Viavi Solutions Inc.

Good afternoon, everyone, and welcome to VRB Solutions' fourth quarter and full year 2024 earnings call. My name is Vibhuti Nair, Head of Investor Relations for VRB Solutions. And with me on today's call is Oleg Hykin, 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. The IBE 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 4.30 p.m. Pacific time this evening. Now, I would like to turn the call over to Elad.

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 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 8 cents at the high end of our guidance range of 6 to 8 cents and was up 2 cents sequentially. On a year-over-year basis, EPS was down 2 cents. 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 NEMS. Operating margin for the full year was 11.5%, down 410 basis points from fiscal year 2023. And full year EPS was 33 cents, down 22 cents 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 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 NEMS. 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. NSC'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. NSC'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 to $69 million, and was up 6.2% on a year-over-year basis as a result of strengths 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 NEMS. 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 5 cents and 7 cents. We expect NSE revenue to be approximately $164 million plus or minus $4 million with a break-even 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?

Thank you, Ilan. The IV and 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. NSC revenue declined 8% on year-over-year basis, driven by the softer demand from service providers and wireless NAMs. We believe that decline in NSC 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 remain largely at the maintenance levels. due to the absence of major network build-outs and upgrades by Tier 1 service providers, particularly in North America. That said, the investment in data center fiber internetworking by Tier 2 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 NSC 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 lab and production. Mill 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 AIOps products, and expected 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 in wireless and wireless NEMs leading to overall weaker NE and seasonally weaker SE revenue offset by continued strength and fiber level production and mail error 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 VIAVE 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 VIAVE 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.

We're ready for the Q&A. Emma? Thank you. We ask today that you limit yourself to one question and one follow-up. Thank you. Your first question comes from the line of Ruben Roy with Stiefel. Your line is open.

Thank you. Hi, everybody. Oleg, thanks for the detail around how you're thinking about sort of the near-term environment and then the sort of first half of next calendar year. I guess, can you drill in a little bit on

um you know sort of how you're thinking about inventory levels at your customers um i guess by field instruments and then also lab instruments and then i added just one or two quick follow-ups thank you sure i i mean there's really no inventory um to speak of i mean all of our deliveries for field instruments to our customers are just in time and it's mainly um coincides with whenever they are doing um any kind of major um, uh, expansion project or a technology upgrade or things like that. Um, there's also, obviously when I say we see our revenue at the maintenance level, you know, there is this constant turn that big chunk of our quarterly revenue is just terms. And it 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 internet working 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 you know i don't know to what extent they have equipment inventories uh for you know uh networking gear but i imagine that is also uh winding down and um you know uh clearly as they start talking about the um resuming their expansion and technology upgrade uh that is what we view as a positive news for us on the um 11 production uh that is also pretty uh for um 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 compute is 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're 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.

Yeah, very helpful. Again, you hit my follow up on the 1.6 part of that side. So thanks for that. I guess then I'll shift over to just a quick follow up for Elon on the restructuring. Elon, you talked about the OPEX savings through the fiscal year. Maybe you can put a finer point on sort of how you're thinking about that between R&D and projects 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.

Sure. So thanks for the question. And obviously, as I mentioned earlier in the prepared remarks, most of it would be a reduction of the overall operating expenses. We don't see any of our, you know, major 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, you know, in terms of development will be impacted. And also, you know, 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.

Got it. Thank you.

Thank you. Your next question comes from the line of Ryan Coots with Needham. Your line is open.

Great. Thanks for the question. Certainly appreciate your comments about 5G. That doesn't sound like it's coming back around anytime soon. I 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 connectivity and bandwidth from the service providers on a wholesale basis?

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 pick a vendor who lays fiber and they lease those fibers from them. And what's a little difference is, you know, when a service provider lays a fiber, there's a lot of dark fibers, 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 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 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. 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 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.

Thank you for that, Oleg. And just following up on another big segment, 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, I assume you're seeing some pushouts in fiber and bead and these sort of things that would be driving the fiber access industry. Any comments around broadband?

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 smoother shipment over the multiple quarters. And I think part of it is because uh since the fiber uh to the home players have slowed down or stopped their deployment i think the pressure is a bit uh less however you know i saw comments you know and and at&t does appear to be serious about resuming uh their aggressive push fiber to the home next calendar year um i expect the competitive pressure on cable to accelerate and we will probably see more aggressive spend by the 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 I, 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 hibernate hibernation mode where they continue to do kind of advanced research, but not much in terms of the accelerating new products to market.

That makes a lot of sense. Thank you. And just one last quick comment on 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 will be driving the step down in inventory in-house?

Well, I think, you know, as we all know, during the supply chain shortage, you had to agree to a lot of product, like kind of NCNR, 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, we've been, you know, bringing inventory more in line with our kind of current run rate demand.

Perfect.

We haven't been buying much new stuff. Let's put it that way.

Yeah, 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.

That's right. Yep. Great stuff. Thank you. That's all I've got.

Thank you.

Your next question comes from the line of Mehdi Hosseini with SIG. Your line is open.

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 weak and just carry through and have a follow-up?

Well, you know the actually actually I say as difference from the prior quarters and I mean what we are seeing is the 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 consolation. 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 NSC. 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 um the way it makes me feel a little better is they actually showing up uh whereas before they would get pushed out or get canceled so i think the the booking environment while the revenue may be lower the booking environment is now more predictable and more robust, so we can plan better our quarter.

Great. And then if I just double click on OSP, should I see the MX sensor, what is being reflected in the guides for the September quarter? Would that show any year-over-year growth?

You're talking which segment? The... 3D sensing or anti-counterfeiting?

3D sensing.

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 growth is not enough to offset the ASP erosion that just went into effect for the next year. And, of course, it's still very much driven by a single customer, where we have a very high level of penetration of product. So it's very much driven by their demand and volumes. One thing we're also noticing there that is positive, uh, the demand is now being a little bit better linearized, uh, 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, uh, 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 3D sensing. It's still very small volumes, just a handful of platforms. But if this becomes a major trend and adoption, this will be actually a big positive for us in 3D sensing. And there's also, you know, rumors that, you know, Samsung may be trying to make another go at it. But after having so many years of full start, I will hold off on that one as the outlook. Sure.

And maybe I will let you know it's about $2.5 million year over year for, you know, for the first quarter. So roughly 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.

Sure. Just for proof of modeling, the implied midpoint of your guide implies about a 9% sequential growth in OSP. Is that true? driven by both 3D sensing and counterfeit?

Well, I think the 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 yes, you know you probably would be in the closer to an $80 million range. between the two of them but of course it's uh both segments are doing better demand-wise um volume-wise uh than um in the prior year okay well thank you and and you know when the anti 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.

Got it. Thank you.

Your next question comes from the line of Michael Genovese with Rosenblatt. Your line is open.

Great, thanks. I just have one question, which is, Oleg, you've spoken a lot about how AI and data center investment can improve or help field test 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.

well sure i think uh i think all of that is goodness actually those are all positive things i mean to be fair i mean lumen um to give them credit even when they were really uh beaten down in the last 12 months they've actually been you know when i talk about the tier twos being more aggressive um i think lumen has been one of the um more proactive and more uh innovative companies in that space in terms of how what technology they deploy and how they roll out their value proposition and i mean uh we like uh lumen because they actually uh listen to a lot of good innovative ideas in there and they're one of the you know more innovative players in terms of implementing things that truly differentiate them from the your round of the mill fiber operators so I'm not going to say any more on that, but Lumen, they didn't just start it. They've been doing it for the past year and a half, even when they were beaten down into the pulp. They continued with the innovation.

I guess you did touch on this a bit earlier, but any more color or comment, prediction on this AI investment creating more... whether it's optical or fiber, you know, whether it's so 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 do that.

So, yes, because so what I was talking about is the, and particularly 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 mixed 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 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're 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're doing it is the time between lighting up fiber and lighting up the next fiber. The time is much, much shorter and they see there as 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 would look for their metro and. core network. And I view it as a positive for us because that basically means much more frequent changes and need for a much faster responsiveness.

Thanks. I appreciate the call.

Your next question comes from the line of Mita Marshall with Morgan Stanley. Your line is open.

Hi, this is Karanju Vikar on Formida. So first question, just on the NSC side, I know you're sort of expecting a conservative spending environment throughout the calendar year. I guess as you look into the first half of next year, where you expect some uptake, 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 European and U.S. 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 I expect the recovery there to play out.

When you said service, what function? Do you mean like a NE, NSE, or?

No, no, just like the recovery being a step function or sort of more gradual.

Oh, step function. Got it, got it. I think it's, you know, so look at it. So there's the basic things like field instruments. I think that's being a, I would say not a big step, but like lots of little steps because they're 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. And 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 a deployment, it sends 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 uh that everybody needs to start responding so uh it generally um just as when they stop spending everybody else stops spending when they start spending um 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 um where i see a a greater acceleration is really the fiber lab and production and we do think 1.6 terabits will be a big driver in the first half of next calendar year okay and um in terms of the clearly as north america starts to recover i mean europe follows pretty quickly uh but the good news is europe never really did not really get down as much as uh 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 it has been pretty solid all along.

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.

You're talking about our internal inventories, right? Not the inventories of the service providers. Which inventories are you talking about?

Like the OSP side inventories. OSP, yes.

So as I mentioned earlier, the 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 uh less of the restocking or anything like that okay that's helpful thank you sure thank you your next question comes from the line of tim savageo with northland capital your line is open hey good afternoon um

Couple 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, there's some negatives in the currency business, but what it sounds like, maybe not. Did I get that right?

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's 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. I get that. I get that relationship.

Yeah, I get that relative to last year. I was just talking sequential, but I think we're talking about the same thing. And a similar question on NSE coming down sequentially. It looks like that could be some seasonality that you see typically there, but is there any particular product or end markets driving that sequential decline in NSE for Q125? Yeah.

I think it's 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.

Okay, thanks. And then back on the kind of AI data center side, and I don't know if you break it out or look at it this way, but I think it'd be interesting to get a sense for within the NE segment, what sort of revenue level can you attach to data center overall or fiber-driven data center, whether that's you know, 800 gig test going to 1.6 in lab and production. You can 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, you know, if you had to take a swing at it, would you say, you know, data centers as a prospects of getting up toward, you know, 10% of your any business over time, or is it there now? Or, some sort of order of magnitude?

You know, I'm not going to get into this thing because, I mean, any number I give you will ultimately be a number anyhow. So, I mean, 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 center, right? Whereas when we went from 400 to 800, it was primarily driven by carriers and NAMS supplying carriers. So I think, you know, I don't really try to supply 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 a service providers ended up supplying data centers. When the service providers start spending, you know, you can't really, cause it's a multi-use technology. So we, 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, um, Um, in terms of the build out of the networks, uh, it is still the, uh, service providers, uh, fiber, but it's a tier two service providers who are providing those fiber interconnect between all the data centers, rather than the big players, like say AT&T or Verizon. So, I mean, 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, it's a multi-use, so we don't really. sweat trying to figure out what's the unmarked demand.

Okay, I understand. Let me take one last desperate attempt at that question and say, Art, if you were to replace 800 gig and replace data center in my question or AI data center with 800 gig, it 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.

I have the numbers, but now you're asking me to go into this 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 calendar year we're going to have 1.6 terabits. I mean those things are it's just like sediment chart there keeps you know one goes down and the other one goes back up and there is a substitution. I don't think I'm going to go into that level of detail.

Fair enough. Thanks.

Your next question comes from the line of Mehdi Hosseini with SIG. Your line is open.

Yes, thank you. A couple of housekeeping items. Given the fact that the $25 million of annualized cost savings is going to materialize the second fiscal year 25. Should I keep the OPEX kind of flabby from here? And the implied OPEX for the September is 120. And I'm just wondering how should I model that for the rest of the fiscal year?

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.

Okay. And what about the fiscal year tax rate?

So, you know, we got it for about $8 million. Then, you know, for the remainder of the year, it will depend on the jurisdictional kind of mix. Obviously, 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 higher than normal effective tax rate. But that's kind of the thinking.

Yeah, 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.

Okay. Got it. Thank you, guys. Thank you.

This concludes our Q&A portion of the call. I turn it back to Vibhuti for final comments. Thank you, Emma. This concludes our earnings call for today. Thank you for joining everyone. Have a good afternoon.