Viavi Solutions Inc.

Hello, everyone. My name is David. Welcome to the VIAVI Solutions fourth quarter and full fiscal year 2023 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'll now turn the conference over to Hank Dirksen, VIAVI Solutions CFO. Please begin.

Thank you, David, and welcome to VIAVI Solutions fourth quarter. 2023 Earnings Call. My name is Henk Derksen, BIAVI Solutions CFO. Also joining me on today's call is Oleg Hyken, our President and CEO. Please note that 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 guidance we provide during this call, are valid only as of today. The IRB 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 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 will make the recording available by 4.30 p.m. Pacific time this evening on our website. Let's start with our quarterly financial results. Fiscal Q4 revenue came in at $263.6 million, slightly ahead of the high end of our guidance range of $242 million to $262 million. up sequentially by 6.4% and down 21.4% on a year-over-year basis. Operating profit margin of 11.7% near the high end of our guidance range of 10 to 12.4% increased by 30 basis points from the prior quarter and decreased 9.6% from the prior year result of leverage on lower revenues. EPS at $0.10 ended above the high end of the guidance range of $0.07 to $0.09, up $0.02 sequentially, and down $0.14 year over year. The current share count was 223.6 million during the quarter, down from 231.3 million shares in the prior year. Cash flow from operations was $23.5 million for the fourth quarter versus $73.6 million in the prior year period. Fiscal 2023 was a challenging year for VIAVI. The full year revenues decreased from record levels of $1.3 billion in 2022 to $1.1 billion in fiscal 2023, down 14.4%, a result of an overall slowdown in service providers, network equipment manufacturer, and semiconductor spend. NSE full-year fiscal revenue came in at $801.2 million, down 15.6% year-over-year from $949.1 million. OSP also experienced contraction as central banks digested currency inventory builds during COVID. reducing revenues from $343.3 million in 2022 to $304.9 million in fiscal 2023, or down 11.2%. Mainly because of low revenues, we have this full year 2023 operating profit margin at 15.6%, declined 6.6% from 22.2% in 2022. Within our NSE segment, operating profit margins declined 8% from 15.6% in 2022 to 7.6% in 2023. Within our OSP segment, operating profit margins reduced from 40.5% in 2022 to 36.5% in 2023, which also includes the impact of startup costs related to our new facility in Chandler. Full year 2023 EPS at $0.55 decreased 42.1% or $0.40 from record EPS levels of $0.95 in 2022. Despite headwinds, cash flow from operations for the full year continued to be solid as we generated $114.1 million in fiscal 2023 and $63 million in free cash flow. compared to 105.6 million pre-cash flow in fiscal 2022. For further improving our balance sheet by retiring the remaining 2023 convertible notes and partly exchanging the 2024 notes comparable terms, we continue to execute on our capital allocation strategy. and deployed $83.9 million towards our share repurchase program and $67.3 million towards acquisitions. This average share count during the year reduced from 231.3 million to 223.6 million shares. As a result, the change in short-term outlook early in fiscal 2023, we announced a restructuring program in February of this year. that cumulated into a reduction of approximately 5% of the labor force with a non-recurring expense of $12 million that is expected to result in net operating expense savings of $28 million on an annual basis. Finalization of this plan is below our original expected non-recurring expense of $15 million. and better than our originally anticipated savings commitment of $25 million. Reduced levels of operating expenses in combination with an improved capital structure will allow us to benefit from more meaningful operating and financial leverage as revenue recovers. Now moving to our reported Q4 results by business segment, starting with NSE. NSE revenue came in at $197.9 million, exceeded our expectations of $179 million to $195 million, albeit down 19.6% year-over-year. NSE revenue of $173.3 million improved 15.8% sequentially and declined 22% year-over-year. at $24.6 million, increased 2.5% from last year. NSE gross profit margin at 62.1% decreased by 280 basis points year over year. Within NSE and E gross profit margins, at 61.5% decreased 270 basis points from the prior year, primarily due to leverage on lower volume in combination with product mix. SE gross profit margins at 66.3% decreased 500 basis points from last year, primarily due to unfavorable product mix. NSEs operating profit margin at 5.8% was near the high end of our guidance range of 3 to 6%. Now turning to OSP. Four-quarter revenue at $65.7 million ended up slightly ahead of the midpoint of our guidance range of $63 million to $67 million, and down 26.3% year-over-year. Gross profit margin at 46.6% decreased 9.3% year-over-year, slightly lower than expected, mainly a result of leverage on lower revenue. Now that the Chandler startup costs are behind us, and as revenue returns, we expect the gross profit margins to normalize to historical levels. The operating profit margin of 29.5% came in slightly below the guidance range of 30 to 31% and declined 9.1% year over year. Now turning to the balance sheet. The ending balance of our total cash and short-term investments was $525.6 million. down 39.3 million compared to the prior year during the fourth quarter the company repaid the remaining 68.1 million principal value of 2023 convertible notes as well as a 0.6 million semi-annual interest payment for a total of 68.7 million dollars At the end of the fourth quarter, 2023, we're left with an outstanding balance of $96.4 million on the 2024 convertible notes that we are planning to pay down with cash on the balance sheet during the upcoming quarters. Our balance sheet is strong. We improved the quality of our debt by reducing our convertible notes exposure, adding long-term fixed-rate debt, and as a result, extended maturities at a lower cost. As mentioned earlier, operating cash flow for the quarter was $23.2 million, an increase of $5.4 million from the prior quarter and a decrease of $50.4 million year-over-year. In addition, we invested $7.4 million in capital expenditures during the quarter compared to $10.8 million in the prior quarter, prior year quarter. Fiscal Q4, and in addition to retiring convertible notes, as mentioned before, we repurchased 1 million shares of common stock for $10 million under the current share repurchase program. On a full year basis, we repurchased 7.3 million shares of common stock for a total of $83.9 million and returned over 100% of free cash flow generation in fiscal 2023 to our common shareholders. As you may recall, in September, we announced that the board authorized a new common stock repurchase program for up to 300 million. As of the beginning of fiscal 2024, we have 234 million available under this program. Now onto our guidance. We expect the first fiscal quarter 2024 revenue to be in the range of 240 to $260 million. Operating profit margins is expected to be 13.5% plus or minus 70 basis points, an anticipated improvement of 180 basis points sequentially, and EPS to be between 9 cents and 11 cents. We expect NSE revenue to be approximately $175 million plus or minus 8 million with an operating profit margin of 4% plus or minus 100 basis points. OSP revenue is expected to be approximately $75 million, plus or minus 2 million, with an operating profit margin of 35.5% plus or minus 50 basis points. Our tax expense is expected to be around $8 million, or 26% for the first quarter, a result of jurisdictional mix. We expect On income expenses to reflect a net expense of approximately $4 million, the share count is expected to be around 224 million shares. With that, I will turn the call over to Oleg.

Thank you, Henk. During 2023 fiscal fourth quarter, we saw initial signs of stabilization and gradual recovery. Despite the slowdown in overall service provider spend, some service providers have begun to free up funds for network maintenance and optimization, which benefits the NFC business segment. As a result, our fiscal fourth quarter revenue came in slightly above the higher end of our guidance, and we expect the stabilization and recovery momentum to continue throughout the fiscal year. NFC revenue declined year on year, but grew sequentially, driven primarily by our NE business segments. NE was up double-digit percentage sequentially, reflecting a rebound in demand from cable service providers upgrading their networks. Demand for level production test equipment from wireless and fiber NAMs and semiconductor companies saw gradual recovery from the lows in the March quarter. Ofcom business continued to perform well, driven by robust demand from the avionics and mil-air customers. Our SE business segment grew 2.5% year-on-year, in line with our expectations. Now turning to OSP. The OSP demand environment continues to be challenging. That said, the fourth quarter revenue came in slightly better than expected, held by stronger demand for anti-counterfeiting products. 3D sensing revenue was impacted by seasonally lower demand for smartphones, and the supply chain transitioned to new form models. Fiscal 2023 was a very challenging year for Viavi. Early in the fiscal year, NSC demand experienced a rapid slowdown in orders from service providers. The slowdown pattern was broad-based across all customers and geographies. The slowdown in spend by service providers then spread to the network equipment manufacturers and semiconductor companies, further impacting demand for our NSC products. The OSP business unit started the fiscal year strong, but so demand for its two major products impacted by macroeconomic headwinds. The demand for anti-controverting products was impacted by the inventory corrections as governments dialed back fiscal stimulus, and 3D sensing was impacted by weaker demand for smartphones. Despite the disappointing year, VIAVI continued to invest in new technologies and applications, expanding into higher growth markets such as resilient P&T, and initiated and completed the restructuring program to reduce expenses. These initiatives, combined with our strong position in our traditional markets, are expected to result in strong operating and financial leverage as our revenue rebounds. In conclusion, I'd like to thank my VIAVI team for managing this challenging environment and express my appreciation to our customers and shareholders for their support. With that, I will now turn it back to Operator for Q&A.

Thank you. At this time, I'd like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. To allow everyone an opportunity, we ask that you please limit yourselves to one question and one follow-up. We'll pause for just a moment to compile the Q&A roster. We'll take our first question from Mehdi Hosini with Susquehanna. Your line's open.

Yes, thanks for taking my question. I just want to go back to your comment regarding service providers. To what extent do you have visibility? Are we reaching a point where your guide reflect a minimum investment? And then on the optical side, just curious to hear what you think with upcoming product cycle in the smartphone. How do you see that compared to the prior year upgrades?

So thank you, Mehdi. So the first one is, You know, let's put it this way. There are signs of life in multiple discussions with service providers. I mean, it took them about six months to put a hold and, you know, cancel backlog on a lot of CapEx. When we announced in October, remember, they can effectively zero us out within a month because it's mainly coming out of OpEx. But for a lot of big capital items, they have normally a six-month lead time that they cannot cancel. So, as of March quarter, pretty much all the big spend has been put under control and a lot of the backlog has been pushed out. And now, as they're stepping back, they're looking, okay, well, I still got to run my network. There's things accumulating and people are screaming for supplies. So, we're seeing more and more conversation around upgrading equipment and providing their, you know, network maintenance and optimization um, uh, folks with tools to, uh, manage the network. So I think, you know, if you ask me that question, let's say three, four months ago, it was all crickets, you know, there's silence, silence. And, um, uh, right now there's clearly some are more, um, dynamic and aggressive than the others. Like I say, cable guys are actually very, um, aggressive in, um, upgrading their networks. Uh, but also we're seeing, um, select mobile network and fiber network operators returning back and doing optimization and upgrade. So I think this momentum will continue to pick up through our fiscal year. Now, with respect to the 3G sensing, I'd say this coming year, I mean, it's kind of hard to predict the coming year. I mean, the market for our prime application is fairly saturated. I mean, we're now in both front and rear cameras. So really, the revenue is really driven more by total market demand. And I think what we are seeing is somewhat more sluggish smart for demand than we saw, let's say, a year ago. And I think in that respect, we're taking a more cautious outlook on the volumes that are going to be demanded this fiscal year.

Can I ask a follow-up question? Sure. Just looking into calendar year 24, I want to hear your opinion in terms of the catalyst. I personally don't see an urge to install equipment or upgrade equipment for 5G+. There is plenty of fiber underground. what else could happen with service provider with cable operators that could at least entice them for some technology upgrade? And tell me if I'm not thinking about this the right way.

Well, I think, you know, I tend to agree with you. But remember, we don't depend. Actually, our business is driven more by turning on what you already got and starting to putting it into exploitation, right? So in that respect, yes, there's plenty of fiber in the ground. There's plenty of equipment in the warehouse. But every time you turn on a circuit or you put it in production or put the equipment into exploitation, you do need field operations to do the work. And, you know, the maintenance of the network and things like that are an ongoing thing. And as you have bad weather or you have wear and tear, you constantly got to be doing something to your network. So in that respect, more money gets spent on OPEX to get more of what you got. That's actually very good for us. When somebody is building network, it's very good for us. What's not so good for us is when they are kind of in between. So I think service providers had to take the equipment deliveries they took. They probably now wish, they probably now have a bit access of the equipment, some of it sitting in a warehouse. But little by little, once you have it, you've got to put it into operation. And that's what's driving demand for our products. Now, the second element is competition. All it takes is your biggest competitor announcing they're going to be more aggressive than you are. Well, whether you want it or not, you're going to have to respond appropriately. And we are seeing, at least in the mobile space, it's a three-way proverbial Mexican standoff. And when you have more than two strong operators, there is a very strong tendency to cheat, try to do a little more. And of course, the other two are watching. I think as much as everybody in their logic says, hey, we're better off doing nothing if we all agree on it, it inevitably takes one person to try to pull a fast one and the rest respond accordingly. Now, in case of the, I think, cable operators, they're seeing it as a very good opportunity for them since I think many of them are healthier than telecom operators. I think they're taking an opportunity to upgrade the speeds on their network to be more competitive against the fiber and definitely try to avoid wireless broadband stealing their customers. So I think the competitive pressure is probably the single biggest thing that keeps

um a service provider spending money uh whether they want it or not okay great thanks for details thank you next we'll go to a tim savageo with northland capital your lines open hi good afternoon um a couple of questions here um you know first i'm guess i'm trying to reconcile your commentary

about, you know, stabilization and growth throughout the year with your Q1 guide for NSC, where you got it down a fair bit after a better-than-expected Q4. Anything, you know, going on in there that would reconcile those two seemingly conflicting comments? And, you know, or you see, you know, seasonality in the first part of your you know, fiscal year or what have you, and I'll follow up from there.

So, I mean, if you take the, I would say, last couple years out where during COVID there was a supply constraint, customers wanted to take product any time you could deliver it. So I think in that respect, the usual seasonality that we have in NSC, whereas you have March and September are the down quarters, and June and December are the stronger quarters. That was like for the last couple of years it almost became a non-event because whenever you had a product somebody wanted to take it. Now I see with the lead times collapsing and effectively you can place the usual order and take delivery within the same quarter. We see the ordering cadence is back to what traditionally was where the September And March quarters are generally the lower end of the demand range. And the June and December are the higher end of the demand range. So I think what we see is, you know, I'm aware it's all within, I would call, normal way of business. Clearly, a run rate is not as high as it was a year ago, but it's following the same kind of trend. fluctuations, but also I'm looking at the booking funnel and the opportunity funnel, and it is a hell of a lot healthier than I would say it was in the March quarter of this year where everything was just shut down. So the level of conversations, the engagements, negotiations that are going on, it leads to expectations that we're going to see continuous gradual recovery. The second element is the NAMs and semiconductor companies, after retrenching in the first half of the calendar year, we are seeing the competitive pressure and new product introduction driving continuous quarter-on-quarter increase in the lab spend. And that's obviously the second element of our NSE business that was kind of down. It was about a quarter lagging the service providers when it went down, and I think it's finally starting to come back, also lagging about by a quarter the service providers. And then the last but not the least, I think on our service enablement business, the software business, we feel pretty good about the momentum and the opportunity funnel that we are seeing for our new solutions. And in that respect, I mean, even though those things take longer lead times to go from booking into revenue, it's nevertheless a positive momentum.

Got it.

And the follow-up, I don't know if this is contributing to this improving funnel, either on the service provider side or NEM side, but what are you seeing around 800 gigs kind of high-speed connectivity either inside or outside the data center in terms of current trends for VIAVI?

So I think that is a very, so that's, you know, I remember we've been selling 800 gig into lab for quite a while. It's now moving to what I would call production, although still there's a lot of tests. There's a lot of fiber operators. I mean, there's both, actually. I mean, I'm not so sure how much there's an 800 gig right now happening in the data center, but we are seeing a lot of interest from the fiber operators to test and play with the 800 gig. gig to interconnect various data centers. I mean, right now it's in a 400 gig as a norm, but there's early discussions and testing going on with the 800 gig. And some are talking about terabits. I don't know. A terabit is maybe a little too far out. But 800 gig is something that is on the drawing board. But right now, the name of the game is 400 gig within the network. That's what's shipping today. The 800 gig is really more around the, I would quote, even though it's been in the lab for a while with service providers. And it's really select service providers, not the mainstream. This is now entering what's called testing proof of concept stage. And those are usually also service providers that are very tight strapped for cash and liquidity. But when it comes to that, this is one area they want to spend the money because their idea is if they can directly interconnect hyperscale data centers without bypassing third parties, they feel they can grab some good business.

Thanks very much.

Sure.

Okay, next we'll go to Michael Genovese with Rosenblatt Securities. Your line's open.

Great, I think so. Oleg, I want to follow up on Tim's question. First of all, with 800G inside the data center in, for instance, AI clusters, I think we thought that there were design wins that you maybe spoke about mid-quarter. I mean, my understanding was maybe it's not driving the current business, but it's an interesting growth driver for the future. Are we understanding that correctly, or are we ahead of ourselves there?

Well, I mean, when we talk about design wins, it's usually a NAM that's selling equipment that they are using in the lab and in production to do both. One is produce the systems, and second, produce the modules. to those systems. But I don't think this is, at least this quarter, was that much of a demand in that respect. But we are seeing end market interest for that.

Okay. And I just, you know, I guess I want to follow up on Tim's other question and then ask my question. I just have one. But the follow-up would be, like, I just want to crystallize that I think what I heard is that any, the upside in any in the June quarter largely came from cable. And even though that the funnel of business opportunities is greatly improved versus six and nine months ago, any guide is sequentially down because of seasonality and not for any other reason. Is that generally right?

Yeah, that's pretty much right. And I would say the upside, I mean, came clearly cable, but we also had some major wireless NAMs doing their annual purchase. We have several major NAMs that, at various parts during the year, take significant deliveries.

Okay, and this is my question. I know you don't give guidance more than a quarter at a time, unless you're giving three-year CAGRs, but if 22 was a $1.3 billion in the 90s of non-GAAP cents, And then this last year was 1.1 and below 60. I'm just wondering, I mean, we've got the first quarter guide and it is what it is, but, you know, there's this sense that things should strengthen throughout the year. So, I mean, do you envision this year sort of looking – in between those two years or more like one or the other? If you could comment, any kind of thoughts.

Yeah, so the way I look at it, usually you have a year you start in strong and then it gets weak. Our fiscal year ends in June, right? So now if you take the opposite mirror image, like kind of the first half of the year, as it continues to recover, it's almost like you end up with the two mirror images of the same thing. So if you think about, you know, 2023 fiscal year was slightly about $1.1 billion. I mean, from our, you know, you know, purely, you know, you're right, we cannot see beyond one quarter, but as we have to operate a certain scenario, so we're taking a fairly conservative look. Let's say, hey, let's say this year will be demand-wise a mirror image of the prior year, so our exit velocity would be equal to the entry velocity of the prior fiscal year, but now we are doing it with a much lower operating cost structure, and a smaller outstanding share count. So then you overlay the operating and financial leverage onto it, right? And that shows you, okay, even at roughly flattish up top line, you're going to see a nice growth at the EPS level. So that's how we operationally thinking about upcoming fiscal 24. Great.

Thank you very much.

Helpful.

Next we'll go to Alex Henderson with Needham. Your line's open.

Great. A couple of just simple operational stuff. Has the benefit of the improved production out of Chandler, Arizona, now been fully feathered into the margins on OSP?

Yeah, sure. So Chandler is now running in production. So all the startup costs are behind it. The startup yields and optimization, it's all behind it. And now as the volume increases, all the unabsorbed expenses are being absorbed. So it's clearly, you know, whatever the gross margin drag we were getting ahead of time is now behind us.

So June to September in OSP and in that production facility is fairly stable on the margin side.

It's already steady state, yes.

Perfect. Second, the cost-cutting moves that you've done, those are fully in the June quarter?

They are partly in the June quarter. They will be fully in the September quarter. So the full quarter impact you will see in the September quarter. So we're planning with OPEX levels of, call it, $118 million, $120 million per quarter for the September quarter.

And that's the run rate going forward, obviously, with some seasonality to it?

Absolutely, with some seasonality to it, and as revenue recovers, there's some variable costs, but you should think of that as the run rate.

And on the OSP side, can you characterize whether we're on the... counterfeiting products at a point where we're at baseline or are we below baseline or how do we characterize that? Historically, you've talked about a baseline and then you'd have these spikes above it. You're talking about it being down from last year because of absorption, but wasn't it above normal and therefore we're kind of back to baseline here?

well i think the baseline has gone up over the years right so in terms of the uh when you're talking baseline you're talking about revenue not the cost right yeah so i'm talking about revenue so i think this year we we believe uh it's running below the baseline uh because of the you know the two it's a twofer effect on one hand the um fiscal stimulus has ended, a lot of countries are pulling back. But it's further reinforced that they are not only pulling back, they also have taken all the delivery of a lot of product in the past several years. So now they have to burn down all that inventory. So on one hand they are printing less, on the other hand it's taking, they have inventory that's taking them some time to consume. And we think we probably should be back in equilibrium by the end of this calendar year. And the second half, we should see a beginning of recovery in the anti-counterfeiting demand, which obviously will drive significant operating leverage for our speed business.

What do you think the quarterly baseline in the counterfeiting business is?

I think the base business today we are seeing running around $50 million, closer to $50 million from the normal about $55 million and kind of higher end about $60 million. So we said $55 million was the base. At the higher end, we get up to $60 million. Right now, I'd say this is kind of the lowest demand I've seen in a long time.

Okay. So baseline is around $55 million is the normal that you should get back to? once we get through this correction in that business.

Yeah, and as you can imagine, this is pretty much almost everything, with the exception of materials, drops to the bottom line, because it's a pure fixed-cost business.

And at that level, it's what type of operating margin? At 55?

Well, you've got to take combination of the baseline business and the anti-counterfeiting. So as I say, when both of them are firing in all cylinders, we get into the mid, what, 40s. When both of them are in the worst possible shape, you get into the low 40s.

Right. So the baseline on the counterfeiting excluding the 3D sensing is at the higher end of that range, right?

Yeah, we don't break it out, but I would say when you're kind of running steady state, you should be in the high 30s. Okay. For the whole business unit.

One more question. So it sounds like the strength in the June quarter came as a result of the seasonal uptake of cable, which is pretty clearly a very seasonal pattern around the summer period. they spend and deploy over the summer, and they tend to pull back into the colder weather. As we go into the fourth quarter, I would think that most telcos are under enormous pressure to deliver significantly improved cash flow. Certainly, AT&T has promised that they're going to deliver much improved cash flow in the back half. Are we at risk that we're Getting a little bit of improvement here over the course of the summer, driven primarily by cable, but at risk of a fourth quarter disappointment as a result of them pulling back into that seasonally critical fourth quarter for them on their cash flow.

Well, you know, I actually don't believe that. I mean, you're right about the cash flow and what they want to do. But remember, the 800-pound gorilla in their cash flow is the capex that they spend on equipment and construction. If they're going to do it, that's what they're pulling. And remember, they couldn't do it a year ago because they had six months of NC&R contracts, non-cancelable, non-refundable. So they had to go. So they initially shut down all the APEX expenses. And that's what got us here. Right now, if you think about what they spend on network maintenance, it's a pimple on the elephant's behind, relatively speaking, but it's giving them significant operational effectiveness just by keeping the network running. So I think the money pool from which we are drawing, even though it's not burning coal in their pocket, they are spending the money not at the same rate as it was a year ago, but this is one area that they are looking to spend to get more out of what they already have installed rather than adding to the capacity. So I think you're right on them buying new equipment and doing new construction, but what I do see them spending money is trying to get more bank for the buck they already spent. And that's what we benefit primarily from.

Okay, that makes good sense. I appreciate that. that differentiation. Just one last question if I could. When I look out into the back half of the year and the potential recovery in the first half of next year, the street's sitting at 2.5% kind of revenue growth, 0 to 5 if you want to do a band in 61 cents. And I know you don't want to guide, but Do you feel like those are reasonably attainable, or do you think that they're a little challenging, or do you think that they're easily beatable? Can you just give us some tone around it?

You know, I mean, it really depends on the first half of calendar, next calendar year, right? I mean, we don't have much visibility, but we do know that We think our lab and production part of the business is going to continue to recover. I mean, we are seeing R&D at SEMI and NEMS kind of getting back. I mean, there is a strong competitive angle to it. I mean, they cannot forever reduce their engineering spend. We do think the anti-counterfeiting business is going to continue to recover, especially in the second half of the year. And, you know, I'd say the, and we know Milero is actually pretty strong as well. So the only thing that I, that, you know, we have to wait and see as to how aggressive the service providers will do in the second half of the calendar year. So if they are conservative, then we are thinking you've got to be roughly flattish. If they decide to start getting back and spending a bit more money, then the growth projection could be a reason. Great. Thank you.

All right. Thank you. Thank you, Alex.

Thanks, Alex. Next we'll go to Mita Marshall with Morgan Stanley.

Great, thanks. Maybe I just wanted to spend a second on the SE business. You know, you guys have had a number of products that kind of can help drive revenue for your customers. And just wondering, you know, in this environment, are they less likely to adopt those? Or are you kind of seeing traction with those products that can kind of help with more revenue upside for customers? And then maybe just a second question. you know, obviously M&A in this space has been a little bit tough in the past, which is kind of more elevated valuation expectations. I would assume with a more challenged customer set right now, you know, that maybe people's expectations are a little bit more reasonable. So does it change how you kind of view the M&A landscape? Thanks.

Sure. So, you know, we're actually feeling pretty good about our SE business these days. You know, it's been a, I'd say, five, six years of restructuring. We've reduced spend significantly. And within the existing R&D, we had to retool the product architecture and more importantly, focus where we are going to invest going forward. And the area where we have a very strong product offering today is around the AI ops. which is kind of your network operations center automation, the artificial intelligence helping you with the preventive maintenance and things around that landscape. We are seeing pretty good traction, and we are winning some pretty, again, some very heavy hitters in the market, which gives me confidence confidence that, you know, this is not a one-off type opportunity. So we do feel that SC has every opportunity to become a gaining momentum through this year, which is, you know, finally, this is the year it's going to finally start contributing to the overall. And by now, we have pretty much flushed all the declining legacy business, which was roughly around $50 to $60 million in six, seven years ago, pretty much all of it has gone away and we've been replacing it. And from this point on, it's all kind of firing and pulling in the same direction. So in that respect, we feel our SE business on both on the enterprise and service providers side has some very exciting story to tell. And we think that they could achieve pretty good success in the coming years. On the M&A environment, It's quite interesting. I mean, clearly, there's only a handful of big transformational M&A opportunities, and we all know what those are. I mean, I think they're still fairly inactionable. But what we are seeing very interesting is the lack of liquidity. And all of a sudden, a lot of sizable software, mainly on the software side, companies that are complementary to our SE business, all of a sudden, We've seen the company where I just give you one example that we saw a year ago and we gave them a very respectable offer and they walked away laughing at us. They just got sold. for one-fourth of our offer a year ago at liquidation because they couldn't repay the debt they were carrying. So there is actually now a lot of very interesting technologies that you can pick up at the bargain basement of stock-ins. So it's purely becoming a make versus buy. And all of a sudden, you can pick up modules for your software offering below the cost of make. And this is what we are seeing right now, and we are obviously aggressively looking at these opportunities.

Perfect. Thanks so much. Sure. Next, we'll go to Ruben Roy with Stiefel. Your line's open.

Thank you. I just had a couple. Oleg, on the topic of improving conversations, how would you characterize that? Is that sort of broad-based across your customer base or is it relegated to sort of your larger customers and also geographically? Are you seeing that, again, broad-based geographically or is it sort of centered in any specific areas.

Yeah, I mean, I'd say, you know, customer conversation is actually fairly broad-based. It's not a one-off. I mean, clearly, there's more intense conversations with the companies like cable. Amazingly, also, the conversations are with the Tier 2 telecom providers. Mainly, many of them are private equity-funded, like fiber deployers and things like that. I mean, they were the first ones to kind of pull back, but they're also now coming back and, you know, looking what they're going to be doing. On the lab and production with the engineering organizations, I think after about two quarters of pulling back, they're back, you know, because they need to deliver their roadmap and products to their customers. So we're seeing that coming back. So I'd say between the engineering CapEx customers and the, I would say, cable and fiber service providers, the talk is much more intensive. The wireless, I think, is kind of quiet still. I think they're still digesting what they already got. But we do think the wireless is going to be coming back probably in the second half of the year.

Got it. Thank you for that detail. And just a quick follow-up, just a clarification on the lab spend. It sounded like you're starting to see a little bit of discussion or improvement in the and maybe even orders from semiconductor companies and some of the equipment companies. But then, you know, we are still lagging behind the field stuff. So I guess, are you expecting lab to be down again and then, you know, stabilize in the current quarter? Or has it already stabilized?

No, I think the bottom quarter for lab was the March quarter. And it had some recovery in June, and I expect it to continue to recover throughout the year.

Got it. Thank you, Oleg. Sure. That concludes today's question and answer session and today's call.

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