Viavi Solutions Inc. (VIAV) Q4 2018 Earnings Report, Transcript and Summary

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. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. 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 million to $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 & Production test products. Our SE revenue grew from 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 decline in 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 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 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 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 revenue decline in our Lab & Production test products. SE 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 toward NSE’s 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 a 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’ve 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. Thus, 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 Code 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, our service providers deployed fiber-to-the-home and DOCSIS 3.1 respectively. Lab & 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. VIAVI 5G market trials and anticipated 5G deployments 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 for two consecutive quarters as a result of changes in our product and go-to-market strategy. We are 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 volume. 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 and 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 banknotes and incremental demand overlays driven by major banknote redesigns, lasting two to three 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 revenue to rise in fiscal Q1 and Q2 as our major smartphone customer deploys special 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 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 segments 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 trends 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 the timely opportunity to benefit from the increased spending on avionics and radio test products. And finally, the fourth, 3D Sensing. VIAVI’s differentiated technology and strong IP position, position us well to benefit from 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’ll be participating in the Morgan Stanley Investor Bus Tour on August 21st taking place at our San Jose corporate office. We’ll also be presenting at the Deutsche Bank Investor Conference on September 12th in Las Vegas. Cheryl, let’s begin the question-and-answer session and we ask everyone to limit their question to one question and one follow-up.

[Operator Instructions] Our first question comes from the line of Dmitry Netis of William Blair. Please go ahead, your line is open.

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 [G.fast] 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 two part question here?

So let me start with the first part first, Dmitry, so that you can get color on the -- 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 three -- 50 million for the full year we expect majority of it, I would say almost three-fourth of it to land in first of 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 -- our 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 your -- the part two of the question. Now regarding the operating margins, I think we’re guiding on 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 point 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 probably about 2 percentage points because you -- Q1, our fiscal Q1 which is the 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 two 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 modeled 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 three 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 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 $2.25 million, at this point in time that's what we're 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 is -- I believe is higher than what Street was expecting because our guidance is from $0.12 to $0.15, so the 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 have actually even absorbed the accounting impact of us moving to the new accounting standard.

There's lots going on. I'll take all these details offline. 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 within that range that you've been guiding after you closed the acquisition or are you now thinking maybe that picks up a little bit? I don't know how you're approaching it, so 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?

So let me take the Cobham piece, the AvComm and Wireless business that we acquired. As we said, Q4, our June quarter was a first full quarter where we had this business under VIAVI. The revenues especially on the Wireless side came in higher than expected for three reasons. One, the market conditions remained favorable on the 5G side with a lot of momentum there. The team executed well. And number three, which is important to note is fiscal Q4, which is the June quarter, is seasonally a strong quarter for our Wireless business, okay? So with that -- we -- with AvComm and Wireless business and if you do the math, because I have given a lot of data here, AvComm and Wireless business posted about $65 million of revenue in fiscal Q4. 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. But -- 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'll be towards the high end of the guidance range which is roughly $245 million for this business and the operating margins between 14% to 16%. So we incrementally feel positive about this business, mainly driven on the Wireless side.

I think it’s 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 four months, now just four and five 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, total NSE, you talked about the organic growth in 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, just purely looking at the rest of the world, we feel comfortable that we're 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 3.1 is kind of approaching later -- latter third of the cycle in North America and -- 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 in it, new story within that. So as Oleg mentioned, NSE is expected to grow at 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’s a sort of a revenue impact because of 606 of about $8 million to $10 million.

And that’s already factored.

That’s already factored, yes.

So yes, 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. Please go ahead. Your line is open.

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

Yes. Thanks, Alex. So the first -- answer to the first question is, we’re 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. On the second question was regarding -- I am sorry. What was your second question?

606?

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 two distinctly different variables there. Can you give us a little bit better quantification of what happens excluding the non-utilization of 3D capacity in the quarter, how much of the decline in margins came from just simply the weakness in the 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 underutilization of 3D Sensing capacity. That pretty much drove most of it. In terms of snap back, I’d say snap back over two quarters with some snap back in the first quarter and then the full recovery to margins in the second quarter. And the reason for that is there is still -- while we did have an underutilization, we were still producing some products 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 underutilization gets carried into the September quarter and then by December quarter it will pretty much work itself out.

And then just last one question along that line. The outlook for 3D as you go into the first half of next year, the inventory that you are producing I assume is going to your prime customer as we start folding in Android devices. So does that change the cost mechanics in the first half of calendar '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 a typical seasonality of, I won’t to say like a particular cell phone manufacturer, it’s very strong two 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 high for two quarters, then somewhat lower in the third quarter and then you could might shutdown 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 then as we only have one customer. So I think as a whole kind of smartphone ecosystem runs our 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 will 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 products 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. Please go ahead. Your line is open.

Just to touch on 3D Sensing a little bit again. What makes you a little more confident about the adoption of 3D sensing in manufacturing customer maybe amongst some of the Android customers? Is that -- am I reading that right, are you seeing -- are more confident than you were say a quarter ago among Android adoption of 3D sensing. And I’m wondering about just any thoughts on world-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 following on that question, if anything changes, do you got to switching on 3D?

Sure. So I think as I said all the talk is there, that’s what the intention is. But as I said on my prepared remarks, the actual forecast, it will actually happen. It’s too early to guide. And I’d probably defer it to our next earnings call in late October, early November, we will have a much better guess because right now we clearly know where we have all the design wins. How many of them will turn into hard orders, I mean that clearly we’re delivering samples and all that but I think by most of these customers still have not finalized their decision what and how much and in what models they’re 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 a functionality that's coming and we talk to a number of customers that is one of the things they want to expand, clearly somewhat different design 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 world-facing would be more of I’d 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. Please go ahead, your line is open.

Maybe I’ll throw up another 3D Sensing question which is -- I’ll ask a question very directly here on competition whether you expect to be largely a sole-sourced 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 am not going to comment on it because it’s a proprietary information that’s not subject to disclosure while we feel -- as I said earlier, given our intellectual property position and we are effectively now working on second, 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.

My second question is on your NSE business, don’t know which one have you mentioned in your opening remarks, but you talked about a little bit more balanced geographically as you have added the Cobham business. Wondering if you can give us a sense of what's your split in 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, while Amar is pulling out the exact numbers. So well there's a couple things, right? With addition of Cobham business we did 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 network equipment manufacturers are in Europe and in Asia. So as -- by default significant chunk of our revenue in the wireless space is heavily weighted towards Europe and Asia and to a much lesser weighted 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’d say in North American service providers. The spending environment that we have seen at those major service providers has been the lowest at least as far as I have been here and talking to people who have been here for a long time, the lowest they have ever seen in the last 10, 15 years. So in that respect by effectively giving a lot of focus on business development outside of North America, we have lessened our dependence on North American service providers. But they also present an opportunity because they cannot indifferently delay upgrading your maintenance tool kit 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.

But to be clear on this, I think you mentioned this on 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.

Your next question comes from the line of Michael Genovese of MKM Partners. Please go ahead. Your line is open.

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 -- thinking on. And as I said in my remarks, we pride ourselves on being very prudent stewards our capital between -- and we always look at it what's most effective way of deploying our capital between returning to the shareholders, retiring our debt or doing targeted acquisitions. I think so far we have had a very good track record in our two acquisitions, we are very happy with both of them. And we intent to keep the same formula. I mean generally, our preference is for acquisitions that leverage our OpEx base, and provide a significant dropdown to the bottom-line but we also are always going to lookout for acquisitions that meaningfully will differentiate and extend our technology leadership in the markets we are playing. So in that respect, I’d say if we talk about the bigger acquisitions they have to be hugely accretive and with high degree of synergies. On the smaller acquisitions, could be things as buying additional technologies to drive our differentiation and technology leadership. So that’s kind of the two 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.

And then maybe just switch gears and go back to 3D subject. I just want to ask explicitly on the 50 million guide for the year, Amar said two-thirds in the first half, one-third in the second half. So just on that piece of business, the 50 million. How -- I mean could you give us a sense of when lead customer -- I mean I know it’s a sensitive information but just on the Android remarks it sounded like that was -- the comment was uncertain but the 50 million was a certain number. So I’m wondering how much Android within the 50 million or is the 50 million really the one customer and if we get Android would be higher than that?

Yes, so Michael, this is Amar here. Maybe I was not clear, the 50 million, majority of that, three-fourth of that is in the first half, not to the two-thirds, it’s three-fourth, right? And then one-fourth is in the second half. This is just primarily one customer. 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 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. Please go ahead. Your line is open.

So, my focus is more of 3D Sensing and just wondering could you breakdown the 3D Sensing revenue for June quarter and September quarter and also can you give us a little bit color on the ASP trends for the primary clients and also the -- for the Android market and also because I think there’s also time-of-flight 3D Sensing trend for the rear 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?

Sure. Let me start with giving you more color on the June versus September quarter and then Oleg will jump in on the ASP and other questions here. So, the June quarter which is a 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 quarter and the October -- 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 quarters with three-fourth of the 50 million landing in the second half -- in the first half, sorry.

Regarding the -- your question about ASPs, well clearly I am not going to give you the answer on that, I mean there’s fundamentally two people, two types of suppliers in this world, those who know what the prices and those who are guessing. We’re clearly in the know and we’re not going to educate our potential competitors about that. However, all of 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 depends -- it actually depends on the customers’ design and generally the size of the filter is smaller in the world-facing camera and as such ASPs will be somewhat lower but we aren’t going to provide any specific numbers.

Do you see more competition in for the time-of-flight -- few other products in the time-of-flight 3D Sensing compared with the satellite 3D Sensing or you have -- you will still keep the sole apply 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 a very, very low PPM issues in the module design and as such I think I feel we have very good position and I’d say repetition 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 sub-par filter which cost you to throw away your [home] 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 more high performance you demand the better we are positioned. But 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. Please go ahead. Your line is open.

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

Well, I think the ASP is heavily driven by two things, your 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 a customer with a smaller design filter will have a lower price than ones with a 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 lead.

What about in terms of space, I mean do you think Android space 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 software product just to make a fun of. I mean actually 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 talked to they would rather delay launching a product than putting something that will make -- become a joke in the market because I think the reviews are more serious, if you out a product that doesn’t meet what the established market standard is. So clearly I’m not seeing anybody looking to pickup some crap and put in their product.

Moving to NSE side, how should we think about the mature products, there the theory going forward?

So I think the mature products, just to recap in the 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 you just look at what we did in Q4 you will 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 is higher margin and so the teams have been very successfully renewing the contract 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 to 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. Please go ahead, your line is open.

Hi, this is [Brian] in on for Vijay, thanks for taking the question. I just wanted to touch on two 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 transfers into 2019?

So I think the -- in terms of the federal kind of defense budget, the only business segment that kind of depends 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 the upgrading the personal communication infrastructure for the US military and that would present us with some very good opportunity. So I think that’s on the military side. In terms of public safety that’s a continuous market and clearly there is number of federally funded programs such as the FirstNet, they are just starting to drive the upgrade of the public safety infrastructure and they’re also present. So I’d say while today we are still kind of into a steady state kind of trends business, we expect over the next 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, it was very high double-digit growth in the data center business. As Oleg mentioned in his prepared remarks we’re 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, may be at the high single to low double-digit.

Your next question comes from the line of Meta Marshall of Morgan Stanley. Please go ahead, your line is open.

First question, when you mentioned kind of North American service providers and spending patterns there, are you mentioning they’re 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 secondary question to that, just are there different patterns that you're seeing between the wireless spend and the 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?

Right, I’ll comment on the area and you can take on 606, yes. 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. Generally, as you introduce new standards or you deploy new services as 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 gigabits to the consumer to the home, now the cable infrastructure has started last year and they’ve pretty much upgraded the home -- network to DOCSIS 3.1 and -- 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 capitalization 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 upgrade of their network to match the cable providers. In terms of the wireless, yes, clearly, a lot of them are investing in the wireless infrastructure but it's really more kind of preparing for 5G and there we benefit from our Wireless business. But the traditional network maintenance, network service turn on monitoring what we have seen is effectively driving greater sharing of equipment or reducing the technician workforce, reducing costs. And obviously that -- I don’t know what it does to your network but I think in many ways that’s -- 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 hold in the OpEx line. And that’s an easy thing to delay for into the future. So I think I don’t know what's going on with these guys but I’d tell you I think the level of ability to deliver services and innovation is heavily skewed toward the cable side of the business from where we said in terms of the capabilities that they have been deployed in the last 12 months.

On the 606 Meta, the impact is predominantly in the SE business, so mainly in our software-centric business. And so in a big 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 accounting impact, no cash flow impact, it’s a deferred revenue write-down that needs to happen as we do our 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 -- continue to sell our software products in our growth businesses in some cases and sort 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.

And then maybe if I could just sneak in one more on the -- you mentioned that uptick in lab test 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 are starting to see?

So I’ll start and Oleg will jump in here. So on lab and test, as you know, for the last three or four quarters, starting from our fiscal year '18, Q1 of '18, we had seen the lab and test business actually decline and then hit a bottom in our fiscal Q2 which is a 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. Please go ahead, your line is open.

I just wanted to start off -- I had a few questions on Cobham and just wanted to start off with the -- if I could get a detailed update on Cobham. I believe you’ve said they are a leader in 5G test systems and the plan was always to kind of extend that capability into deployment, so how -- 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 and all these 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 our modeled assumptions and promised performance of various products. So we actually are already seeing a number of opportunities to combine the -- our 5G wireless product capabilities with the rest of our portfolio on fiber, on the data -- service monitoring, service performance monitoring and offer our customer a bundle that allows them to kind of, I’ll 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 provides us with a very good path, 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 would be in a position to offer.

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 layering through the year. If you can just provide me some color there?

I think Samik, we will maintain the guidance we’ve provided last quarter, where we said that 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 a 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 integration. As you know we just acquired this four months ago, four, five months ago and so they are with us for now last 4.5, five 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 that’s quite early for the year or should I think if it as being more backend loaded as you mentioned there is more work to do?

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

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

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