Viavi Solutions Inc. (VIAV) Q1 2019 Earnings Report, Transcript and Summary

Good afternoon. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the VIAVI Solutions First Quarter 2019 Earnings 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, Senior Director of Investor Relations, you may begin the conference.

Thank you, Chris. Welcome to VIAVI Solutions first quarter fiscal year 2019 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 our 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. Effective fiscal year 2019, VIAVI adopted a new accounting standard call 606 for revenue recognition. We have recast our financials for fiscal year 2018 in order to have equivalent and meaningful financial comparisons. Please see our supplemental earnings slide deck posted on VIAVI’s Investor Relations website for more financial details. 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. VIAVI’s revenue at $268.5 million grew 40.6% year-on-year and exceeded the midpoint of our revenue guidance. The growth in revenue was driven by both NSE, with the acquisition of AvComm and Wireless and OSP’s strength in 3D Sensing and anti-counterfeiting products. NSE revenue was $190.7 million, coming in at the lower end of $187 million to $203 million guidance range. A weaker than expected demand from Field Instruments in North America was partially offset by a strong demand for a Wireless, as well as our Lab and Production products. OSP delivered a strong performance with revenue at $77.8 million, exceeding the $70 million to $74 million guidance range due to higher than expected demand in both anti-counterfeiting and 3D Sensing products. The overall VIAVI operating margin at 16.3% expanded 260 basis points year-on-year and exceeded the 14% to 16% guidance range helped by favorable mix and good operating expense management. EPS at $0.15 was at the high end of our guidance range of $0.12 to $0.15, and grew $0.05 from a year ago level of $0.10. Now moving to our reported Q1 results by business segment, starting with NSE. NSE revenue at $190.7 million, grew 39.7% year-on-year. The primary growth came from the AvComm and Wireless acquisition where the 5G wireless business was particularly strong this quarter. NE grew 47.4% year-on-year, reflecting the acquisition, but also saw a broad-based strengths in Lab and Production instruments, particularly fiber in both 100-gig and 400-gig Ethernet products. Field Instruments demand however is disappointing due to weaker North American service provider spend. SE revenue grew 5.2% from a year ago levels, as a result of double-digit percentage growth in our data center products while revenue for our assurance products was roughly flat year-on-year. The mature assurance business as expected continue to decline year-on-year and in the quarter was at about 16% of SE revenue. As indicated in our last earnings call, please note that ASC 606 revenue accounting changes resulted in an unfavorable impact to SE revenue, estimated at $8 million to $10 million for this fiscal year of 2019. NSE gross margin at 63.6% declined 60 basis points year-on-year due to the mix change resulting from our acquisitions in NSE. However, NSE’s operating margins at 8.6% increased 570 basis points from a year ago levels, driven by operating leverage from the addition of the acquired AvComm and Wireless businesses, and continued cost management in our core NSE business. NSE’s book-to-bill ratio was slightly above 1. Now turning to OSP. OSP revenue at $77.8 million increased 43% from a year-ago levels on the strength of 3D Sensing optical filters and anti-counterfeiting banknote redesign product demand. OSP gross margins at 50.6% declined, 710 basis points from a year ago due to higher mix of 3D Sensing products. Our 3D Sensing products have lower gross margins than our core anti-counterfeiting products. That said, the 3D Sensing business is accretive to the overall VIAVI operating margin and operating profit. Now, turning to the balance sheet. Our total cash and short-term investments ending balance was $659.5 million, operating cash flow for the quarter was $27.6 million. In September, we issued a notice to fully redeem the 0.625% 2033 senior convertible notes. In October, our fiscal Q2, we completed the redemption of approximately $142.7 million aggregate principal amount of this note. In connection with this, this redemption, holders who elected to convert, received in an aggregate approximately 231,800 shares of common stock and approximately $111.8 million in cash while the balance of the notes were redeemed in full for cash. As of today, VIAVI has the 1% 2024 notes, and the 1.75% 2023 notes for a total outstanding debt balance of $685 million. Lastly, this afternoon, VIAVI filed an S-3 automatic shelf registration statement with the SEC. The shelf registration statement is typically valid for three years. We are using this window of opportunity prior to filing our first quarter 10-Q to file an S-3 now to provide flexibility in the future and also to reduce the administrative burden of having to recast additional historical periods to reflect the newly effective ASC 606 revenue standard. Now, to our guidance. We expect fiscal second quarter 2019 revenue for VIAVI to be $280 million plus or minus $10 million; operating margin at 16.5%, plus or minus 1%; and EPS to be in the range of $0.15 to $0.17. We expect NSE revenue to be at $200 million, plus or minus $8 million with operating margin at 8.5% plus or minus 1%. We expect OSP revenue for fiscal second quarter to be at $80 million, plus or minus $2 million with operating margin at 36.5% plus or minus 1%. For the full fiscal year, we now expect an incremental increase in 3D Sensing revenue from Android-based smartphone customers. As a result, we are raising our forecast for 3D Sensing revenue from $50 million to $60 million for fiscal year 2019. The majority of 3D Sensing revenue is still expected to ship in the first half of fiscal year 2019. Our tax expense rate is expected to be approximately 17%. We expect other income and expenses to reflect a net expense of approximately $2.5 million. Share count is approximately 231.5 million shares. With that, I will turn the call over to Oleg.

Thank you, Amar. Despite a continuing challenging spend environment faced by our NSE business in North America, I’m pleased with the fiscal Q1 results and our Q2 outlook. Starting with NSE. The wireless business continued its strong performance driven by the initial 5G trial demand. As operators proceed with the 5G field deployment later in the calendar 2019, we expect to see continued strong demand for our 5G products by NEMs and service providers. Lab and Production test equipment continued to increase year-on-year, driven by 100-gig and 400 gigabit Ethernet. Robust growth in Lab and Production was dampened by a decline in our Field Instruments. North American carrier spending continues to remain challenging. Also, as expected, our cable products in North America also saw order decline as our customers largely completed their procurement cycle. That said, cable demand from Europe, although a smaller market than North America, is now starting to materialize. Our SE business segment, post restructuring, continues to perform to our expectations. Moving on to OSP. As we stated back in spring, we expected the anti-counterfeiting business to recover in the second half of calendar 2018. The strong fiscal Q1 results and fiscal Q2 guidance for OSP reflect incremental banknote redesign demand from major end customers. We do not yet have visibility from our customers into the currency redesign orders for the second half of fiscal 2019. As such, we conservatively plan our base case anti-counterfeiting revenue scenario for the second half of fiscal 2019 to be about 50 million per quarter. For 3D Sensing business, we expect a strong first half of fiscal 2019, driven by a lead customer deploying facial recognition technology into multiple mobile devices. We’re also seeing increased activity from our customers in the Android ecosystem and anticipate increased revenue from them in the second half of fiscal 2019, but not at the level to offset the expected seasonal decline from the lead customer. Lastly, this afternoon, we announced the acquisition of RPC Photonics. RPC is a technology leader in engineered optical diffusers used for 3D Sensing and other related applications. RPC products go into the projector part of the 3D Sensing module. With VIAVI’s strong presence in the camera portion of the module, this acquisition significantly increases VIAVI’s opportunity in 3D Sensing. In summary, fiscal 2019 is off to a good start. As we look ahead, we expect fiscal Q1 business trends to continue into fiscal Q2. As we outlined before, four major trends expected to continue to be the primary drivers of our business. The first one is fiber everywhere. The continued densification of network is driving fiber demand everywhere, including wireless and cable networks. The second one is 5G. 5G wireless testing and deployment continues to gain industry momentum. And we are positive about the business outlook for our recently acquired wireless business. The third one is increased military and public safety budgets that we see as an opportunity to upgrade communication infrastructure. And it is a positive long-term driver for our avionics and radio test products. And lastly, the 3D Sensing. The application now starting to proliferate into the Android ecosystem with new augmented reality and virtual reality apps and eventually into the automotive applications. Our recent RPC Photonics acquisition further strengthens our position in the 3D sensing market. In conclusion, I’d 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. Chris, let’s begin the question-and-answer session. We ask everyone to limit discussion to one question and one follow-up.

[Operator Instructions] Your first question comes from Vijay Bhagavath with Deutsche Bank. Your line is open.

My question is on what are the milestones we need to monitor heading into next year for the NSE business, in particular for Field Instruments? And I know there are some big product cycles coming up with fiber-deep and 5G and Field Instruments. So, guide us and help us in terms of the key milestones to monitor?

Well, I think, the first one is, clearly, we are monitoring the North American spend. I mean, I’d say, I’m very happy with the customer spend environment in EMEA, in Asia-Pacific and our traction that we are gaining in those markets as well as the Latin America, which is also showing signs of recovery. The biggest kind of base case concern that I have is with the major service providers in North America. At this point, as much as well as we’ve been doing everywhere in the world, a lot of that great performance has been offset largely by decreased spend in North America. So, we’re going to continue to monitor to see to what extent they’re going to continue to start reinvesting in their network. The other big one of course is 5G. I mean, for us, even though the actual deployment is some time off, we make our money on the early stages of the network development, network testing, field trials and things like that. That’s where we make our initial revenue with lab equipment. Once it goes into production, clearly, we are looking to carve out a meaningful share for our Field Instruments in the RF space which is the area where we’re largely absent today. And the third one I think is continued fiber. I’m pretty bullish on the fiber continuing to grow. And we’re seeing it now in obviously in the wireless networks, in cable networks, and we’ve had very good traction and execution in the fiber space around the world. And just the matter of fact, we are seeing very strong demand right now for ROADM 100 gig, 400 gig deployment. It’s just the precursor for the future deployments in fiber deeper into the network at the later time.

Perfect. A quick follow-on for Amar. How should we think of product mix and margins heading into the rest of the year and into next year? Thanks.

Yes. I think, when you look at just for NSE, we guided to about 8.5% at the midpoint of the guidance. The product mix -- so, before I get to the margins, the product mix, as we go drive more wireless in the lab as well as our Lab and Production instruments which also goes into the lab on the fiber and the optical transport side, those two businesses come in with the higher margins compared to our Field Instrument business. So, there has to be a favorable impact to our margins from that perspective. Number two, we have continued to reduce our operating expenses. As you can see, operating expenses has gone down sequentially and also versus a prior guidance. And so, there is a lot of operating leverage in the model. In case North American service providers come back and start spending, it should create a very good operating leverage in the model. Having said that, I believe that we should be within the 7% to 9% operating margins for NSE for the full-year, at least from what we are seeing as of now.

Your next question comes from Michael Genovese with MKM Partners. Your line is open. Michael Genovese with MKM Partners, Your line is open.

Hi. So, you guys beat my estimate for OSP by about $5 million. I had $18 million for 3D Sensing. And I guess, I’m just wondering the $5 million upside, did that come more on the 3D Sensing side or more on the core OSP or was it spread between the two?

Yes. Thanks, Michael. Good question. It was spread between the two. So, we saw both, our expectation on 3D Sensing, as well as an anti-counterfeiting products -- the demand came in higher than our expectations in both those areas. So roughly, I would say, it’s split evenly between those two product lines.

And was some of that upside from…

And let me just add to that, Michael. So, the upside is mainly coming from, as I mentioned in my prepared remarks, as well as Oleg mentioned too, it’s coming from the Android ecosystem. We have started seeing some traction in the Android ecosystem. And that’s something that showed up in Q1; we expect that in Q2. And hence, we increased our guidance from $50 million to $60 million, and with the same ratio of having about 75% of that revenue show up in first half was the second half.

Okay, perfect. Thanks. I can say my follow-up for another question, which is the acquisition. Does the acquisition just improve your filter technology or does it actually grow the addressable market that you can sell into smartphones, other consumer electronics, and is there a play into the auto and other markets as well?

So, that’s an excellent question. It actually increases our addressable market. RPC plays on the projector side of the module, it sits right above the pixel. [Ph] That’s what defuses the laser light to avoid -- to provide eye safety and the distribution of laser light onto the object. And our filter sits on the camera side, which is a receiving end of the module. So, by doing this, we now have like going through both of the transmit as well as the received part of the module. And RPC, we were attracted to the company for the same reason that where we are playing today on filter side. It’s got unique technology, is ranked to be the best in the world by our customers, and they have a significant design win traction in the Android ecosystem. And in [indiscernible] is where you absolutely need to have the engineered diffuser.

Your next question is from Alex Henderson with Needham & Company. Your line is open.

Good afternoon. This is Dan Park on for Alex. Thanks for taking my question. So, I just wanted to -- so, with Verizon guiding their full year FY18 CapEx down, I just want to see if you guys are seeing any impact from this?

So, yes. I mean, we clearly saw in Q1, and it also really comes down to where they are guiding. In some areas, they are probably going to spend some money, mainly on 5G wireless for the field trials. So, in that area, we’ll probably see some upside to our opportunities. But, for the kind of major bread and butter, the base network maintenance, that’s one area where we are obviously more concerned about as to what the spend is going to be in the coming quarters.

Your next question is from Richard Shannon with Craig-Hallum. Your line is open.

I may have missed first few of comments. So, if I’m repeating things, I apologize. With the RPC acquisition, Amar, can you give us any quantification or characterization of how much that’s adding to your December quarter revenue, so we can get a sense of apples-to-apples comparison?

So, for December quarter, it’s not much. Actually, this is -- the Company from a revenue perspective, it’s less than 1% of a total VIAVI revenue. So, it’s not material. This is mainly a technology acquisition that puts us strategically into the 3D sensing ecosystem. So, for December quarter, it’s immaterial, because we just closed the deal, and it is two months worth of revenue, which is not material enough. Having said that, as we close this deal, integrate it, we will come back when we announce earnings for the December quarter and give you more color on the opportunity in the space.

Okay, perfect. Thanks for that. My follow-on question. You talked about this in your prepared remarks and I believe last quarter as well regarding the opportunity for military and public safety communications upgrades. Can you guys give us a sense of timing and scale of how we should think about that, it’d be a useful perspective, please?

Well, when we talk about the government, as you can imagine, things are move at a snail pace. What we monitor is the budgets approval. So, the most important thing is that budget has got approved and they got assigned to particular project. The next step is the RFQs for these projects and awards that come from it. So, I think for me, while we talk about wireless 5G as kind of more of a near-term opportunity, I’d say the government, military type of opportunities that we see on the outcome side are more into the second half of next calendar year. So, for us, the business that we are targeting from that increased spend is really more starting in the second half of next calendar year. That’s the earliest that we see visibility on.

Your next question is from Jun Zhang with Rosenblatt Securities. Your line is open.

Hey. Good afternoon, guys. This is Kevin Gargan [ph] on for Jun. Thanks for taking my question. I was just wondering if you could provide any color on how sustainable you think the demand is for 5G and 400 G testing in the next 1 to 3 years. And then, are you seeing kind of any increasing competition in these markets?

So, on the 5G testing, I think we need to just basically segment the market. So, where we play is on the system side. So, that’s NEMs, when they build base stations, they test them for protocol testing, capacity testing, security testing, so on and so forth. That’s where we play. And then, when it goes into the field, we provide similar type tester to operators to evaluate various vendors, as well as providing them also with some of the field instruments to kind of monitor network from the field point of view. So, that’s where we see ourselves playing. We’re not playing in the lab, the designs chips or the actual boards for the equipment; that’s where some of the other players are seeing demand as well. In the space where we play, we are, to the best of my knowledge, the majority market share leader worldwide. And in this particular case, success breeds success, because it requires significant investment in software and infrastructure by major NEMs and operators. And once they are invested in our solutions, it becomes not only an integral part of their testing protocols but also integral part of their network planning. So, in that respect, I feel pretty good about our long-term prospects given that we’re in the early stages of the technology deployment.

And then, just a quick follow-up. I know you kind of mentioned some of the 3D Sensing trends heading into 2019. Have you seen any impact on your business from a slowdown in the industrial and automotive segment for 3D Sensing?

Well, I mean, the industrial -- we have virtually zero revenue in industrial automotive. So, that’s really not even an issue for us. So, in fact, I think 3D Sensing in automotive is probably a couple years away, because whatever sensing they’re using today, it’s not a 3D, it’s more of a conventional sensing. So, I’m not really sure what you mean by slowdown in that space. But, our view on automotive, it’s a really a longer term opportunity. We are currently involved with all the major Tier 1 and Tier 2 OEM or subsystem providers to automotive manufacturers. And our view on the 3D Sensing being more presence in the car is probably about 2 to 3 years away. We are going to see in some high-end cars some of the in-cabin monitoring that’s already happening today. But, it’s a relatively small volume by comparison.

Your next question is from James Kisner with Loop Capital Markets. Your line is open.

So, I guess first, you didn’t mention this at all. I just noticed in your filings that you guys talk about having some production in China. I’m just wondering any of your products in the current product for [ph] tariffs or maybe be on the new list if they’re not, any impact at all from tariffs at this point?

So, I think, yes, we do have some products in China, but the impact is minimal at this point in time, James. We are continuously monitoring it. And I know there are 3 lists out there now. And we are also working on mitigation plan. So, at this point in time, we don’t see a material impact to our P&L, because of tariffs. And we will continue to monitor the situation.

And then just talk a little bit more about the North American slowdown in the past. You guys have talked about this being pretty diversified and being able to kind of weather kind of a slowdown in North America, you’re talking about it now. And so, I’m just -- sounds to me like it was the pretty start, pretty sharp slowdown in spend in North America. And I assume it’s kind of merger related or maybe comment on what you think the motivation might be and sort of how lasting that -- how sharp that slowdown is?

Well, I mean, the slowdown is in indeed very sharp, especially with the biggest operators. They try to triage the tradeoff between M&A, network maintenance, network expansion and their dividend policies. So, unfortunately, the purchases of our equipment in their P&L fall under the OpEx, not the CapEx. So, as such, if you have [ph] begun to improve your quarterly P&L, the operating profit to extend you tighten up on spending, that’s really where we normally get impacted. So, I think, clearly everybody’s kind of watching each other, and they’re all making bold acquisitions and they all looking for money to pay for them. But that’s largely happening at the expense of delaying maintenance or delaying upgrade of the network monitoring and management. Eventually, it’s just like how you can delayed fixing your roof for a long time, but eventually the bill comes through in, and the longer you delay, the more you have to do spending later on. So for us, at this point in time, I’d like to say we’ve mitigated a lot of that risk. But obviously, you only mitigate it when it’s truly zero. Until it gets down to zero, there is always some downside of it. But, given the drop in the last 12 months that we have seen, it’s largely -- I’d say it’s kind of hard to imagine this thing to go further down. But then, again, zero is the ultimate floor.

Understood. Just one quick follow-up. You guys I think talked about being in the higher end of your prior guide range for wireless test assets for the year. Is that still kind of unchanged, still in the high end of that range? You have changed the outlook for the year for the wireless….

I mean, it’s really 5G is driving a lot of the upside now. And we expect further down the road the government and military spend starting to contribute. And initially what we’re doing today is we’re winning big in the lab with 5G testing as well as the early deployments where the service providers are using our equipment to evaluate various vendors. And what we are working on is to parlay our leadership in the lab testing into a longer term field instrumentation testing. Because once the networks are getting deployed, the real money and the big volume will be in field instruments.

Your next question is from Dave Kang with B. Riley FBR. Your line is open.

Hey, guys. This is actually Lee Krowl on for B. Riley. Thanks for taking my questions. Real quick just on the acquisition. I just wanted to kind of parse the slide deck. You guys mentioned the lever to the Android ecosystem. The Android ecosystem is obviously very diverse. And there is many, many OEMs, some very high volumes, some very low volumes. So, just when you refer to design wins, are these high volume design wins or is it more that you do have design wins and you’re kind of sampling for future opportunities.

Well, the design wins, they have combination of both. They have the design wins with the biggest Android OEMs, which is not saying much at this point in time. But, it’s -- we’ve got all the -- basically the top 4, 5 players in the Android ecosystem. And they are in all the kind of early volume application. So, that’s -- and everyone is pretty much purely on the merits of their technology. Now, that said, it’s Android ecosystem, it’s not iOS because as you know, Apple does their own. And it’s primarily driven by time-of-flight applications. So, that said as time-of-flight proliferates and gets adopted into various other applications, we feel it presents us with a good opportunity to go further.

Got it. That make sense. And then, switching over to the North American market weakness, I’ll ask my question on that space as well. You kind of -- you hinted at the procurement cycles for certain adoption demand reaching kind of a conclusion of their cycles. If I had to dig in and guess, I would say the DOCSIS 3.0. But maybe just kind of curious, because it seems like in the past you guys described DOCSIS as ramping and getting good traction with G.fast on the horizon. So just kind of curious if that G.fast opportunity kind of past you guys or if it did indeed get concluded as well?

First of all on DOCSIS 3.1, the big deployment took place in North America, or at least big procurement took place in North America over the past 12 months. And I believe we’ve taken the lion share of the -- all the opportunities. And now, I would say, our customers are kind of approaching the end, or the lower end of their procurement cycle. That said, the cable, the next wave, while smaller wave, will be in Europe. Now, the G.fast is -- has been perennially delayed and postponed in North America. It’s not that it has past us by, I don’t think that anybody got any spend. And the expectations that telcos would match the cable guys with the spend on DSL side with the gigabit to the home, thus far have largely not materialized with a few exceptions of a smaller operators. The biggest players are still kind of kicking the can down the road. Where we are seeing G.fast picking up and happening it’s a really in Europe. But as I said, Europe is a much smaller market for both cable, as well as G.fast than North America would be. So, I think, it still may happen, but it will probably at a much smaller volumes than many of our customers were initially anticipating. And I think some of the telco companies are now thinking perhaps using 5G to do the kind of final couple of hundred yards into the home versus the copper. So, it still hasn’t fully shaken out yet. So, that’s the status of G.fast. It’s pretty much dormant and delayed.

Just if I can just add some color on North America versus rest of the world performance in NSE, just so that you’ll appreciate the diversification that we have driven in the last couple of years. In fact, outside of North America actually grew to double digits, just to give you guys some color. And so, to Oleg’s earlier point, we continue to see spend, good demand and good execution across the board, both in North America as well as outside of North America. But, the demand is particularly good outside of North America.

And in fact, I think, I’m very pleased with our team’s efforts in Europe, Latin America and Asia where we’ve taken a significant share from our competition in the last two years. And we have a very strong momentum going into the next calendar year.

Your next question comes from John Marchetti with Stifel. Your line is open.

Maybe just following up a little bit on that G.fast comment. Oleg, you mentioned before, obviously, fiber-to-the-home and those fiber deployments as being sort of one of the four key pillars going forward. Just trying to sort of reconcile that as a real leg of growth. If you think maybe, at least in North America, you might see some of this bypassed, if you will, for 5G deployments and some things like that. Is the rest of world enough with fiber-to-the-home type of deployment to make up for that? I’m just trying to reconcile the fiber deployments as one of the key trends with some of the comments you just made on G.fast?

Sure. So, I mean, let’s talk about fiber growth. I call it fiber everywhere. And we consciously change the fiber-to-the-home to fiber everywhere. Because fiber-to-the-home is a big deal indeed everywhere else in the world, right. In North America, it’s really more of a function of dense urban areas, like say, New York, Boston where you run fiber into the building. What really is in kind of most of North America is you run the fiber to the optical node within the last couple of hundred yards of home and then you run G.fast or sometimes fiber all the way to the building, maybe the new production. So, what we are seeing is in this fiber is being pushed regardless whether the customers are deploying or not deploying G.fast. They’re pushing fiber ever closer to the home, because it reduces their maintenance of the copper plant. In everywhere else in Europe, I mean in Europe and Asia, fiber is in indeed running over to the home. But, we are also more excited about other things. We are seeing now people are making fun of cable guys. I mean, I don’t call them cable anymore; they’re fiber guys now. They’re no longer cable. I mean if you really look at cable service providers, they’re pretty much fiber network operators who are becoming more and more fiber network operators there than cable clicks, is really now the last couple of hundred yards as they run into the home. And they are pushing fiber all the way into the neighborhood. And that’s where we’re seeing a lot of fiber opportunities, in the near-term, it is really selling to cable service providers. And now when we talk also about the wireless, I mean we’re now talking about fiber being pushed all the way down to the antenna, all the way to the antenna tower, to the base station. So, I mean this is now a really -- that’s where see a lot of fiber interest from both telcos as well cable companies.

Right. So, more pushing fiber deeper in the network, not so much fiber-to-the-home as you used to sort of comment about it?

Well, yes, in Europe it’s truly fiber-to-the-home. In America, I would say, it’s more to the building in a big urban areas. But, it still in the suburbs is just economically not feasible for most of them to push fiber all the way to the building.

And then, if I can just ask on OSP for a minute. You had obviously a little bit more strength than you expected in the banknote side and in the anti-counterfeiting side. Just trying to think about that as we move forward here. Were those -- did you get a couple of programs that you weren’t sure were coming in relative to your expectations, were the ones you got a little bit larger than you expected? And how do we think about that potentially then dropping off in the second half of the fiscal year?

Clearly, we get forecast from our customers. But our modus operandi is always to take a more conservative judgment to it. We don’t take the number that customer gives us and run with it. We always know that having enough cards [ph] in your bag from a lot of these customer forecast. It’s always -- it usually never as good as they predict. And you got to be smart about planning your capacity and linearizing the demand. So, in our case, we’ve taken a prudent, I’d say conservative look at the forecast and said, hey, if it materializes with customers want, we will be able to with some over time and upside to meet the upside. But, when we plan our capacity, we plan our costs, we plan for some judge forecast. So, what happened in this case, some more -- I mean, probably more of a customer forecast materialized rather than failed to materialize. And we got some upsize. It’s not a big upsize but it’s nevertheless an upside. And we could easily absorb it all within our current operating budget. And that obviously provide a bigger operating leverage to the bottom line. So, we never plan for the peak. We always plan for kind of the RMS value of the customer forecast.

Plan conservatively, execute aggressive.

That’s exactly right. The worst thing you can do is you plan for the peak and then end up holding the bag.

Your next question comes from Meta Marshall with Morgan Stanley. Your line is open.

I just wanted to ask on the NSE operating margins. Just to the extent of which kind of that is just better operations versus some synergies [ph] being realized. And then, maybe as a second point, I know you talked about 5G strength. Is there any particular geography in which you’re kind of seeing more surprising early interest than you would have expected or is that kind of widespread? Thanks.

So, I’ll take the first question here, Meta. Thanks for the question. So, in terms of operating margins, there are two things here. One is definitely the leverage that we have by adding just the AvComm and the Wireless business in the model. We have not added a lot of corporate overhead here. We are leveraging the corporate OpEx to deliver the additional revenue. So, there’s a natural leverage there. Number two is we continue to manage our expenses in a core NSE business. We knew that at the end of the day we have a cyclical business and we have to manage expenses very tight, and that’s what we continue to do it. So, for example, if North American service provider starts spending, it should be a very good operating leverage for the model, and good amount of operating profit should drop through. In terms of synergies for AvComm and Wireless, we’re still in the early stages. We did see some cost synergies as we continue to execute on the integration, and that was also baked into this model. But again that’s in fact ahead of us.

And I’ll take a question on a 5G. So, I would kind of characterize it maybe as three buckets. The first one is the NEMs, that’s by far the biggest, that’s the equipment manufacturers, that’s your major European and Asian base station or a 5G equipment providers. They are the biggest spending group at this time. They ramp production and testing of their products prior to their delivery to the service providers. The second bucket is the service providers. And I would say, the second biggest point is, it’s really about Asia and it’s really about Japan. I’d say Japan is by far the most aggressive. In fact, if you want to know what’s going to happen and not happen, and what works and doesn’t work in 5G, I would very closely watch Japan, because they truly are the early adopter and most aggressive customer in terms of testing all the potential values of 5G. And I would say, the third bucket would be the kind of European and North American operators, who are just kind of putting their foot in the testing 5G and kind of playing with it. And it’s really more of a science experiment and just kind of getting the initial learnings. So, I would say in that order, it’s by far the NEMs are first, followed by Japanese service providers, followed by the service providers everywhere else in the world.

The last question comes from Samik Chatterjee with JP Morgan. Your line is open.

This is actually Bharat Daryani [ph] on for Samik. So, my question is on 3D Sensing. One of the players in the 3D Sensing market recently highlighted being close to a design win for world-facing 3D Sensing application. So, what is your take on the adoption of 3D sensing on the world-facing side? How would you size that opportunity? And also in terms of timeline. Is second half of next calendar year a realistic timeline to look at? Thanks.

So, when people say world-facing that usually means time-of-flight technology. And there is a lot of different players playing. We are -- there is number of Android players doing it; there is rumors that iOS is also doing it. So, I mean we’re involved in pretty much every design that’s out there. I mean, I don’t know I think we probably now world-facing, we have all of the business, but we have much -- big chunk of the opportunities are in the bag for us with our filter technology. But now with the acquisition of RPC, one of the key elements in the technology chain on the world-facing camera is a diffuser. And RPC is leader in the technology in the diffuser that provides the lowest lost and highest eye safety available in the market. And through them, we are also now extremely well-positioned in the world-facing cameras on the laser side of the equation, not only on the camera side of the equation.

Thanks for that. And just quick follow-up on the data center product. In 4Q fiscal ‘18 and in the first quarter as well you highlighted data center products have grew by double-digit percentage. So, how should think about that going through 2019? And we’ve also been hearing some comments around moderation in spending by the hyperscalers. So, I would like to know your thoughts on any possible impact from that. Thanks.

So I’m not going to provide a guidance for the full year on data center products. But just directionally, that business should continue to grow. Again, depending on the market condition, whether it’s a single-digit growth or double-digit growth, we had a good growth in the last 3 or 4 years. And that is a result of two things. One is, we started off at a lower base. And so, it was easier compare. And secondly, I think we have a team in place and product strategy et cetera that’s all starting to work and come together. Having said that, going into fiscal year ‘19, the business unit as such should continue to grow and -- depending on the market demand.

And we’re pretty happy with our performance. I mean, your question specifically regarding hyperscale data centers. Frankly, for us, they’re non-event. They do for the most part their own technology development. So, they’re not really the customer base we are addressing. Most of our customer base in the data center are the enterprise customers and customers managing their own networks. Now, we do provide for also customers who do use hyperscale data centers, we provide them solution to monitor the performance of the data -- the hyperscale data center operator. So, just kind of idea of keeping them on to make sure that they are fulfilling their obligations or their service agreements -- service level agreements.

This concludes the Q&A portion of the call. I’d now like to turn it back over to Bill Ong.

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