our NE segment, reported better than expected. The early 5G market trials and anticipated 5G deployment in late fiscal year 2019 are driving strong demand for our wireless test products by both NEMs and service providers.

The data center products grew by double-digit percentage from a year-ago levels or 2 consecutive quarters as a result of changes in our product and go-to-market strategy. We're seeing strong traction across many vertical markets and increasingly competing for and winning $1 million-plus opportunities. We are entering fiscal year 2019 with strong momentum and a healthy business funnel.

Moving on to OSP. Q4 revenue benefited from slightly better-than-expected anti-counterfeiting product demand. OSP is a business that is characterized by the cyclical nature of anti-counterfeiting in a seasonal nature of 3D sensing. In fiscal 2019, we expect both of these cycles to overlap.

Anti-counterfeiting product demand is a combination of steady-state demand driven by reprinting of existing bank notes and incremental demand overlays driven by major back note redesigns, lasting 2 to 3 consecutive quarters. In fiscal 2019, we expect the redesign activity to drive higher revenue levels in fiscal Q1 and Q2 and then moderate in fiscal Q3 and Q4.

Likewise, we expect the 3D sensing revenues to rise in fiscal Q1 and Q2 as our major smartphone customer deploys facial recognition on multiple mobile devices and then to decline in the second half of the fiscal year in line with smartphone seasonality. That said, we anticipate seasonal weakness in the second half of fiscal 2019 to be partially offset by new smartphone customers deploying 3D sensing technology. The magnitude of the second half offset is too early to forecast at this time.

To recap, in the fiscal 2018, we have continued to successfully execute on the Viavi transformation strategy that we laid out during our September 2016 Analyst Day. We have achieved sustainable profitability in our SE business segment throughout the fiscal year 2018 and are reversing years of losses. We have successfully reduced our dependence on North American service providers by diversifying outside of North America.

We have successfully launched 3D sensing products and positioned Viavi for a strong growth in fiscal year 2019. And we continue to exercise prudence in allocating capital by returning cash to the shareholders, retiring and refinancing our existing debt and pursuing a responsible and focused corporate development strategy.

As we start fiscal 2019, we remain committed to continue executing on our strategy, and optimistic about Viavi's ability to continue growing revenue and profitability. Four major trends form the basis for our optimism.

The first one is fiber-to-the-home. As a market leader in fiber instruments, we expect to continue to benefit from the industry trend to bring fiber closer to home.

The second is 5G. 5G wireless testing and deployment is gathering industry momentum, and our recent acquisition of the wireless business is expected to drive growth for the NE business.

The third one is increased military and public safety budgets to upgrade communication infrastructure. The acquisition of AvComm provides us with a timely opportunity to benefit from the increased spending on avionics and radio test products.

And finally, the fourth, 3D sensing. Viavi differentiated technology and strong IT position, position us well to benefit from rapidly -- a rapid adoption and proliferation of 3D sensing.

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

I will now turn the call over to Bill.

Thank you, Oleg. This quarter, we will be participating in the Morgan Stanley Investor Bus Tour on August 21, taking place at our San Jose corporate office. We will also be presenting at the Deutsche Bank Investor Conference on September 12 in Las Vegas.

Cheryl, let's begin the question-and-answer session. (Operator Instructions)

(Operator Instructions) Our first question comes from the line of Dmitry Netis of William Blair.

So just to kind of clear the air a little bit, you're guiding Q1 fiscal '19 revenue significantly higher than consensus, yet the EPS guidance and margins seem to be light relative to that revenue guidance. So can you walk us through the dynamic there? Is there some potential under-absorption of fab still there?

And maybe as you walk through that, can you maybe delve a little bit deeper into the OSP and how that is being split? I think I caught the $72 million is what you're guiding for OSP. And so how would that split up then between the core OSP business and 3D sensing revenue? So sort of 2-part question here.

Yes, let me start with the first part first, Dmitry, so that you can get color on -- there's a mix here that is also playing into the operating margins that you're talking about here. So we did mention that our guidance for OSP is $72 million, plus or minus $2 million. And we also mentioned that our 3D sensing business for the full year of '19, we expect up to about $50 million of revenue in 3D sensing. And out of the 3 -- $50 million for the full year, we expect majority of it, I would say almost 3/4 of it, to land in first fiscal half 2019 and evenly distributed between Q1 and Q2, right.

So that gives you sort of an idea of the mix of 3D sensing as well as the core anti-counterfeiting business. So both the businesses, the core as well as 3DS will be up sequentially. And of course, 3DS will be up high triple digit so to speak. So that's the part 2 of the question.

Now regarding the operating margins, I think we are guiding in operating margins which is 15%, which is -- we believe is higher than what Street had, to be honest, based on the analysis we have done. But when you look at it sequentially, it is up about 1 percentage points on a sequential basis. And that sequential increase is coming from higher operating margins in our OSP business since we are bouncing back to sort of mid-30%. And again, the mid-30%, roughly 34% that we guided is based on the mix between 3D sensing and anti-counterfeiting.

And on the NSE business, it is actually declining roughly about 2 percentage points because you -- Q1, our fiscal Q1, which is our September quarter, is seasonally a low revenue quarter for NSE business, not only in our core NSE but also in our wireless business that we acquired. So I think those are the 2 reasons why you see operating margins offsetting each other and actually going up about 1 percentage point.

The other thing that I think -- I don't know what The Street model for OI&E, our other income and expenses. Our other income and expenses is roughly about $2 million to $2.5 million. So the midpoint, about $2.25 million of expenses; because keep in mind now, we have 3 types of debt on our books and there is interest expense associated with that. In the prior quarters, we had some offset to those interest expenses. So our OI&E was roughly -- for example, in Q4, which is our June quarter, was roughly $200,000 of expenses. But that's going up to about $2 million to $2.5 million. At this point of time, that's what we are estimating.

So I think those are the reasons why I think there is sort of a disconnect between guiding revenue up but EPS -- and EPS guide, I believe, is higher than what Street was expecting because our guidance is from $0.12 to $0.15. So our midpoint of the guidance is roughly about $0.135 rounding up to $0.14. So it's a guide up.

The other thing I want you to note is the 606 impact of revenue in our SE business. And this is just accounting standard. As I mentioned on the call, it's about $8 million to $10 million of impact for the full year. So if you quarterize it, it's about roughly $2 million; and $2 million of revenue and profit impact. So within our guidance, we will actually even absorb the accounting impact of us moving to the new accounting standard.

Okay. That's very helpful. There's lots...

Does that help?

Yes. I'm here if you can hear me. There's lots going on. I'll take all these details off-line. But as I look at kind of the full year, could you give us a sense, maybe excluding Cobham, if you want to comment on Cobham separately of what you're expecting there, whether it's still kind of within that range that you've been guiding after you closed the acquisition or you're now thinking maybe that ticks up a little bit. I don't know how you're approaching it. I'd love to hear your thought on that. So Cobham, sort of one topic.

And then the second, maybe the NE side of the business. Would you expect growth out of NE for the -- NSE rather, so NE plus SE together, combined for the full year organically, would you expect growth in that business in fiscal 2019?

Sure. Let me take the Cobham piece, the AvComm and wireless business that we acquired. As we said, Q4, our June quarter, was the first full quarter where we had this business under Viavi. The revenues, especially on the wireless side, came in higher than expected for 3 reasons. One, the market conditions remain favorable on the 5G side with a lot of momentum there. The team executed well. And number three, which is important to note, is our fiscal Q4, which is the June quarter, is seasonally a strong quarter for our wireless business, okay? So with that, the AvComm and wireless business -- and if you do the math, because I've given a lot of data here, AvComm and wireless business posted about $65 million of revenue in fiscal Q4.

Now we won't continue to break this out because this is the first quarter that we are reporting this, so we wanted to give more color here. But as we integrate, we may not be able to break this out. So that $65 million. And if you now compare to our guidance, we guided midpoint of $225 million for the full year for fiscal year '19. We believe that we will be towards the high end of the guidance range, which is roughly $245 million for this business. And the operating margin is between 14% to 16%. So we incrementally feel positive about this business, mainly driven on the wireless side.

I think absolutely right. So I think we wanted to truly understand the dynamics on both forecasting and execution on that business before we felt comfortable to raise the guidance. And after having it under our belt for 4 months, now by this point 5 months, we feel much more comfortable about the business and the forecast and the outlook. And as Amar said, we are raising the midpoint -- our guidance for the business to the higher end of the guidance, roughly $245 million.

Now on the other hand, in total NSE, you talked about the organic growth on the rest of the business. I think that business should continue to grow low single digits. There is still a lot of uncertainty about the North America. At this point, North American service providers are not that big of a deal for us anymore. To the extent they come back and start spending money, we think it could present a nice upside to the next fiscal year. But just taking all the North American uncertainty out at this time and just purely looking at the rest of the world, we feel comfortable that we are well positioned and we should see some growth next year.

And keep in mind that the cable has had a fantastic run for the past 12 months or so. So the deployment of DOCSIS .1 is kind of approaching the latter third of the cycle in North America. But we feel that other product lines will be able to make up the difference elsewhere in the world.

So just to dissect that because there's an NE story within that. So as Oleg mentioned, NSE is expected to grow and very low single digit. But within that, NE will grow sort of low to mid-single digit. But SE is going to decline as the mature assurance products continue to decline. But also keep in mind that there is sort of a revenue impact because of 606 of about $8 million to $10 million.

And that's already factored in there.

That's already factored, yes, in our guidance.

So yes, even with that guide -- with the 606 already fully integrated, we see the NE business growing slightly.

Your next question comes from the line of Alex Henderson of Needham.

I just wanted to start with 2 simple questions. Can you give us the guide on the 2019 fiscal year tax rate? And then second, you forecast the 606 revenue impact, but is there also a cost impact? And if so, how much?

Yes. So thanks, Alex. So the first -- answer to the first question is we are expecting the tax rate to be anywhere between 16% to 18%, roughly, with 17% at the midpoint, give or take. Typically, you see tax rates higher in the first half and then it goes down in the second half. The second question was regarding -- I'm sorry.

606.

Oh, 606, yes. So on 606, Alex, the $8 million to $10 million of revenue impact -- most of it basically impacts the operating profit, too.

Okay. So my -- if I could ask a fundamental question now. I'm looking at the OSP margin decline. And obviously, there's 2 distinctly different variables there. Can you give us a little bit better quantification of what happened excluding the non-utilization of 3D capacity in the quarter? How much of the decline in margins came from just simply the weakness in OSP margins? And shouldn't that snap back to more normalized levels pretty quickly?

Yes. So pretty much most of the impact came down to under-utilization of 3D sensing capacity. That pretty much drove most of it. In terms of a snap back, I'd say snap back over 2 quarters with some snap back in the first quarter and then full recovery to margins in the second quarter. And the reason for that is there's still -- while we did have an under-utilization, we were still producing some product. And obviously, it went into the inventory at a higher cost. As we release this product in the September quarter, it will provide some drag to the margins. So some of the under-utilization gets carried into the September quarter, and then by December quarter, it will pretty much work itself out.

And then just one last question along that line, the outlook for 3D as you go into the first half of next year. The inventory that you're producing, I assume, is going to your prime customer as we start folding in Android devices. Does that change the cost mechanics in the first half of calendar of '19, i.e., back half of fiscal year '19?

Very good question. We certainly hope that, that will be the case. As you have seen, the typical seasonality of one -- say like a particular cellphone manufacturer, is very strong 2 quarters, slowdown in the third and really not much orders in the fourth as they consume the inventory, right; which means for the supplier, that means you run very hard for 2 quarters, then somewhat lower in the third quarter, and then you pretty much shut down your line in the fourth quarter. As we see the Android ecosystem to ramp up, we certainly hope that the third quarter will be somewhat mitigated and then the volume into the fourth quarter will mitigate the fourth quarter much more than if you only have one customer.

So I think as the whole kind of smartphone ecosystem ramps up 3D sensing, we expect the seasonality to be a lot less pronounced because there is a tendency to launch products off cycle for various phone manufacturers. And that would actually act as a very nice smoothing effect for our manufacturing capacity.

Just to be clear, the equipment -- the components are usable, fungible between both non-Android and Android devices?

No, no, no, not components. Each customer has their own product built to their specification, but it all runs on the same assets.

Your next question comes from the line of James Kisner of Loop Capital Markets.

Just to touch on 3D sensing a little bit again. It sounds like you may be a little more confident about the adoption of 3D sensing outside your end customer, maybe amongst, I assume, Android customers. Is that -- am I reading that right? Are you seeing consumer confidence worse, say, a quarter ago regarding the Android adoption of 3D sensing? And I'm wondering about just any thoughts on front facing. Do you have any insight into that adoption next year? Do you think that's more likely from where you sit now versus a quarter ago? And I guess I'd roll into that question: has anything changed in the competitive situation in 3D?

Sure. So I think as I said, all the talk is there that, that's what the intention is. But as I said on my prepared remarks, the actual forecast, what will actually happen, it's too early to guide. And I'll probably defer it to our next earnings call in late October, early November. We'll have a much better situation because right now, we clearly know where we have all the design wins, how many of them will turn into hard orders -- I mean clearly, we are delivering samples and all that -- but I think most of these customers still have not finalized their decision of what and how much and in what models they are going to launch. So it's probably I think the true visibility will be really -- should be there by November. But of course, at this point, every one of them is saying that absolutely they want to have that.

Regarding the world facing, some of them are trying to do something as early as next year. I think definitely that is the functionality that's coming. And we talked to a number of customers. That is one of the things they want to expand. Clearly somewhat different designs from the facial recognition, but it is clearly at the top of the list for quick following for most of the customers we deal with.

But I think the world facing would be more about, say, our fiscal 2020, which is starting in the second half of next year.

Your next question comes from the line of Richard Shannon of Craig-Hallum.

Maybe I'll throw another 3D sensing question, which is -- I'll ask the question very directly here on competition, whether you expect to be largely a sole-source at least with your primary competitor. Any comments on that as well as any change in pricing curves, please.

Well, I think the -- our pricing and volume is inherently built in our guidance. So I'm not going to comment on it because it's a proprietary information that's not subject to disclosure. But we feel -- as I said earlier, given our intellectual property position and we are effectively now working on second- and third-generation products, we feel confident that we can hold our own in this market and continue to have a strong position going forward in the foreseeable future with our major customers.

Okay. Fair enough. My second question is on your NSE business. I can't remember which one of you mentioned it in your opening remarks, but you talked about a little bit more balance geographically as you've added the Cobham business. I'm wondering if you can give us a sense of what your split, North America versus rest of the world, is; and if you can give us a sense about the differential growth rates we might think about for the next year.

So I will give you color and Amar is pulling up the exact numbers. Well, there's a couple of things, right. With the addition of Cobham business, we added a whole wireless dimension to our ecosystem, right. So for one thing, we are less reliant on the wired infrastructure, right. So we are picking up. We believe the wireless is a faster growth market. So in that respect, we are in a healthier, I would say, neighborhood, right.

In terms of the geographic, a lot of the wireless sales, clearly big infrastructure, and that's what equipment manufacturers are in Europe and in Asia. So by default, a significant chunk of our revenue in the wireless space is heavily weighted towards Europe and Asia and to a much lesser weight towards North America. So in that respect, it geographically balances us much more.

But I think one of the comments I made about geographical diversification is -- really was meant about major service providers and mainly, I would say, North American service providers. The spending environment that we've seen at those major service providers has been the lowest, at least as far as I've been here and talking to people who've been here for a long time, the lowest I've ever seen in last 10, 15 years.

So in that respect, by effectively doing a lot of focus and business development outside of North America, we have lessened our dependence on North American service providers. But that also presents an opportunity because they cannot indefinitely delay upgrading your maintenance toolkit. And eventually, as they do come back and start spending money, we think that could be an upside to our expectations in the coming fiscal years.

Okay. But to be clear in this, I think you mentioned this in your prepared remarks, but just to be clear, you don't necessarily expect that to happen this fiscal year, is that correct?

Not in the foreseeable future. Not that I can see in the next quarter for us.

Your next question comes from the line of Michael Genovese of MKM Partners.

Oleg, I'm wondering, how are you looking at the M&A environment right now, particularly looking for targets? What are you seeing out there?

Well, we see a lot of very expensive, grossly overpriced targets. Let's put it that way. Now joking aside, I mean, we always look at a lot of things. And as I said in my remarks, we pride ourselves on being very prudent stewards of our capital between -- and we always look at what's the most effective way of deploying our capital between the returning to the shareholders, retiring our debt or doing targeted acquisitions. I think so far, we've had a very good track record in our 2 acquisitions. We are very happy with both of them, and we intend to keep the same formula.

I mean generally, our preference is for acquisitions that leverage our OpEx base and provide a significant drop down to the bottom line. But we also are always on the lookout for acquisitions that meaningfully will differentiate and extend our technology leadership in the markets we are playing. So in that respect, I would say if we talk about the bigger acquisitions, they have to be hugely accretive and with high degree of synergies. On the smaller acquisitions, it could be things as buying additional technologies to drive our differentiation and technology leadership.

So that's kind of the 2 avenues which we are looking at. I do not see us spending a lot of money for a startup. Let's put it that way.

All right. And then let me just switch gears and go back to the 3D subject. I just want to ask explicitly on the $50 million guide for the year. Amar said 2/3 in the first half, 1/3 in the second half. So just on that piece of business, the $50 million, how -- I mean, could you give us a sense of the lead customer? I mean I know this is sensitive information, but just some of the Android remarks, it sounded like that was on the comment was uncertain. But the $50 million is a certain number. So I'm wondering how much Android is in the $50 million. Or is the $50 million really the one customer and if we get Android, it would be higher than that?

Yes. So Michael, this is Amar here. Maybe I was not clear. The $50 million, majority of that, 3/4 of that, is in the first half, not 2/3, 3/4, right. And then 1/4 is in the second half. This is just primary one customer. We -- at this point in time, given the limited visibility we have in the second half, we know we are working with all these Android customers, we have not included in any volumes from the Android customer in that $50 million. So to Oleg's point, to the extent that comes in, which will be mainly first calendar half of 2019, it should offset some of the seasonal decline in volumes from this one primary customer.

Your next question comes from the line of Jun Zhang of Rosenblatt Securities.

So my focus is more of 3D sensing. And just wondering, could you break down the 3D sensing revenue for June quarter and September quarter? And also, could you give us a little bit color on the ASP trend for the primary client and also for the Android market? And also, because I think there's also a time-of-flight 3D sensing trend for the real camera module by the Android market, do you -- what do you think about your future products' fit into those time-of-flight 3D sensing module market?

So let me start with giving you more color on the June versus September quarter, and then Oleg will jump in on the ASP and the other questions here. So the June quarter, which is fiscal Q4, it was minimal. There was not much of a 3D sensing revenue. I would say less than 5% of our overall OSP revenue in fiscal Q4, which is our June quarter, was 3D sensing. And this is in line with what we had mentioned earlier, maybe slightly more than that but it's in line. So we did not ship anything. We actually very strategically took down the inventory, and there was no shipment.

The September quarters and the December quarter, the numbers are evenly distributed in September and December quarter as of now. That's what we are expecting, and that might change, as you know. This is a highly volatile business. But that's what we are assuming. September and December quarter is even within those 2 quarters with 3/4 of the $50 million landing in the second half -- in the first half, sorry.

Regarding the earlier question about ASPs, while clearly I'm not going to give you the answer on that, I mean, there's fundamentally 2 people -- 2 types of suppliers in this world: those who know what the prices are, and those who are guessing. We are clearly in the know, and we're not going to educate our potential competitors about that. However, all the ASP curves are built into our forecast. So you can do your math and kind of indirectly go back and kind of estimate the average prices.

But I mean, in terms of the front facing and rear facing, the rear facing ASPs are generally lower than the front facing because it's -- it actually depends on the customer's design. And generally, the size of the filter is smaller in the world-facing camera, and such ASPs will be somewhat lower. But we aren't going to provide any specific numbers.

Okay. Great. Do you see more competition for the time-of-flight -- the filter product in the time-of-flight 3D sensing compared with the structured-light 3D sensing? Or you have -- you still keep the sole supply for both solution?

So I think the -- a good filter is always a key piece of the system. And I think our filter technology has shown itself to be extremely reliable, having very, very low ppm issues in module design. And as such, I think we -- I feel we have a very good position. And I would say our reputation with all the major, not only smartphone manufacturers, but module manufacturers because clearly, modules have a very high material content. And if you have a subpar filter, which cause you to throw away a whole module, it's obviously a very expensive proposition.

So I feel our filter technology is equally well positioned in both markets. But I think clearly, in the more secure and the more high performance your demand, the better we are positioned. But in generally, we are winning designs in both facial recognition as well as the world-facing.

Your next question comes from the line of Dave Kang of B. Riley FBR.

First question on 3DS. So should we expect the ASP for Android devices to be comparable to the lead customer?

Well, I think the ASP is heavily driven by 2 things here: volume and the size of your filter. So I mean clearly, the customer with the highest volume will have a better pricing, all things being equal. And the customer with a smaller design filter will have a lower price than one with the bigger. So I think generally, it's a volume game. And if you want to get similar type of terms and conditions, you got to be in the same league.

What about in terms of specs? I mean, do you think Android specs will be less stringent compared to the lead customer?

Well, it depends if you want to have a reliable authentication and secure product. I don't think any self-respected Android customer would put a subpar product just to be made fun of. I mean effectively, the bar is very high and the expectations are very high and the performance of the product is now very high. I think all the customers we talk to, they'd rather delay launching a product than putting something that they will become a joke in the market, because I think the reviews are merciless if you put out a product that doesn't meet what the established market standard is. So I'll tell you, I'm not seeing anybody looking to pick up some crap and put it in their product.

Got it. Moving to NSE side, how should we think about the mature products, their decay rate, going forward?

Yes. So I think the mature products, just to recap, in fiscal year '18, we exited with about 23% of the mix of total SE in mature products. So 77% was growth. 23% was mature. We expect fiscal year '19, mature should be less than 20% of the mix, and the growth should be greater than 80% of the mix. And if we just look at what we did in Q4, you'll see that, that trend has already started.

Having said that, we would like to keep the mature product as long as possible. And so we're not in a hurry to go drive it down because it higher margin. And so the teams have been very successfully renewing the contracts on the mature products, which is good for the business. So the rate of decline is expected at the same rate, and the mix should be roughly less than 20% for mature and greater than 80% for growth.

Your next question comes from the line of Vijay Bhagavath of Deutsche Bank.

This is Brian Yun on for Vijay. I just want to touch on 2 of your growth drivers. First, if you could expand on what you're seeing in terms of the federal and military budget as it relates to the NE and SE businesses heading into 2019.

And second, could you just touch on the -- how you kind of anticipate data center growth, how that trends through 2019?

So I think the -- in terms of the federal kind of defense budgets, the only business segment that is kind of dependent on that is our AvComm, which is a lot of military radio testing. And we see a number of bills making their way through Congress and being approved that are aimed at upgrading the personal communication infrastructure for the U.S. Military, and that would present us with some very good opportunities. So I think that's on the military side.

In terms of public safety, that's a continuous market. And clearly, there was a number of federally funded programs such as the FirstNet that are just starting to drive the upgrade of the public safety infrastructure and that also presents. So I'd say while today we are still kind of -- it's a steady-state kind of churns business, we expect over the next kind of 12 to 24 months to see additional spending coming through that could meaningfully increase the demand for that business.

And on the data center business, in fiscal '18, there was very high double-digit growth in the data center business. As Oleg mentioned in his prepared remarks, we are seeing a very healthy funnel. And also the size of the deals are getting larger. So we do expect the data center business in fiscal '19 to continue to grow maybe at the high single to low double digit.

That's right.

Your next question comes from the line of Meta Marshall of Morgan Stanley.

First question: when you mentioned kind of North American service providers and spending patterns there, are you mentioning them not spending on kind of older maintenance equipment or just kind of slower purchasing even in the fiber and some of the newer areas?

And a secondary question to that of just, are there different patterns that you're seeing between their wireless spend and their wired spend?

And then maybe just a second technical question, on the 606, does that impact to -- does that impact more NE or SE going forward?

All right. I'll start and you take on the 606. So on the North American operators, the combination there is in both, right? So clearly, I mean, we generally don't sell equipment for the legacy network. I mean, that already exists. It's generally as you introduce new standards or you deploy new services is you need the new equipment.

And what we have seen is initially, there was a lot of talk of all of them pushing out kind of gigabit to the consumer or to the home. Now the cable infrastructure has started last year, and they've pretty much upgraded the whole network to DOCSIS 3.1, which enables them to deliver a lot of very attractive services, interactive services, high bandwidth and so on. Where we have seen in many ways a capitulation or not really following through is on the DSL side. A lot of the service providers basically kind of kick the can down the road and delayed the upgrade of their network to match the cable providers.

In terms of the wireless, I mean yes, clearly, a lot of them are investing in a wireless infrastructure. But it's really more kind of preparing for 5G. And there, we benefit obviously from our wireless business. But the traditional network maintenance, network service turn-on monitoring, what we've seen is effectively driving greater sharing of equipment or reducing the technician workforce, reducing cost. And obviously, I don't know what it does to your network, but I think it's -- in many ways, they are under a lot of OpEx pressure and they are just cutting costs. And I mean, a lot of the purchases for maintenance equipment falls in the OpEx line, and that's an easy thing to delay into the future.

So I think -- I don't know what's going on with these guys, but I'll tell you, I think the level of ability to deliver services and innovation is heavily skewed towards the cable side of the business from where we sit in terms of the capabilities that they've been deployed in the last 12 months.

Yes. On the 606, Meta, the impact is predominantly in the SE business, so mainly in our software-centric business. And so in a bigger scheme of things, $8 million to $10 million for overall Viavi is less than 10% of revenue. But when it comes to SE, it is $8 million to $10 million. Again, this is an accounting impact. No cash flow impact. It's a deferred revenue write-down that needs to happen as we do a retroactive. It just meant going from the old revenue accounting standard 605 to the new accounting standard 606.

And it also creates an advantage for us going forward. In the event that we sell soft -- continue to sell software products in the growth businesses in some cases instead of deferring the revenue, we may be able to recognize it upfront. However, we do not have visibility to that, but as we go and sell new licenses, et cetera, there is a potential of offsetting some of this.

Got it. And then maybe if I could just sneak in one more on the -- you mentioned an uptick in lab tests, and some of that is tied to the optical market. But just any major trends in optical customer pickup throughout the quarter, or that you're starting to see?

So I'll start and then Oleg will jump in here. So on lab and test, as you know, for the last 3 or 4 quarters, starting from our fiscal year '18, Q1 of '18, we had seen the lab and test business actually decline and then hit the bottom in our fiscal Q2, which is our December quarter. And then from since then, we are seeing an uptick in this business, and it nicely bounced back in our June quarter.

We are seeing across all our product lines within the lab and test -- whether it's optical transport or our fiber optic lab test, which we sell to both the lab as well as the production environment; and the storage network test -- all these businesses actually performed quite well. So it is a broad-based recovery and a very good execution by the team since we were ready with the next product cycle here.

Your last question comes from the line of Samik Chatterjee of JPMorgan.

I just wanted to start off -- I had a few questions on Cobham, and I just wanted to start off with the -- if I could get a detailed update on Cobham. I believe you've said they're the leader in 5G test systems and the plan was always to kind of extend that capability into deployment. So how come -- like what's been the progress on that front? How comfortable are you feeling that if deployments were to start, you would be able to successfully kind of leverage that growth?

We see it as a major opportunity, actually. In all the meetings we've had with both NEMs as well as the operators, they all want the ability to correlate real-world performance to what is the -- at this point in time, a model of assumptions and promised performance of various products. So we're actually already seeing a number of opportunity to combine our 5G wireless product capabilities with the rest of our portfolio on the fiber, on the data -- service monitoring, service performance monitoring and offer our customer a bundle that allows them to kind of -- call it a 5G bundle, which not only allows you to provide simulation but you also have a real-life feedback, network monitoring with real data and correlating that real data to the modeled performance.

So in that respect, I think it clearly provide us with a very good path, I'll call it, from lab to field and obviously from field back to lab. So I see it as a very synergistic value proposition that Viavi will be in a position to offer.

Got it. And maybe just a follow-up question for Amar. Amar, how do you -- how should we think about the synergies from the integration of Cobham during -- through the year if you can just provide me some color there.

Yes, sure. I think, Samik, we will maintain the guidance we've provided last quarter where we said we expect synergies of about $15 million to $20 million over 24 to 36 months with majority of that landing in the first 24 months. We also expect the first year, which is the fiscal year '19, assuming that's the first year, first 12 months, we expect the synergies should be offsetting some of the deferred revenue write-downs that we had to do when we actually did purchase price accounting for this business.

So when you combine what we save in '19 and what we'll save in '20, I think it's going to be good synergy savings on a net basis in fiscal year '20. So $15 million to $20 million still remains.

We are making good progress with the integration. As you know, we just acquired this 4 months ago -- 4, 5 months ago. And so they are with us for the last 4.5, 5 months. We have made progress in go-to-market integration. We are right from go-to-market, let's say, all the way down to how do you consolidate the books. And so there's a lot of work to be still done in that area, but I think we were able to transition it smoothly and start our integration process.

So pretty pleased with the progress we are making in a short period of time, and we are still shooting for the $15 million to $20 million of synergies.

And is that linear through the year? Or should I think of it as being more back-end loaded as you mentioned there's more work to do?

Yes. I think you should expect in fiscal year '19 to be more back-end loaded with offset happening for the deferred revenue write-down. So I think it's back-end loaded for '19, back-end loaded for '20. But overall, as you exit fiscal year '20, you should have a significant portion of the $15 million to $20 million hitting our P&L. So feel good about it. We have crystallized the plans. We have an integration team in place that's executing. Oleg and I are reviewing it on a regular basis and I think making good progress.

I would now like to turn the call over to Bill Ong for closing remarks.

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

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