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Viavi Solutions Inc.
1/30/2025
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 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 BIAVI's website at www.investor.biavisolutions.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. With that, I would like to turn the call over to Ilan. Ilan?
Thank you, Vibhuti. Good afternoon, everyone. Now I would like to review the results of the second quarter of fiscal year 2025. Net revenue for the quarter was $270.8 million. which is above the high end of our guidance range of $255 to $265 million. Revenue was up 13.7% sequentially and on a year-over-year basis was up 6.4%. Operating margin for the second fiscal quarter was 14.9%, significantly above the high end of our guidance range of 11.4% to 13.4%. Operating margin increased 490 basis points from the prior quarter and on a year-over-year basis was up 170 basis points. EPS at 13 cents was also above the high end of our guidance range of 9 to 11 cents and was up 7 cents sequentially. On a year-over-year basis, EPS was up 2 cents. Moving on to our Q2 results by business segment. NSE revenue for the second fiscal quarter came in at $199.9 million, which was above the high end of our guidance range of $184 to $192 million. This was mainly driven by strong order pays from service providers and NEMs for field instruments, in addition to the recovery across many of our product segments. On a year-over-year basis, NSE revenue was up 11.3%. NE revenue for the quarter was $179 million, which is up 15.1% year-over-year as a result of strong demand by service providers and NEMs for both lab and field instruments. SE revenue was $20.9 million and declined 13.3% from the same period last year, driven mainly by enterprise customers' conservative spend. NSE gross margin for the quarter was 64.8%, which is 140 basis points higher on a year-over-year basis. NE gross margin was 64.5%, which is an increase of 200 basis points from the same period last year as a result of higher volume and product mix. SE gross margin was 67.5%, which is a decrease of 140 basis points from the same period last year due to lower revenue. NSE's operating margin for the quarter was 8.7%, which is a 510 basis points increase on a year-over-year basis, and came in significantly above our guidance range of 3.8% to 5.8%, driven by higher gross margin fall-through. OSP revenue for the second fiscal quarter came in at $70.9 million, which is slightly below the low end of our guidance range of $71 to $73 million. On a year-over-year basis, revenue was down 5.3%, primarily due to weaker demand for 3D sensing products. OSP growth margin was 50.6%, down 150 basis points from the same period last year, and was primarily driven by lower volume and product mix. OSP's operating margin was 32.4%, which is a decrease of 400 basis points on a year-over-year basis as a result of lower gross margin fall through. Moving on to the balance sheet and cash flow. Total cash and short-term investments at the end of Q2 was $512.8 million, compared to $497.9 million in the first quarter of fiscal 2025. Cash flow from operating activities for the quarter was $44.7 million versus $20.4 million in the same period last year. CapEx for the quarter was $8.2 million versus $5.8 million in the same period last year. During the quarter, we did not purchase any shares of our stock as we prioritized our capital allocation towards M&A with the acquisition of inertial labs. Fully diluted share count for the quarter was 224.8 million shares, up from 223.5 million shares in the prior year, and versus 224 million shares in our guidance for the second fiscal quarter. Moving on to our third fiscal quarter guidance. For NSC, we are expecting a stronger seasonality trend across most segments. For OSP, we expect softer demand for 3D sensing products. We anticipate demand for anti-counterfeiting products to start stabilizing as the end customers continue to work down their inventories. For the third fiscal quarter of 2025, we expect revenue in the range of 276 and $288 million. Operating margin is expected to be about 14% plus or minus 100 basis points and EPS to be between 10 cents and 13 cents. We expect NSE revenue to be approximately $207 million plus or minus $5 million with an operating margin of 7% plus or minus 100 basis points. Our revenue guidance for NSC includes a high single-digit million from inertial labs, which is in line with our previous communication of $50 million annual revenue run rate. OSP revenue is expected to be approximately $75 million, plus or minus $1 million, with an operating margin of 33% plus or minus 100 basis points. Our tax expenses for the third quarter are expected to be around $9 million plus or minus $500,000 as a result of jurisdictional mix. We expect other income and expenses to reflect a higher net expense of approximately $4.2 million as a result of lower interest on cash on hand used for the inertial labs transaction. Lastly, the share count is expected to be around 226.1 million shares. With that, I will turn the call over to Oleg. Oleg?
Thank you, Ilan. During the December quarter, our revenue in EPS came above the higher end of our guidance range. As we mentioned in prior call, many of NSC traditional end markets have stabilized and are showing signs of gradual recovery as we enter calendar 25. Now let's look at in more detail at each of our businesses, starting with NSE. NSE revenue in fiscal Q2 grew year over year, driven by recovery and growth across many of our product segments. We expect this momentum to continue through the remainder of fiscal 25. A bit more color on individual product segments. Fiber field saw solid demand from service providers and NAMPs, particularly in fiber monitoring systems. in support of fiber network build out. We expect this momentum to continue. As we mentioned in our prior call, we're also seeing signs of stabilization and green shoots in our wireless business, driven mostly by the resumption of 5G deployment in North America. We expect the gradual recovery to continue during the first half of calendar 25. Fiber lab and production demand was up significantly in the December quarter, driven by growth in lab fiber and optical transport. We also shipped our first 1.6 terabit fiber product, and so continued demand for our 800 gig products, which should drive significant growth for the remainder of fiscal 25. Our aerospace and defense business segment continued its robust year-on-year growth, driven by growth in our mission-critical products, including communications, avionics, and P&T. which stands for Positioning, Navigation, and Timing. Earlier this week, we closed the acquisition of Inertia Labs, which strengthens VIAVI's position in the P&T space by complementing our industry-leading, resilient timing technology with positioning and navigation solutions. Our expanded P&T portfolio positions us well in the high-growth markets such as alternative navigation and autonomous air, land, and sea vehicles. Lastly, SE was down year-on-year, primarily driven by lower enterprise customer spend. Looking ahead for NSE, we expect a seasonally stronger Q3 across the broad base of our product portfolio with continued recovery momentum for the remainder of fiscal 25. Now turning to OSP. During the fiscal second quarter, OSP declined on a year-over-year basis, primarily due to lower demand for 3D sensing products. We expect fiscal Q3 to be roughly flat year-over-year, characterized by seasonally weaker 3D sensing. We continue to monitor inventory levels of anti-counterfeiting products, and we currently expect to reach demand-supply equilibrium within the next two quarters. To summarize our near-to-mouth look, we expect Q3 to be seasonally stronger and recover momentum to continue through the rest of fiscal 25. In conclusion, I would like to welcome employees of Inertia Labs to VIAVI and thank the VIB team for managing through the challenging environment over the past two years. Lastly, I would like to thank our customers and shareholders for their continued support. With that, I will now turn it back to the operator for the Q&A.
Thank you, sir. And once again, everyone, it is star one. If you have a question today, we'll go first to Reuben Roy. Great.
Thank you for letting me ask some questions. Oleg, nice to see the turn as you, you know, sort of, highlighted on the last call. I guess if we could drill down into some of the moving parts here, starting with the field demand for fiber monitoring. Can you talk a little bit about that? Is that still mostly telco service providers, or are you starting to see some hyperscalers get involved with fiber monitoring?
Well, it's a combination. I mean, clearly on a broad base, it's the telcos, because as they build out their fiber networks, I mean, it's just a really – the volumes game, right? Because there's so many telcos and so many of them are building out fiber, but also there is cable providers, but they also building out fiber. So clearly that's driving, but the new segment emerging is really the hyperscalers who are kind of not your father's data center operators. They're actually putting very sophisticated fiber monitoring interfaces onto their data centers. to monitor all the fiber going in and going out of their network. And part of it is really protecting the billions of dollars they're putting into those data centers and making sure that the connectivity, latency, and performance of their fiber interconnect is on par with the performance inside the data center. And that is a new phenomenon because traditionally data center operators really didn't care. They just took whatever the connection they got. And today I would say the hyperscalers have gotten extremely well educated on the performance and strengths and weaknesses of the traditional fiber connections they've been getting and they're taking it, you know, they're taking matter into their own hands and actually paying and deploying this thing so they can hold any of their service providers accountable for the service level agreements that they are signing with them.
Interesting. Thank you. And then on the lab side, congrats on the 1.6T shipment. But if we look at 800 gig, can you talk about your visibility there? You know, clearly you're talking about momentum through the end of fiscal 25. But, you know, kind of how are you thinking about that business, the 800 gig shipments, you know, throughout the rest of the calendar year? And can you give us a little bit of an idea of how big you think that could get as part of the NE business?
Well, you know the reason I say fiscal because we generally don't like to go beyond 100 most two quarters. I mean clearly 800 gig is the workhorse that everybody is buying today and the volume is growing very rapidly. 1.6 terabit is really what is entering the R&D labs at semis, NAMs and module developers, and that's probably going to be hitting, you know, production maybe towards the end of the calendar here. We think the 800 gig will be the volume driver for this year, calendar year, and the 1.6 starting to maybe gain momentum towards the end. And, you know, there's still 400 gig shipping as well. So, and that's, you know, across the board, I would say traditional semis module developers and NAMs. And then on top of it, we are seeing very strong demand from, you know, module builders you know the factories production testing in uh asia uh that is largely uh in support of the um kind of i'd say 400 and 800 gig predominantly actually growing 800 gig module demand to support the ai data center infrastructure great thank you ole if i could just sneak one in for elon um on the comment around
capital allocation and the M&A with the inertial acquisition and successful closer, maybe you can just give us an update on what your appetite for further M&A might be, you know, going forward. Is there still room, you know, for additional M&A as you look out into your calendar 25, or how are you thinking about capital allocation here?
Yeah, thanks, Robin, for the question. So, obviously, you know, M&A continues to be part of our overall capital allocation We believe that, you know, we have more bandwidth to kind of raise additional funding if we kind of find the right opportunity for us. We are very kind of focused in terms of our EPS growth for the short, mid, and long term, and that's a major driver for us in our decision-making process. And it's less about the funding, more about the specific opportunity and the EPA specifically.
Yeah, and I'd say if we look at our M&A potential target funnel, nobody's in there that has a bunch of PowerPoint presentations. All of the deals that we are considering and evaluating are highly profitable. with the margin profile that is accretive to our overall thing. Clearly, in the end, the price, there's got to be the right price, because one thing we are very cognizant is we have multiple options how to deploy our cash, and we believe in paying the right price for the right deal.
Great. Thanks, guys. Thanks, Ruben.
Next up is Andrew Spinola, UBS.
All right, thank you. I was wondering if we could talk about the upside in the quarter and wondering if, when you look at it, how much of it came from your cyclical uptake in your SP business, and I'm talking specifically about NFC, versus maybe how much of the contribution came from sort of your secular growth drivers in some of the other businesses?
Well, so, I mean, it's a good question, Andrew. So, I mean, I would say maybe, I would say probably The third two and a half and I came in from the kind of tide that rises all the boats. You know the service provider started to come back, you know, crossing the T's, dotting the eyes, the fiber span. We actually saw very interesting wise the green shoot and wireless was buying wireless field instruments, which basically tells you right away somebody is planning to start doing major 5G deployment. restart in the next two quarters. So that is what I would call a gradual recovery and continued recovery. And the rest came really from our diversification efforts into, you know, fiber lab and production, the aerospace and defense segments where we've seen a really good revenue growth and a substantial margin expansion that the volume has driven both of those segments.
Got it. And I guess just a follow on to that. I think I'm trying to understand, you know, obviously the AI demand is driving some pretty substantial growth rates in some of the end markets that you serve. I'm trying to correlate that with your fiber lab business to try to understand what's the potential upside in that business, how much of that 50% of your growth in this quarter that came from secular came from fiber lab and just anything you can do to help me understand how, how big that business is, you know, that's exposed to 30, 40% growth rates and how big can it get?
Well, so there's two segments to that business. One is, um, we sell advanced test equipment to the developers. So if you are developing next generation chipsets or processor, you know, the, uh, 400, 800 gig, 1.6 terabit, uh bandwidth you need those uh tools to aid you in the development and debugging if you're developing modules you need those that equipment and if you're developing systems you need that equipment and then there is a whole other market so i'd say this one i mean it's growing i mean i wouldn't be surprised if it doubles or triples over the next three to four years because what's different here is when the telecoms were driving um migration node to node it would be about six years six to eight years between going let's say 100 gig to 400 gig 400 gig to 800 gig now today the really evolution of technology nodes is not driven by telecom it's driven by datacom so as a result you're seeing every two three years there's a new techno technology node so your product cycles are just as big and they're happening much faster. So seeing that business doubling, tripling is fairly realistic. And then there is a whole other part is the production piece. So again, when you were doing telecom, you only deployed so many modules. Well, when you're putting fiber optic modules in the data centers, you have orders of magnitude more modules. So the demand for spectrum analyzer, power meters and fiber, the inspection, all these kind of things, that is purely a function of how many units need to be shipped. And what was interesting is when it was a 400 gig, we did not see much demand because a lot of it was bought by the, or installed by telecom service providers. And when their business tanked about two years ago, all of that capacity shifted to uh hyperscalers well as you know bringing out 800 gig and then over the horizon just over the horizon 1.6 terabits well uh it's the um data center operators who are driving the deployment of um that production capacity and that's happening at a much faster uh turnover pace instead of like kind of six year horizon over two three year horizon so again there is a doubling or tripling i mean whichever the um volume goals you're going to see so we are very positive on that business and then the third element here traditionally we played in kind of layer one layer zero and uh now we're going to layer two to layer seven so we're also expanding the market that we're addressing within uh all of these applications so We feel that business unit will be a major growth driver for us in years to come.
Thank you.
The next question is from Ryan Coons, Needham & Company.
Great, thanks, and terrific color on different product areas, Oleg. I wanted to drill down on wireless if we could. You know, this is a pretty quick rebound here, and we've heard some recently some Pretty optimistic signals from Ericsson, Nokia as well, pretty aligned. But if you drill down there, do you think in terms of the operators, is this driven by capacity additions via small cells or rebanding of spectrum? Or is it new services around the 5G core? Anything you can share there on the wireless front?
So, I mean, uh, so actually that correlates very well with the, um, what you heard from Erickson and so on. So, but before you, so you get maybe orders or indication that there's going to be a restart or 5g deployment. Um, what we saw, I mean, is the placement for field instruments. And that's usually the first thing you do, because you got to equip all of your, um, checks with equipment before you kick off a campaign. And what I believe is happening, it's really all about cost, cost, cost. And it's really accelerating conversion of a 4G spectrum to 5G spectrum because it's our understanding you're seeing anywhere between 90% to 80% drop in cost per bit when you convert the spectrum. And if you want to grow the available bandwidth to your customer base, one of the cheapest things to do is just accelerate conversion of 4G into 5G. uh the instruments that we are saying and if i look at the um what kind of software downloads and codes and use cases that we provision with those instruments it indicates to me it's a lot more about um uh retarget re um reclassifying spectrum from 4g to 5g and it also kind of feeds our belief that millimeter wave is pretty challenging to do on a mass scale and the easiest way to create bandwidth is really re-purposing your 0 to 7 gigahertz spectrum that's just our view of this thing yeah that's great and then and then by the way north american phenomena only um and i believe europeans will jump on it as well because they have exactly same problem they're all under massive uh cost pressure and that is one of the easiest ways to lower cost of your bandwidth yeah great point
Just a quick follow-up, if I could, around your acquisition of Inertia Labs. How do you see that product fitting into your portfolio? Is it very much a standalone business unit? Is there much adjacency or synergy with the rest of your commercial activities? You've had a couple of weeks at the helm there. What's been the feedback?
We just closed this deal two days ago, but we've been obviously working with them for a while. So this has been a conscious diversification for us to be less reliant on the highly volatile telecom service provider and taking our, you know, if I look at our core competencies, it's really communications, engineering, algorithms, advanced, truly advanced system design, And when we looked at our skill set and say, well, where is there richer postures using these know-how? Well, it's aerospace and defense. And the technology we have is actually generations ahead of what the traditional mill arrow players service the market with today. And we think, hey, we can take it and we really could leapfrog pretty much everybody in that space. And we've shown it. With the our resilient timing, actually our and these products are unlike the traditional bookship business in the test and measurement. While it's a very attractive margin business, you have to every quarter your big chunk of it is a bookship business, whereas the what we're talking about here in aerospace and defense PNT. It's a design wind driven business. Once you win module subsystem or. a product inside a larger system with a tier one OEMs, you're done. And when they go into production, they just pull all the business. So it's a much lower cost of growing revenue and profitability from point of view of go-to-market. So you're still leveraging your engineering know-how and competence, but at a much lower go-to-market. And I think longer term, that gives us a very nice operating margin expansion. and the gross margin expansion. And so when we acquired Jackson Labs a couple years ago, we acquired the T in P&T. With the acquisition of Inertia Labs, we added P&T positioning and P&N, positioning and navigation. So now we can effectively deliver the whole alternative navigation modular system to any system integrator out there. And in particular, the high growth drones and the alternative navigation solutions demand is where we are playing into.
That's great. Thanks so much for that, Keller.
Sure. Next up is Meta Marshall, Morgan Stanley.
Great, thanks, and congrats on the quarter. Maybe just as a first question, you know, you had been kind of more optimistic about seeing some of this demand kind of return in know fiscal q3 or uh calendar q1 so was this you know you just started to see some of those orders earlier than expected or starting to see it stronger than you expected and then maybe the second question is just kind of the recovery path that you see for the sc business and some of that business returning thanks sure so um i mean so so you know i was really looking and um kind of measuring temperature of
what even starting in the summer and really September quarter, just the tone of the likes of AT&T, Verizon, T-Mobile, and all the other operators has been shifting towards, hey, we're going to increase build outs of our fiber. And what we saw is run for the hills has kind of became, you know, market share grab shift mindset within those operators. And that was really the first inkling that, hey, you know, we're going to start seeing things finally turning around after two years. And then this kind of dialogues that started in September quarter and they accelerated into December quarter. And of course, now you see it's pretty much again has become a competitive play where, you know, nobody wants to be left behind. I mean, you saw T-Mobile is getting into fiber. Verizon is getting back into fiber. AT&T is accelerating fiber bills. Well, MSOs, the cable operators, are looking at it and said, hey, wait a second. They're coming after my bread and butter, which is broadband. So they're now being forced to start doing at least something in the interim before DAX's 4.0 shows up. And of course, by doing all of that, the wireless was not far behind. So when we saw the change in all these kind of dynamics happening, we said, OK, That's a beginning of the change in the mindset that we're seeing with service providers. But we didn't see the money yet materializing. And then in the Q3, in the fiscal Q2, which is December quarter, we saw people putting money where their mouth was. And it continuing into Q3, which is normally we generally see as a weaker quarter because everybody doesn't set their budgets until the end of February. Well, that's continuing into this quarter. So the mere fact that we're not seeing the seasonal dip in the service provider, it continues to move. It's clearly telling us it's not a one time blip. And one thing was really kind of the last thing is, you know, we were kind of doom and gloom up until about September on the wireless space. We didn't think much was going to happen until the middle of next year. Well, the indication that people are starting placing significant orders for wireless field instruments, you only do that if you are one to two quarters away from doing a mass deployment or restarting your 5G. And we also know what kind of software download you have in those instruments. And that pretty much gives you a clear indication what kind of work people are planning to do. So in that respect, we feel and I will just emphasize it's North American. I mean, we're not talking yet about Europe and it's North America. I'm feeling much more optimistic on the North American landscape. And if I look at traditionally, Europeans are about three to six months behind, and I do think it will spread to Europe probably by the middle of the year. So it will provide kind of the next wave of recovery. So that's on the NAMs. On SE, well, it's a story of good news and maybe good news but not so good news, right? So the good news is our AA ops. is absolutely everybody and their brother uh wants it and that there's a lot of interest the you know not so good news it's taking time to uh get through the teething pain and deploy it and be able to deliver all the use cases the customers want so as a result there's a disconnect between the uh velocity of uh engagement and how quickly we can turn it into revenue i think um you know throughout this year will resolve most of these kind of early teething pains and catch up on the development of all the use cases. And we feel this is going to be a major driver for the EFC business unit growth. The second part in there is the private networks that business is doing really well, especially private mission critical networks. It's growing off of a small base, but it's doing very well. And we're seeing a lot of both kind of industrial and sovereign interest in building their private security networks. And the third piece is the enterprise. And I think that is a piece that I think is, I mean, with exception, maybe security, the rest of it is not spending as much money. So I think that would be probably the last piece to recover in that business. But we do think calendar 25 will be the year where this business I mean, they already turned the corner from point of view of technology development and redeveloping product portfolio. The next step for them is to start putting points on the board by growing quarter on quarter.
Great, thanks.
And next up is Tim Savagello, Northland Capital Markets.
Hey, good afternoon and congrats on the results from me as well. And you touched on some of this, but I'll maybe see if I can fill in some blanks here. In terms of the carrier strength, and, you know, I note your U.S. or North America revenue is, you know, quite strong sequentially in the corner, and you kind of touched on it, the strength there in fiber monitoring and carriers. being principally U.S.-based, just want to confirm that, and also whether that's really concentrated with the real big guys, the AT&Ts and Verizons of the world, or if you're seeing any broader base to that strength in the U.S. in fiber access and fiber fields.
So, you know, the fiber monitoring, ironically, is the – Countries outside of US are the big user of fiber monitoring. They always believed in monitoring their fiber network in North America. We are now seeing some outside Tier one players are starting to consider. They're rolling it out in several markets, and if that trend catches on, it's going to be a significant boost to growth in that business. But with also in North America, it's really the hyperscaler. It's the who is who in the you know the big. um social media ai and all that they are viewing um fiber monitoring as an integral part of building out if you're going to spend hundreds of billions of dollars building out data centers you should spend at least a hundred million to make sure that they're connected to something that works and uh they're finding that the weak link is the interconnect uh between the data uh in between the data centers it's you know the because they usually use a third party to connect all the data centers. And there is already very quick bifurcation between those who can and those who can't. And there is some really next-generation fiber service providers who are really putting in state-of-the-art fiber links where you monitor even dark fiber. So you can turn it on at a drop of a hat and provide the SLA agreement that is needed. And then, of course, there's your... father's fiber network who is like okay we'll send the truck and we'll connect and that's just not what those players require so we actually view it as a the smart money and the smart engineers are deploying it of course it's self-serving we believe they should be doing it but it's also putting a major investment in quality of service and quality of performance that the networks are able to deliver so I think North America is the early stages of deploying. Where we do see North America is also fiber monitoring. It's really more handheld, and they use fiber monitoring when they build out networks, but then they kind of leave it alone. But we believe you should be using it when you build it out, and then also when you're managing it, because it actually enables you to automate and reduce the cost of managing the network.
Okay, great. And then you did see a bit of an uptick in Europe, at least sequentially in the quarter as well. You've indicated you really haven't seen the carriers come back, and I guess that's both fiber field and wireless. So should we assume that's network equipment manufacturers driving that or any other factors?
So clearly Europe is pretty strong for us with NAMs. Although, you know, a big chunk of it is wireless NAMs and they have not been that strong. I mean, we hope that the recovery in the field, wireless, maybe in one, two quarters, as they start shipping equipment into the networks, you know, the infrastructure test equipment will also pick up. And of course, the fiber NAMs in Europe are quite strong. And, you know, in Europe, there's a run rate demand that is fairly consistent. But we know that generally Europe is about one to two quarters behind the U.S. I mean, when U.S. went into a tailspin September of 22, Europe probably took about one or two quarters behind. So we think by middle of the year, I think Europe should start picking up as well. And there it's very much all about, you know, continuation of deploying fiber and 5G. And if that happens, that kind of would be the second wind to our field instrumentation telecom business that would come in. Because Europe is, I mean, equally big to the North American market.
Got it. And last one for me. And in terms of the discussion about seasonality, and I think what you're saying is you're seeing, you know, better than seasonal. So, you know, backing out inertial, it looks like your NE segment would be, you know, flattish to maybe down a very little bit where you might normally see, I don't know what, some, maybe a mid single digit, low to mid single digit seasonal decline typically. And you're not sort of seeing that this year, given the recovery in demand. Is that, That's basically right.
Yeah, that's basically right, although I wouldn't even say decline. I think it's flat to maybe even single digit. I mean, low single digit growth and then on top of it, you had inertial apps, so that's why we feel I mean the mix changes within that revenue. I mean, that's why I mean some of the margin. I mean that even though top line is flat to maybe slightly even up the margins are a little weaker because the mix there is a. uh you know in some segments there's a lower margin profile than what we did in the december and um i would say also uh you know first quarter is when we accrue most of our statutory expenses for the year so that's clearly i'd say the biggest drag but also some of the mix will be different so volumetrically i mean we feel nsc is going to see pretty strong um uh well i would say a seasonally strong q3 because generally we drop you know, anywhere between 5 to maybe even sometimes 10% Q2 and Q3, and here we are glad to slightly even maybe up.
Great. Thanks very much.
Sure.
We'll take the next question from Maddy Hosini, Tuskegahna.
filling in for Mehdi. Oleg, it looks like the 3D sensing is being weaker this quarter, but it is seasonally stronger in the second half. Could you touch maybe on what you're seeing in terms of ASP and dynamics? And where does that go from there? How much contributes to your OSP guide of 75 million in the third quarter of 25? Thank you.
So usually, if you look at the 3D sensing, the September and December quarters are bigger. and the march and june are smaller so um um i would say when we say seasonally weaker i mean we had a more demand in the september quarter and some of it might have been pulled in from the december quarter plus there is also some annual asp reduction that kind of lowered the uh the revenue but the volumes were pretty healthy so um on the second half of a fiscal year it's pretty much in line with seasonality and 3d sensing i mean that's know they're just fundamentally fewer units being built in a second half than first half and um on the um i think on 75 we kind of always break break up you know uh core business and the 3d sensing uh we you know i think we we have a pretty healthy anti-counterfeiting and industrial business and that more than offset the decline in the 3d sensing And, you know, but we also doing a one thing, I don't know if Ilan mentioned it, is we are actually taking proactive measures to lower our internal inventories. So we are shipping intake counterfeiting demand from our inventories. So even though the volumes go up, we are not running the factories of full bore. So we're not picking up the extra absorption. So, you know, as a result, we'll end up with lower inventories. We'll free up more cash. but we are not picking up maybe another one, two, three percentage points of operating profit that we would do otherwise. And it's a conscious measure to really accelerate demand-supply balancing because we're seeing also channel inventories are declining, and we want to get it to by the middle of the year that we're now in supply-demand balance and it becomes much easier to forecast and plan our production after that.
Yeah, the inventory balance is a slight headwind to margin, but, you know, we consciously, you know, took that approach.
Cash is cash.
Yeah.
That is very helpful. Thank you.
Sure. And everyone, at this time, there are no further questions, but I'd like to hand the call back to Ms. Vibhuti Nayar for any additional or closing remarks.
Thank you, Lisa. This concludes our earnings call for today. Thank you for joining everyone. Have a good afternoon.
Once again everyone, that does conclude today's conference. Thank you for your participation. You may now disconnect.