Viavi Solutions Inc. (NASDAQ:VIAV), a provider of network test, monitoring, and assurance solutions, has reported its earnings for the fourth quarter and full year of 2024. The company's net revenue for the quarter was $252 million, which aligns with its guidance and represents a 2.4% increase sequentially but a 4.4% decrease year-over-year.
The full fiscal year revenue was $1 billion, down 9.6% compared to the previous year. Viavi's operating margin for the quarter was 10.9%, exceeding the midpoint of its guidance, and earnings per share (EPS) reached $0.08, at the high end of the guidance range.
The company has also initiated a restructuring plan aiming for annualized cost savings of approximately $25 million by the end of fiscal 2025. Looking ahead to the first quarter of fiscal 2025, Viavi anticipates revenue in the range of $235 million to $245 million.
Key Takeaways
- Q4 net revenue was $252 million, meeting the company's guidance.
- Full year revenue reached $1 billion, a decrease of 9.6% year-over-year.
- Operating margin for Q4 was reported at 10.9%, with an EPS of $0.08.
- Restructuring and workforce reduction plan initiated to save $25 million annually by fiscal 2025.
- Q1 fiscal 2025 revenue is projected to be between $235 million and $245 million.
Company Outlook
- Viavi expects a conservative spending environment to persist throughout calendar '24, with a gradual demand recovery in the first half of calendar '25.
- OSP segment growth is anticipated to continue in the September quarter due to seasonally stronger demand for 3D sensing products.
- Fiscal '25 OSP demand is projected to be similar to fiscal '24 levels.
Bearish Highlights
- Year-over-year revenue decline in both the Network Enablement (NE) and Network and Service Enablement (NSE) segments.
- Overall revenue for the full fiscal year decreased by 9.6%.
Bullish Highlights
- Optical Security and Performance (OSP) segment revenue increased by 6.2% year-over-year.
- Operating margins for OSP exceeded guidance, with an operating margin of 34.8%.
Misses
- NSE revenue for Q4 was at the lower end of guidance and fell 7.9% year-over-year.
- NE revenue decreased by 9.7% compared to the previous year.
Q&A Highlights
- CEO Oleg Khaykin discussed the impact of data centers on the demand for fiber bandwidth and the potential recovery in the NE segment.
- The company is cautious about providing specific revenue breakdowns for data centers due to the multi-use nature of the technology.
- Annualized cost savings of $25 million are expected to materialize in the second half of fiscal '25, with OpEx remaining flat.
- Fiscal year tax rate will depend on the jurisdictional mix, with North American recovery likely to lower the effective tax rate.
Viavi Solutions Inc. has faced a challenging market environment but remains focused on strategic restructuring and cost-saving measures. The company's CEO, Oleg Khaykin, has highlighted the deployment of 5G technology and the recovery in demand for anti-counterfeiting and 3D sensing products as key factors that will influence Viavi's future performance. With a conservative approach to the spending environment and anticipation of gradual demand recovery, Viavi is positioning itself to navigate through the current market conditions while preparing for growth opportunities in the upcoming fiscal year.
InvestingPro Insights
Viavi Solutions Inc. (VIAV) has navigated a mixed financial landscape over the last fiscal year, as indicated by the company's reported revenues and earnings. To provide a clearer picture of Viavi's financial health and future prospects, insights from InvestingPro can be particularly enlightening.
InvestingPro Data reveals a market capitalization of approximately $1.64 billion, reflecting the company's current valuation in the market. Despite a challenging year with a revenue decline of 14.08% over the last twelve months as of Q3 2024, Viavi maintains a gross profit margin of 58.59%, which suggests that the company is still able to retain a significant portion of its revenue as gross profit.
An InvestingPro Tip highlights that Viavi's net income is expected to grow this year, which could signal a turnaround from the previous period's performance. This is an essential factor for investors considering the future earnings potential of the company. Additionally, analysts predict that the company will be profitable this year, which, if accurate, could provide a positive outlook for Viavi's financial trajectory.
On the valuation front, the company's P/E ratio stands at -61.47, with an adjusted P/E ratio for the last twelve months as of Q3 2024 at -108.28. These figures indicate that investors have high expectations for future earnings growth, despite the company not being profitable over the last twelve months.
It's worth noting that Viavi does not pay a dividend to shareholders, which could be a consideration for income-focused investors. However, for those interested in capital growth, the anticipated improvement in net income could be a more relevant factor.
For a more comprehensive analysis and additional insights, there are 6 more InvestingPro Tips available for Viavi Solutions Inc. at https://www.investing.com/pro/VIAV. These tips could provide investors with a deeper understanding of the company's financial health and help inform investment decisions.
Full transcript - Viavi Solutions Inc (VIAV) Q4 2024:
Operator: Hello, everyone. My name is Emma. Welcome to the Viavi Solutions Fourth Quarter and Full Year 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. I will now turn the conference over to Vibhuti Nayar, Viavi Solutions, Head of Investor Relations. Please go ahead.
Vibhuti Nayar: Thank you, Emma. Good afternoon, everyone, and welcome to Viavi Solutions fourth quarter and full year 2024 earnings call. My name is Vibhuti Nayar, Head of Investor Relations for Viavi Solutions. And with me on today's call is Oleg Khaykin, our President and CEO; and Ilan Daskal, our 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 and estimations. We encourage you to review our most recent annual report and SEC filings, particularly the risk factors described in those filings. The forward-looking statements, including the guidance that 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 discussed on this call, 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, as well as our supplemental earnings slides, which include historical financial tables, are available on Viavi's website at www.investor.viavisolutions.com. Finally, we are recording today's call, and we will make the recording available on our website by 04:30 P.M. Pacific Time this evening. Now, I would like to turn the call over to Ilan.
Ilan Daskal: Thank you, Vibhuti. Good afternoon, everyone. And now I would like to review the results of the fourth quarter of fiscal year 2024. Net revenue for the quarter was $252 million, which was at the midpoint of our guidance range of $246 million to $258 million. Revenue was up sequentially by 2.4%, and on a year-over-year basis was down 4.4%. Operating margin for the fourth quarter was 10.9%, which was above the midpoint of our guidance range of 9.5% to 11.8%. Operating margin increased 160 basis points from the prior quarter and on a year-over-year basis was down 80 basis points. EPS at $0.08 at the high end of our guidance range of $0.06 to $0.08 and was up $0.02 sequentially. On a year-over-year basis, EPS was down $0.02. For the full fiscal year, revenue was $1 billion, down 9.6% on a year-over-year basis, primarily due to conservative spend by service providers and NAMs. Operating margin for the full year was 11.5%, down 410 basis points from fiscal year 2023 and full year EPS was $0.33, down $0.22 from the prior year, primarily due to lower year-over-year revenue. Moving on to our fourth fiscal quarter results by business segment. NSE revenue for the quarter came in at $182.2 million, which is at the lower end of our guidance range of $179 million to $189 million. And on a year-over-year basis, NSE revenue was down 7.9% for the quarter. NE revenue for the fourth quarter was $158.5 million, which is a 9.7% year-over-year decline as a result of continued conservative spend by service providers and NAMs. SE revenue was $23.7 million and up 5.8% from the same period last year, partially supported by revenue that was pushed out from Q3. NSE gross margin for the quarter was 62.1%, which is flat on a year-over-year basis. NE gross margin was 61.3%, which is a decline of 40 basis points as compared to the same period last year. SE gross margin was 67.5%, which is an increase of 190 basis points from the same period last year and was driven by product mix. NSE's operating margin for the fourth quarter was 1.8%, which is an improvement of 360 basis points sequentially and 400 basis points lower than the same period last year. NSE's operating margin was at the low end of our guidance range of 1.4% to 3.6% due to lower revenue. OSP revenue for the quarter came in at $69.8 million, which was above the high end of our guidance range of $67 million to $69 million and was up 6.2% on a year-over-year basis as a result of strength across all products. OSP gross margin was 53%, which is an increase of 640 basis points from the same period last year and was primarily driven by higher revenue, favorable product mix and production ramp at our new manufacturing facility in Chandler. OSP's operating margin was 34.8%, which is up 50 basis points sequentially and 530 basis points increase on a year-over-year basis as a result of the higher gross margin fall through. OSP's operating margin exceeded the high end of our guidance range of 31% to 34%. Moving on to the balance sheet and cash flow. Total cash and short-term investments at the end of Q4 was $496.2 million compared to $486.1 million at the end of the third fiscal quarter of 2024. Cash flow from operating activities for the fourth quarter was $26.2 million versus $23.5 million in the same period last year. During the quarter, we purchased 1.3 million shares of our stock for about $10 million. For the full year, we purchased 2.3 million shares for about $20 million. We have approximately $215 million remaining under our current authorized share repurchase program. The fully diluted share count for the quarter was 224.2 million shares, down from 224.6 million shares in the prior quarter and versus 225.5 million shares in our guidance for the fourth quarter. CapEx for the quarter was $3.8 million, compared to $7.4 million in the same period last year when we were completing the construction of our new facility in Chandler. In June 2024, we initiated a restructuring and workforce reduction plan to improve operational efficiencies and better align with the current business needs. We expect approximately 6% of our global workforce to be impacted and estimate to incur approximately $15 million of restructuring charges in connection with this plan. As a result of this initiative, we anticipate to achieve by the end of fiscal 2025 an annualized cost savings run rate of approximately $25 million, which will mainly benefit our operating expenses. Moving on to our guidance. We expect that the first half of fiscal 2025 will continue to experience a conservative spend environment by service providers and NAMs. That said, we believe that we are nearing the bottom of the down cycle and we expect a gradual recovery in demand in the second half of this fiscal year. Given the lingering softness, we are guiding for the first fiscal quarter of 2025, revenue in the range of $235 million and $245 million. Operating margin is expected to be 10.8% plus or minus 90 basis points and EPS to be between $0.05 and $0.07. We expect NSE revenue to be approximately $164 million plus or minus $4 million with a breakeven operating margin plus or minus 100 basis points. OSP revenue is expected to be approximately $76 million plus or minus $1 million with an operating margin of 34% plus or minus 100 basis points. Our tax expenses for the first fiscal quarter are expected to be about $8 million plus or minus $500,000 as a result of jurisdictional mix. We expect other income and expenses to reflect a net expense of approximately $3.5 million and the share count is expected to be about 224.2 million shares. With that, I will turn the call over to Oleg. Oleg?
Oleg Khaykin: Thank you, Ilan. Viavi end-market spend environment continues to be conservative, particularly the North American service providers. Despite these headwinds, our revenue came in at the midpoint of our guidance with stronger OSP revenue partially offsetting weaker NSE demand. Our EPS was at the higher end of our guidance range. Starting with NSE. The fiscal fourth quarter NSE revenue came in at the lower end of our guidance range. NSE revenue declined 8% on year-over-year basis, driven by the softer demand from service providers and wireless NAMs. We believe that decline in NSE demand is bottoming out and we should start to see a recovery in the second half of the fiscal year. A bit more color on that. The first is field instruments demand remained largely at the maintenance levels due to the absence of major network build outs and upgrades by tier one service providers, particularly in North America. That said, the investment in data center fiber internetworking by tier two operators, together with recent comments by major service providers regarding their fiber plans, leads us to expect a pickup in field instruments demand in the second half of fiscal 2025. Our wireless demand continues to be impacted by sharply reduced R&D and production CapEx spend by major wireless NAMs who have reduced investment in response to significant cutbacks in 5G deployment by wireless operators. One positive recent trend we are seeing is the emergence of many new customers pursuing ORAN development. However, their cumulative spend is still relatively small. Other parts of NSE are faring much better. Fiber Lab and production demand was slightly up. We expect the upcoming transition to 1.6 terabits and ramp of PCI Express 6.0 to drive recovery and growth during the fiscal '25 for Fiber 11 production. Mil/Aero business continues to be a bright spot, seeing year-over-year growth in revenue driven by strong customer demand for communication, avionics and positioning, navigation and timing products. We expect this business segment to enjoy strong demand throughout fiscal '25. SE segment grew year-on-year helped by enterprise orders that were pushed out from Q3. We are seeing a lot of interest in our AI OPS products and expect it to be a growth driver for fiscal '25 and beyond. As we look at Q1 fiscal '25, we expect a seasonally weaker demand driven by similar dynamics as in Q4, continued demand weakness from the service providers and wireless NAMs, leading to overall weaker NE and seasonally weaker SE revenue, offset by continued strength in Fiber 11 production and Mil/Aero business. Looking ahead at fiscal '25 for NSE, we expect the conservative spend environment to persist for the remainder of calendar '24 and a gradual demand recovery in the first half of calendar '25. Now, turning to OSP. The fiscal fourth quarter OSP grew on a year-over-year basis, mainly driven by higher demand for anti-counterfeiting and 3D sensing products. Overall, OSP results exceeded the higher end of our guidance range. Looking ahead, we expect OSP to be sequentially up in the September quarter, mostly driven by seasonally stronger demand for 3D sensing products. Overall, we expect fiscal '25 OSP demand to be similar to fiscal '24. To summarize, the fiscal '24 was a challenging year for Viavi and the industry. While we expect the soft market environment to persist for the remainder of calendar '24, we anticipate the start of gradual recovery in first half of calendar '25. I would like to thank my Viavi team for managing through this challenging environment and express my appreciation to our employees, customers and shareholders for their support. With that, I'll turn it over to Vibhuti.
Vibhuti Nayar: We're ready for the Q&A, Emma.
Operator: Thank you. [Operator Instructions] Thank you. Your first question comes from the line of Ruben Roy with Stifel. Your line is open.
Ruben Roy: Thank you. Hi, everybody. Oleg, thanks for the detail around how you're thinking about sort of the near-term environment and then the, you know, sort of first half of next calendar year, I guess, can you drill in a little bit on, you know, sort of how you're thinking about inventory levels at your customers, I guess, by field instruments and then also lab instruments? And then, I had just one or two quick follow ups. Thank you.
Oleg Khaykin: Sure. I mean, there's really no inventory to speak of. I mean, all of our deliveries for field instruments to our customers are just in time and it mainly coincides with whenever they are doing any kind of major expansion project or a technology upgrade or things like that. There's also, obviously, when I say we see our revenue at the maintenance level, you know, there is this constant churn, that big chunk of our quarterly revenue is just churns. And it's just basically low of large numbers, big install base, you know, the batteries die, equipment gets damaged and they periodically replace whatever needs to be replaced. And, you know, it's been a fairly consistent number for the past several quarters, which, you know, makes me feel a bit better because it just shows you that the first thing customers come back to is they start replacing what's been damaged. And as they start looking at the major new projects, and we've heard obviously from AT&T, but also we're seeing, you know, tier two players like -- there was Lumen recently, had a call, and there's others. There's a lot of interest for developing fiber internetworking between all those hyperscale data centers and these are the players that are actually running projects today, and they're placing orders. And you know, clearly, so from that perspective, I don't know to what extent they have equipment inventories for, you know, networking gear, but I imagine that is also winding down. And you know, clearly, as they start talking about resuming their expansion and technology upgrade, that is what we view as a positive news for us. On the 11 production, that is also pretty much [Technical Difficulty] for new equipment. And it usually comes in when they are developing next generation product. They start placing orders in the fiber area and the high speed compute area. You know, high speed computers driving PCI Express 6.0 and the, you know, upcoming 1.6 terabits. I mean the budgets are open and the CapEx is flowing and we are seeing, you know, purely as soon as the equipment is available, they want it. So, in that respect, we feel pretty good. But there's also, probably further away in the second half of the fiscal year or first half of the calendar '25, the 1.6 terabits is flowing into the module manufacturing. And we're seeing a lot of interest from the major AI players to drive upgrades in their contract manufacturing factories to be able to deploy 1.6 terabit modules and products. And for the first time, it's really the data centers that are driving the transition to the higher speeds rather than service providers. When we saw 400-gig, 800-gig, they were driven by equipment vendors to service providers. This time, it's very much the data centers that are driving the transition to the higher speed, you know, speeds of the products, and that's why we're feeling much more bullish on our fiber lab and production equipment. So, that's kind of, you know, more color on those two areas.
Ruben Roy: Yes, very helpful, Oleg, and you hit my follow up on the 1.6 terabit side, so thank you for that. I guess then I'll shift over to just a quick follow up for Ilan on the restructuring. Ilan, you talked about, you know, the OpEx savings through the fiscal year. Maybe you can put a finer point on, you know, sort of how you're thinking about that, you know, between, you know, R&D and projects, you know, versus sales and marketing, and how we should kind of think about modeling that through the year in terms of the savings, you know, as it hits the model? Thank you.
Ilan Daskal: Sure. So, thanks for the question. And obviously, as I mentioned earlier in the prepared remarks, most of it will be a reduction of the overall operating expenses. We don't see any of our major, you know, R&D project being impacted or delayed due to this initiative. So, these are, you know, across the board of the operating expenses, but none of, you know, the initiatives that we drive in terms of the development will be impacted. And also, as I mentioned earlier, the full realization, you know, will be by the end of the year. So, it's more of a 2026 kind of net spend there.
Ruben Roy: Got it. Thank you.
Ilan Daskal: Thank you.
Operator: Your next question comes from the line of Ryan Koontz with Needham. Your line is open.
Ryan Koontz: Great. Thanks for the question. Certainly appreciate your comments about 5G. That doesn't sound like it's coming back around anytime soon. Wanted to double-click a little bit on your comment around data center interconnect for the fiber players. Are you seeing demand there from the data center operators who are leasing dark fiber or are they leasing actual, you know, connectivity and bandwidth from the service providers on a wholesale basis?
Oleg Khaykin: So, I mean, it varies across different data centers operators, but I mean, for the biggest ones, they basically build data centers and then they take a vendor who lays fiber and they lease those fibers from them. And what's the little difference is, you know, when a service provider lays a fiber, there's a lot of dark fiber. And they generally don't connect the dark fiber until they need it, maybe years later. What we're seeing with data center, they're laying fiber. And they also initially started doing the same thing, just lay the fiber, connect a few strands, and, you know, I'm going to lease them, and then when I need it, you turn it on. What they are finding is that they need to turn on additional fibers and additional bandwidth comes a lot faster than everybody thought. And more importantly, it becomes also much more sensitive, the quality of performance of that fiber, right? In terms of the latency, you know, the speeds and things like that. So, they're actually putting pretty strict service level agreements as to what performance that fiber needs to deliver. And that actually plays very much to our strength because what they are realizing is traditional built fiber is fairly unreliable and you cannot turn it on as you need it, right? So, we are now working with the data center operators and with the people who provision fiber to bridge this gap to make sure as the fiber gets deployed, you actually characterize it and you know exactly what you're getting for. And then, you can monitor it throughout the life. And when you need to turn on the next wavelength, it happens very quickly, which usually means you actually connect everything and you only by just turning on it becomes a software switch rather than rolling a truck and starting to connect the fibers and then finding out that things may not work or things like that. So we're seeing the level of evolution and forethought in deploying fiber network, truly changing the traditional paradigm that the service provider has been doing. And I guess it's the tier two players who are responding more, more proactively to the demand of data center operators, and they're the ones who are winning the business, and I think they view it as their new business model going forward.
Ryan Koontz: Fascinating. Thank you for that, Oleg. And just following up on another big segment. You're within the broadband sector, I know that's been pretty depressed. You've talked about previously some pushouts in cable. Are you seeing any signs of life in cable? And obviously, we're seeing, I assume, you're seeing some pushouts in fiber and these sort of things that would be driving the fiber access industry. Any comments around broadband?
Oleg Khaykin: Sure, on cable. So, the cable upgrade is underway, but unlike in the previous things where they would just buy everything in one quarter and just kind of roll it out, they're doing it over multiple quarters, which leads you to a smaller bump up in demand within the quarter. But on the other hand, it provides for a smoother shipment over the multiple quarters. And I think part of it is because since the fiber to the home players have slowed down or stopped their deployment, I think the pressure is a bit less. However, you know, I saw comments, you know, and AT&T does appear to be serious about resuming their aggressive push fiber to the home next calendar year. I expect the competitive pressure on cable to accelerate and we will probably see more aggressive spend by them as well. And you know, the other area that cable was concerned about is the fixed wireless. And so far, it has been, you know, has not been a factor in terms of competitive pressure on them to do anything. And as you pointed out earlier, I mean, as I said as well, 5G deployment I think will be the last piece that's going to start recovering. And, you know, I think earliest will be the end of our fiscal year or kind of middle of next year because I'm not seeing any kind of meaningful movement there. And in fact, all the major NAMs have really kind of gone into hibernation mode where they continue to do kind of advanced research, but not much in terms of the accelerating new products to market.
Ryan Koontz: That makes a lot of sense. Thank you. And just one last quick comment on kind of the operations side. Like your inventory on your balance sheet was down quite a bit. Any comments around that? Are you able to kind of sell what you forecasted and what would be driving the step down in inventory in house?
Oleg Khaykin: Well, I think, you know, the -- as we all know, during the supply chain shortage, you had to agree to a lot of product like kind of NC, non-cancelable, non-refundable. And of course, a lot of semi companies have kind of shoved it all down our throat. So, we built up some components inventory. We have been pretty much working diligently all that inventory down. But also, you know, our anti-counterfeiting manufacturing, we are holding quite a bit of raw materials. And now, as the anti-counterfeiting demand is starting to come back, we've been consuming the raw material, as well as the semi-finished goods and, you know, bringing inventory more in line with our kind of current run rate demand.
Ryan Koontz: Perfect.
Oleg Khaykin: We haven't been buying much new stuff, let's put it that way.
Ryan Koontz: Yes.
Ilan Daskal: It's more to categorize it as a more normalized level now. I mean and it will now, you know, fluctuate, you know, relative more to revenue as opposed to kind of the prior cycle.
Oleg Khaykin: That's right.
Ryan Koontz: Yes. Great stuff. Thank you. That's all I've got.
Ilan Daskal: Thank you.
Operator: Your next question comes from the line of Mehdi Hosseini with SIG. Your line is open.
Mehdi Hosseini: Yes, thanks for taking my question. The first one has to do, Oleg, can you tell us how the quarter progressed, especially in terms of booking? Was there significant erosion throughout different business units, service providers, CSPs and so forth? Or did it start? We can just carry through. And I have a follow-up.
Oleg Khaykin: Well, you know, actually, I'd say, difference from the prior quarters, I mean, what we are seeing is the forecast that we kind of assume early in the quarter largely holds. So, we've been seeing fewer decommits or cancellations. The only big cancellation we had in, and it was not really cancellation, our major customer reduced their order by a third, which was on the wireless NAMs. Had that order came through, actually, we would have beaten the high end of our guidance on NSE and it was really a major wireless NAM decided to take a, you know, less product because of slowness in the market. We don't generally track kind of rely on book to ship ratios because, you know, the way our market works, demand works. The June quarter and December quarter are usually stronger, and we get a lot of bookings within the quarter. And the September and March are generally weaker, and we get, you know, a lot less bookings within those quarters. So, I look more like, the way I gauge the relative health of the funnel is that what kind of bookings we enter the quarter and expectations and how well do they hold up or, you know, there's a left to go. You know, we forecast the bookings and then we track how many of the bookings show up as they're supposed to show up. And the way it makes me feel a little better is they actually showing up.
Mehdi Hosseini: Okay.
Oleg Khaykin: Whereas before they would get pushed out or get canceled. So, I think, the booking environment, while the revenue may be lower, the booking environment is now more predictable and more robust. So we can plan better a quarter.
Mehdi Hosseini: Yes. Great. And then, if I just double click on OSP, should I assume that image sensor, what is being reflected in the guides for the September quarter, would that show any year-over-year growth?
Oleg Khaykin: You are talking which segment? The 3D sensing or anti-counter?
Mehdi Hosseini: 3D sensing.
Oleg Khaykin: 3D sensing. Well, it's actually lower in revenue year-on-year because we have now going to the new ASP schedule. So, there's, you know, pricing roadmap, so the ASP is lower, the volumes are slightly the same, maybe a little higher. But the problem is the volume. Volume growth is not enough to offset the ASP erosion that we just went in effect for the next year.
Mehdi Hosseini: Got it.
Oleg Khaykin: So, but one, you know and of course, it's still very much driven by a single customer which where we have a very high level of penetration of products. So, it's very much driven by their demand and volumes. One thing we are also noticing there that is positive, the demand is now being a little bit better linearized throughout the year. And I think it's mainly driven by contract manufacturers who don't want to be heavily overstressed in the September, December quarter, and then having a lot less demand in the March and June. But still, I think September, December quarters is a much higher volume. And one other development, I think we are now seeing, if we call them signs of life or interesting new trends, mainly the China Android players, are toying with a 3D sensing. It's still very small volumes, just a handful of platforms, but if this becomes a major trend and adoption, this would be actually a big positive for us in 3D sensing. And there's also, you know, rumors that, you know, Samsung (KS:005930) may be trying to make another go at it. But after having so many years of full starts, I will hold off on that one as the outlook.
Mehdi Hosseini: Sure.
Ilan Daskal: And maybe I will let you know, it's about two and a half, sorry, maybe I just said it's about $2.5 million year-over-year for, you know, for the first quarter. So, it actually could be another dynamic of pricing, et cetera, that Oleg mentioned, but also, you know, we'll have to monitor the supply chain that Oleg just discussed, you know, and maybe it's kind of more linearized and, you know, over the course of two, three quarters, it will kind of offset itself.
Mehdi Hosseini: Sure. Just for proof of modelling, the implied midpoint of your guide implies about a 9% sequential growth in OSP. Is that driven by both 3D sensing and counterfeit?
Oleg Khaykin: Well, I think the anti-counterfeiting business is starting to rebound. I mean, a lot of the inventories have been consumed. So we have a -- I mean, there's an uptick in there, but also 3D sensing has a higher numbers, but you have to discount it for some of the ASP erosion. So, you know, you probably would be in closer to an $80 million range, between the two of them, but of course, it's -- both segments are doing better demand wise, volume wise than in the prior year.
Mehdi Hosseini: Okay, thank you.
Oleg Khaykin: And you know when the anti-counterfeiting -- for us it's very important for anti-counterfeiting to start recovering, because that's where, you know, a lot of big iron is sitting in terms of the manufacturing assets. So, clearly, driving a better absorption on a stronger -- anti-counterfeiting demand has a bigger impact on the operating margin of the OSP business unit.
Mehdi Hosseini: Got it. Thank you.
Operator: Your next question comes from the line of Michael Genovese with Rosenblatt. Your line is open.
Michael Genovese: Great. Thanks. I just have one question, which is, you know, Oleg, you've spoken a lot about how AI and data center investment, you know, can improve or help field tests over time. I just wanted to kind of more directly connect the dot on how it could help field test. And so, you know, is the Lumen announcement about their investment in AI, is that key to the second half recovery or, you know, other things like that? Do we expect other service providers to announce something similar? I guess, there's a few questions in there, but if you could kind of run with those thoughts, I would appreciate it.
Oleg Khaykin: Well, sure. I think all of that is goodness, actually, those are all positive things. I mean, to be fair, I mean, Lumen, to give them credit, even when they were really beaten down in the last 12 months, they've actually been, you know, when I talk about a Tier 2 is being more aggressive, I think Lumen has been one of the more proactive and more innovative companies in that space in terms of how, what technology they deploy and how they roll out their value proposition. And I mean we like Lumen because they actually listen to a lot of good innovative ideas and they're one of the more innovative players in terms of implementing things that truly differentiate them from the, you know, run of the mill fiber operators. So, I'm not going to say any more than that. But Lumen, you know, they didn't just start it. They've been doing it for the past year and year and a half. Even when they were beaten down into the pulp, they continued with the innovation.
Michael Genovese: I guess just any more maybe I guess you did touch on this a bit earlier, but any more color or comments, prediction on, you know, this AI investment, you know, creating more, whether it's optical or fiber, you know, whether it's optical kind of core or fiber access demand? So, that's why I zeroed in on Lumen there, because it seems like their AI investment will.
Oleg Khaykin: Yes, because, so when I was talking about is the -- in particular, if you look at 1.6 terabits, I mean, traditionally, you know, driving from 10-gig to 100-gig, 100-gig to 400-gig, 400-gig maybe to 800-gig. Traditionally, the drive to adoption of the higher speeds was driven by NAMs supplying into service providers. 800-gig was kind of like mix between service providers and data centers. 1.6 terabits is being driven all by data centers. And what we are seeing, the rate of fiber bandwidth consumption, you know, whereas let's say, a service provider will lay a fiber and then maybe every couple of years they would turn on another fiber strand, and they generally only connect one and then they roll the trucks to connect the others as they need it. What we are seeing with data centers is a more strands being enabled from get go. They just may be sitting dark, but they actually pay for connecting all the strands, so then as they need it, they turn them up quicker. And the reason they are doing it is the time between lighting up fiber and lighting up the next fiber, the time is much, much shorter, and they see their traffic grow much faster than the service provider. So, in that respect, I see them looking at the fiber interconnecting between their data centers are completely different than the service provider who would look for their metro and core network. And I view it as a positive for us because that's basically means much more frequent changes and need for a much faster responsiveness.
Michael Genovese: Thank you. I appreciate the color.
Operator: Your next question comes from the line of Meta (NASDAQ:META) Marshall with Morgan Stanley (NYSE:MS). Your line is open.
Karan Juvekar: Hi. This is Karan Juvekar on for Meta. So, first question, just on the NSE side, I know you're sort of expecting a conservative spend environment throughout the calendar year. I guess, as you look into the first half of next year, where you expect some uptick, I guess, are you expecting sort of a step function recovery in revenues or a more gradual recovery? And I guess, just parsing out between Europe, European and US carriers, just any trends to be mindful in terms of how you're thinking about a recovery? I know North America is the most challenged today and how you expect the recovery there to play out?
Oleg Khaykin: When you said service, what function, do you mean like NE, NSE or?
Karan Juvekar: No, no, just like the recovery being a step function or sort of more gradual.
Oleg Khaykin: A step function. Got it. Got it. I think it's you know -- so look at this. There's the basic things like field instruments. I think that's being I would say not a big step, but like lots of little step because those are driven by projects. So I think it's a gradual recovery. And I would say, you know amazingly Europe has not been that bad. Yes, they slowed down, but nowhere near as bad as North America. North America has been crickets basically for the last two years. So, I think in terms of a step function, clearly, if AT&T will continue to proceed with their plans to accelerate and resume their fiber to the home, in a way, it will be a bit of a step function for the fiber instruments. And usually if somebody as big as AT&T restarts deployment, it sends a, you know, a shock through the industry, which means the cable guys are going to have to accelerate, the wireless may have to do something more because then it creates a nice competitive whirlwind that everybody needs to start responding. So, it generally, just as when they stop spending, everybody else stops spending. When they start spending, others are going to follow usually. So but you know, I don't want to create expectation of a step function, I'd rather go with a gradual recovery in the base demand. Where I see a greater acceleration is really the Fiber 11 production and we do think 1.6 terabits will be a big driver in the first half of next calendar year. Okay? And in terms of the -- clearly as North America starts to recover, I mean, Europe follows pretty quickly. But the good news is Europe never really -- did not really get down as much as North America. So I expect the recovery in Europe to be a bit more mild. But what's also really interesting is we're seeing a lot more aggressive plans in Latin America, which is, you think always will be the last ones, but they are actually in many ways been playing catch up, and we're seeing some of the more interesting opportunities, especially for our AI OPS and some of the other products coming out of central and South America as well. And NATO has been pretty solid all along.
Karan Juvekar: Okay. That's very helpful. And then I know you mentioned earlier that sort of on the OSP side inventories are sort of depleted, but I just wanted to get a little bit more color on trends you're seeing there. What sort of drove the upside? Is it run inventory builds or new prints and just expectations on that moving forward? That would be helpful. Thank you.
Oleg Khaykin: You're talking about our internal inventories, right? Not the inventories of the service providers. Which inventories are you talking about?
Karan Juvekar: Like the OSP side inventory. So, yes, you're right.
Oleg Khaykin: OSP, yes. So, as I mentioned earlier, we are seeing some recovery in the anti-counterfeiting demand, and it's really driven, I mean, a lot of the inventory that was built up in the channel during COVID because they also order a lot of material and products to keep on hand. Finally, a lot of it has been wound down and consumed. So, the orders that are coming back is really more in line with the demand and consumption and less of the restocking or anything like that.
Karan Juvekar: Okay, that's helpful. Thank you.
Oleg Khaykin: Sure. Thank you.
Operator: Your next question comes from the line of Tim Savageaux with Northland Capital. Your line is open.
Tim Savageaux: Hey, good afternoon. Couple of questions. First on the guide, I think, if I heard you right, because you would expect to see kind of a double-digit million sort of sequential increase in OSP. And I guess you're saying you would have seen something closer to that were it not for the ASPs and that comment about, you know, $80 million or initially looking at it you think maybe something -- so there's some negatives in the currency business, but it sounds like maybe not. Did I get that right?
Oleg Khaykin: No, there's no negatives in the currency business. I think the people are just talking about 3D sensing demand. I mean, we have a new pricing in place. And clearly, with the ASP erosion, it taken down some of the revenue because the volumes are not that much more than they were a year ago. So that was what I was talking about, you know, we would have been closer.
Tim Savageaux: Yes, I get that relative to last year. I was just talking sequential but I think we're talking about the same thing. In a similar question on NSE coming down sequentially. It looks like that, you know, could be some seasonality that you see typically there. But are there any particular product or end markets driving that sequential decline in NSE for Q1 '25?
Oleg Khaykin: I think it's really more seasonality. I mean, just weaker demand. But I mean, clearly, we normally would have gotten some orders more, I think, I'd say wireless NAMs is probably one area where the demand is lower. And I would say just general, you know, the service provider field instrumentation just, you know, demand is weaker.
Tim Savageaux: Okay, thanks. And then back on kind of the AI data center side. And I don't know if you break it out or look at it this way, but I think it would be interesting to get a sense for within the NE segment, you know, what sort of revenue level can you attach to, you know, data center overall or fiber driven data center, whether that's, you know, 800-gig tests going to 1.6 terabits in lab and production. Assume, you know, a good bit of that's probably data center driven. And you've mentioned the potential for more field instrumentation driven by that. But if you had to take a swing at it, would you say, you know, data center has the prospects of getting up toward, you know, 10% of your NE business over time? Or is it there now? Or some sort of order of magnitude?
Oleg Khaykin: You know, I'm not going to get into this thing because, I mean, any number I give you will ultimately be us number anyhow. So, I mean there's, I don't think there's really any good research or understanding because, I mean, one thing I can tell you is the 1.6 terabits is next year will be driven all by data centers, right? Whereas when we went from 400-gig to 800-gig, it was primarily driven by carriers and NAMs supplying carriers. So, I think, you know, I don't really try to splice data center or carry node. I mean, fundamentally it's all driven by technology. But I would just say that 1.6 terabits will be driven by data center demand. I mean, if you want to ascribe that revenue to that, I mean, maybe eventually, we -- as things stabilize, we can start doing segmentation on the end-market use, but usually the same line, just like for 800-gig, the line that was built originally for service providers ended up supplying data centers. When the service provider starts spinning, you know, you can't really, because it's a multi-use technology. So, we think of it more as to who will be the lead customer driving it. And, you know, for the first time, I think data centers will drive the next technology node. And in terms of the build out of the networks, it is still the service providers fiber, but it's the Tier 2 service providers who are providing those fiber interconnect between all the data centers rather than the big players like say AT&T or Verizon (NYSE:VZ). So, I mean, whether it's data center today or they take some of that fiber and give it to, in the future, for 5G towers, I mean, it's a multi-use. So, we don't really sweat trying to figure out what's the end-market demand.
Tim Savageaux: Okay, I understand. Let me take one last desperate attempt at that question and say and if you were to replace 800-gig with replace data center in my question or AI data center with 800-gig, might be a little bit easier to give us a sense of the size of your 800-gig business relative to your overall test business in network, in any?
Oleg Khaykin: I have the numbers, but now you're asking me to go into the segment reporting that we don't report because, I mean, there is a -- at any given time, we have a 400-gig, 800-gig and now, later this calendar year, we're going to have 1.6 terabits. I mean, those things are just like sediment charts. They have skips. You know, one goes down, the other one goes back up and there is a substitution. So, I don't think I'm going to go into that level of detail.
Tim Savageaux: Fair enough. Thanks.
Operator: Your next question comes from the line of Mehdi Hosseini with SIG. Your line is open.
Mehdi Hosseini: Yes. Thank you. A couple of housekeeping items. Given the fact that the $25 million of annualized cost savings going to materialize second half of fiscal year '25, should I keep the OpEx kind of flattish from here? And the implied OpEx for the September is 120. So, I'm just wondering, how should I model that for the rest of the fiscal year?
Ilan Daskal: Generally, yes. You know, there are several, you know, puts and takes. Obviously, some of it has to do with merit increase and variable employee costs. But generally, yes, you're right.
Mehdi Hosseini: Okay. And what about the fiscal year tax rate?
Ilan Daskal: So, you know, we guided for about $8 million. Then, you know, for the remainder of the year, it will depend on the jurisdictional kind of mix. Obviously, as you know, as long as the North American kind of region will recover, then obviously it lowers our effective tax rate. You can see that, you know, in the first quarter. It's still, you know, at $8 million, which is a higher than normal effective tax rate. But that's kind of the thinking.
Oleg Khaykin: Yes. I think you should look at the absolute dollar amount of taxes because they're really driven by statutory kind of things. And ironically the more money we make, the lower percentage in taxes we pay. Because in North America we have NOLs and a lot of other offsets that, you know, will effectively lower our tax rate.
Mehdi Hosseini: Okay. Got it. Thank you, guys.
Ilan Daskal: Thank you.
Operator: This concludes our Q&A portion of the call. I turn it back to Vibhuti for final comments.
Vibhuti Nayar: Thank you, Emma. This concludes our earnings call for today. Thank you for joining, everyone. Have a good afternoon.
Operator: You may now disconnect.
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