Viavi Solutions Inc

NASDAQ:VIAV

Earnings Call Transcript 2019-Q4

[Operator]

Good afternoon, my name is Julian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Viavi Solutions’ Fiscal Fourth Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

Thank you. Bill Ong, Head of Investor Relations, you may begin your conference.

[Bill Ong, Head of IR]

Thank you, Julian. Welcome to Viavi Solutions' fourth quarter fiscal year 2019 earnings call. My name is Bill Ong, Head of Investor Relations. Joining me on today's call are Oleg Khaykin, President and CEO; and Amar Maletira, CFO.

Please note this call will include forward-looking statements about the Company's financial performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from 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. Viavi undertakes no obligation to update these statements.

Please also note that unless we state otherwise, all results except revenue are non-GAAP. We reconcile these non-GAAP results to our preliminary GAAP financials and discuss their usefulness and limitations in today’s earnings release.

The release plus our supplemental earnings slide, which include historical financial tables, are available on VIAVI’s website. Finally, we are recording today’s call and we will make the recording available by 4:30 P.M. Pacific Time this evening on our website. I would now like to turn the call over to Amar.

[Amar Maletira, CFO]

Thank you, Bill. Viavi’s revenue at 289.7 million, grew 11.1% year on year and exceeded our revenue guidance range. NSE revenue at 221.4 million was above the midpoint of revenue guidance driven by revenue upside in fiber and wireless products. OSP revenue at 68.3 million, exceeded the guidance range due to upside from our core OSP as well as our 3D sensing products.

Viavi’s operating margin at 17.6% exceeded the high end of our guidance and was up 460 basis points year on year. EPS at $0.17, exceeded the guidance range and increased $0.05 or 41.7% from a year ago.

Now moving to our reported Q4 results by business segment, starting with NSE. NSE revenue at 221.4 million, grew 6.7% year on year. Within NSE, NE revenue at 197.3 million, grew 10.2% from a year-ago levels driven by strong performance in both fiber and wireless test products across field and lab market segments.

SE revenue at 24.1 million declined 15.4% from a year ago levels, driven primarily from the expected runoff of our mature assurance products and from a decline in datacenter products due to weaker demand from our data center customers.

NSE gross margins at 65.7% increased 370 basis points year on year, primarily due to higher overhead cost absorption from higher revenue volumes as well as gross margin improvements in our growth products within SE. NSE’s operating margins at 13.4% increased 420 basis points from a year ago levels, reflecting the gross margin improvements and the favorable operating leverage in our OpEx structure at higher revenue volumes.

NSE’s book to bill ratio was above 1. In any given quarter, our NSE business is primarily a book ship business. Since we provide specific quarterly revenue guidance for NSE, we believe that the quarterly book to bill ratio metric which we currently report is redundant. Hence, we will stop reporting this metric starting in fiscal Q1 2020.

Now turning to OSP. OSP revenue at 68.3 million, increased 28.4% year on year driven by the 3D sensing and anticounterfeiting product revenue. OSP’s gross margin at 49.5% increased 290 basis points due to higher absorption of manufacturing overhead as revenue grew in both core OSP and 3D sensing product lines.

Operating margins at 31%, increased 300 basis points, reflecting the higher gross margin levels and was within our guidance range

Now moving to our fiscal year 2019 performance. Viavi’s revenue at 1.13 billion increased 29.1% year on year, driven by 27.9% revenue growth in NSE business segment and a 32.6% growth in OSP. NSE revenue growth was driven by a mix of organic growth in our fiber products across both lab and field and inorganic growth from the acquisition of the wireless and AvComm test and measurement assets.

This was partially offset by declines in our SE business from the expected runoff of the mature product revenue and weaker demand for our data center products. OSP’s revenue growth was primarily organic, with strength in both 3D sensing and anticounterfeiting products led by redesign and reprint volume for major banknotes.

Viavi’s operating margins at 17.5% expanded 360 basis points year on year, driven by the significant improvements of 510 basis points in our NSE operating margins as a result of favorable operating leverage with revenue growth and continued cost management discipline across all functions.

Our operating profit at 197.6 million, grew 62.2% or an increase of 75.8 million year on year with 56 million of the growth contributed by NSE and 19.8 million of the growth in OSP.

EPS at $0.68, grew 54.5% or $0.24 year on year.

Now turning to the balance sheet. Our total cash and short-term investments ending balance was 526.5 million. Operating cash flow for the quarter was 28.5 million. In Q4, we repurchased 2.4 million of Viavi stock at an average cost basis of $12.50 per share, including commissions. Of the 200 million authorized for share buybacks, we have repurchased shares approximately 148.6 million, as of the end of fiscal Q4. We will continue to be opportunistic by repurchasing Viavi stock to offset earnings dilution from stock-based compensation.

Now on to our guidance. We expect fiscal first quarter 2020 revenue for Viavi to be approximately 283 million plus or minus 10 million, operating margin at 16.4% plus or minus 1%, and EPS to be in the range of $0.14 to $0.16.

We expect NSE revenue to be approximately 208 million plus or minus 8 million, with operating margins at 10% plus or minus 1%. We expect OSP revenue to be approximately 75 million, plus or minus 2 million, with operating margin at 34% plus or minus 1%.

Our tax expense is expected to be approximately 18% to 19%. We expect other income and expenses to reflect a net expense of approximately 2.5 million. Share count is approximately 237 million shares. The estimated sequential increase in share count primarily reflects the accounting impact to weighted average shares from our existing 2023 and 2024 convertible notes as Viavi’s average share price in this quarter to-date is trading above the conversion price of these notes.

With that, I will turn the call to Oleg.

[Oleg Khaykin, President & CEO]

Thank you, Amar. I'm pleased with our performance during this fiscal fourth quarter. In NSE, the 5G wireless market remained strong and symbiotically pulling along fiber products as service providers upgrade their network infrastructure for higher bandwidth capacity. The strength in both lab and field fiber, independent of 5G is also being driven by industry’s upgrade to 400 gig.

Cable demand cyclically declined year on year as North American cable providers mostly completed their DOCSIS 3.1 upgrade. The North American decline was partially offset by strong demand for DOCSIS 3.1 products in other geographies. The SE business segment remained weak this quarter driven by weaker spending by enterprise datacenter customers.

In OSP, the anti-counterfeiting revenue exceeded our expectations driven by higher banknote reprint volumes. While the business pipeline remains robust, visibility remains limited and we don't expect to see revenue uptick until sometime in calendar year 2020.

The 3D sensing revenue also exceeded our expectations with strength from both the optical filters and diffusers, largely driven by Android-based smartphone devices. We expect 3D sensing revenue to continue growing year on year. To recap, during the fiscal year 2019, we successfully executed on the Viavi transformation strategy that we have laid out during our September 2016 analysts day and have exceeded our non-GAAP profitability targets.

The major highlights include the NSE business segment achieving double-digit, non-GAAP operating margins of 11.9% for the fiscal year 2019, and the OSP 3D sensing product expanding to multiple customers and multiple product lines, with revenue more than doubling from the prior fiscal year.

Lastly, today, about 50% of overall Viavi revenue comes from products with strong expected secular growth, namely 5G, fiber, and 3D sensing as compared to fiscal year 2015, where there was minimum secular growth in both NSE and OSP end markets.

In the fiscal year 2020, we're launching the next phase of Viavi’s transformation with a greater focus on growth, both organic and inorganic. We expect to continue to leverage major secular growth drivers in 5G wireless, fiber and 3D sensing to achieve higher levels of revenue and profitability. We invite you to our Analysts Day event on September 12, 2019, in Santa Clara, California, where we will outline our going forward strategy and goals. There will also be a live webcast of our presentation and we will provide more information regarding the next month's events.

In conclusion, I would like to thank my Viavi team for the strong performance in fiscal 2019 and express my appreciation to our customers and our shareholders for their support.

I will now turn the call over to them.

[Bill Ong, Head of IR]

Thank you, Oleg. Julian, let’s begin the question-and-answer session. We ask everyone to limit discussion to one question and one follow up.

[Operator]

[Operator Instructions] Your first question comes from John Marchetti from Stifel, your line is open.

[John Marchetti, Stifel]

Thanks very much. Oleg, I was wondering if you could talk a little bit more about the -- the Cobham business or the lab test business in 5G. You know, obviously, that's been a driver of growth, certainly through this last fiscal year. Just curious how you see that playing out as we're going into fiscal ‘20. And if you can comment at all about, you know, sort of existing customers and their contribution versus maybe new customers coming on.

[Oleg Khaykin, President & CEO]

Yes, thank you. So, obviously, this business has performed well above our expectations and pretty much exceeded all our own business projections when we were doing this deal. So, you know, as usually the case, the acquired company never performs better than -- the best they ever perform is the day, you know, you look at their first PowerPoint deck. In this case, it's been a nice exception. And it's done much better than even our upside scenario was.

That said, we expect that business to continue to be strong this year, although probably growing at a lower rate. But we're also going to start seeing substitution between the protocol testing to more of a capacity testing, so as our customers start shifting gears from development to production, the configuration of this test will be more of a production focus and a bit less of a development focus, but we still expect development to be a major part of the sales going forward.

Furthermore, what we're doing, we're leveraging our very strong position in the labs to develop and launch a comprehensive rough [ph] portfolio of products for the field. And we have set the roadmap about a year and a half ago as we were contemplating this acquisition, and a lot of those products are coming out in the second half of this calendar year. So basically, first half of our fiscal year. So, in that way, it's not just the Cobham wireless business, but this positioning us for strong outlook this year and continued growth, but also we're placing significant emphasis to use that position to build out a meaningful wireless instrumentation -- field instrumentation business where we have very little today.

So, in that respect, we are looking to change the profile of Viavi from being a primarily wireline field instrumentation to being wireline and wireless field instrumentation business. So, hopefully, that helps, and obviously, we continue to add other product lines and extensions to the Cobham business to expand our TAM within each of our customers.

[Amar Maletira, CFO]

John, I'll just take this opportunity to give a quick update on the -- I know, the question was around the revenue side, but I'll quickly give an update on the synergies on the cost synergies of this business. We were waiting till the end of fiscal ‘19 to give you guys an update. So, if you recall for the two assets that we acquired, the AvComm asset and the wireless asset, we had estimated cost synergies of anywhere between $15 million to $20 million over a three-year period. And, as the end of our Q4, which is 18 months into roughly about 15 to 18 months into the deal, we have actually actioned between $15 million to $20 million of cost synergies, two-thirds of those synergies are actually already reflected in our fiscal ‘19 results. So, in addition to going and driving topline growth, we also accelerated the cost synergies. We then also reinvested some of the cost synergies back into the business to drive further growth in this -- in the wireless lab business as well as the lab to feel initiative for the next, you know, two to three years. So, some of it is reinvested back into the business.

[John Marchetti, Stifel]

And then maybe just as a followup, Amar, you mentioned in the guidance that the higher share count as a result of some of the anti-dilutive measures of the converts. How do we think about that and maybe on a little bit of a longer term basis, is there a way that we can sort of model that based on every dollar above the strike price or something like that? How do we look to sort of beyond even just the next quarter or two to think about this over the longer term given that now it looks like, you know, that's going to be in the money moving forward?

[Amar Maletira, CFO]

Yeah. So, it's a very good question, actually. So, let me give you a little bit of additional color here more than what I mentioned in my prepared remark on how to think about this. Now, I will start with our fiscal Q1 guidance of 237 million shares, and if you see sequentially, it's grown by 4.5 million shares. One thing that you’ve got to keep in mind is, typically, our share count increases sequentially from fiscal Q1, which is a September quarter, to our fiscal -- from fiscal Q4 to fiscal Q1, which is a September quarter due to vesting of equity awards as well as the annual grant. So that happens every year, right. So there's some element of that already factored inti our 237. What we do is, we go and buy back shares and offset that dilution.

In addition to that, coming to your specific questions, what we have seen is, since the share price, if you look at the average share price this quarter till date, it is at about $14.24, and it's higher than the $13.22 and the $13.94, those are the two conversion prices for the two converts we have. So, our stock price is very much in the money. And so there's about 3.5 million shares that got added because of the accounting impact of these converts being in the money. So, for every dollar increase above the average of say $13.50 and if you just take a buck increase from there, you should think about adding about 3 million shares to the share count.

Now, to put things in context, what it really means is that the EPS dilution is less than half a cent is about three tenths of a cent. So, if you then convert it into how much of additional operating profit we need to offset that, it's about 500K to 700K. So, in our models, we actually go and drive the operating profit dollars because you know, we know this, you know, we don't know where the stock price will be, but we always factor that in our operating model.

[Operator]

Your next question comes from Alex Henderson from Needham, your line is open.

[Alex Henderson, Needham]

Great, thank you very much. You have two pretty interesting announcements that came out a little bit later in time that we were unable to ask you a lot of questions [indiscernible]. Could you talk a little bit about the China Mobile deal that you announced and the Samsung deal that you announced and kind of give us some bigger than a breadbox, smaller than a slice kind of calculus?

[Oleg Khaykin, President & CEO]

Well, you know, I think some of those things kind of came out, you know, we didn't think it was such a big deal, but I guess it turned out to be a lot bigger deal. We just kind of thought that everybody knew where our presence was, so it goes to show that it's probably a good occasional to cheer on. I mean, clearly. I mean, the first one is, you know, we've been a partner with China Mobile on the network splicing and a number of other fiber standards, but we also have obviously been working with them on testing 5G. And as I said, you know, when you start originally, you sell a lot of your system emulation system testing gear into the equipment manufacturers, but the moment the products are shipping, I mean, one thing we don't talk much about is the next level of customers that come in are usually the service providers with their own labs where they want to test and evaluate all the vendors equipment.

Although the volumes of sales to service providers are significantly lower because they don't need as many test stands. That nevertheless is an important element as it allows us to get into -- from the OEM labs into service provider labs and, subsequently, into their field equipment. So, in that respect, we felt that our collaboration was just significantly beyond just purely a one-off sale. There we’re actually doing a lot more with the carrier in evaluating various performance of various equipment and standards. And as such, we were happy when they were more than welcome to do a press release with us.

In case of Samsung, I mean it is a significant customer of ours. I mean, they were -- at this point, we pretty much have every major base station manufacturer, where we have majority share with the exception, I would say, of Huawei. Huawei is very much today an internal solution. And aside from Huawei, we are the strongest -- have the strongest position in the testing labs across all our wireless infrastructure. So I think there Samsung was the last OEM for us to capture and we did. And I think that as was the press release.

[Alex Henderson, Needham]

So bigger than a bread box or smaller than a slice, any sizing?

[Oleg Khaykin, President & CEO]

Well, it depends on how big is the bread box or the slice. It’s significant, let's put it that way.

[Alex Henderson, Needham]

One last question if I could, could you tell us whether the 3D sensing grew on a quarter-to-quarter basis?

[Amar Maletira, CFO]

So, 3D sensing did grow on a quarter-to-quarter basis from fiscal Q3 ‘19 to fiscal Q4 ‘19. Yes, it did grow sequentially.

[Oleg Khaykin, President & CEO]

And as I said in my prepared remarks, it was predominantly, I mean, the June quarter is, depending on a standard you are supporting, it's a transition quarter for one and not so much for the other. So, it was primarily driven by the Android devices in Asia.

[Operator]

Your next question comes from Michael Genovese from MKM Partners.

[Michael Genovese, MKM Partners]

Oleg, you mentioned in your prepared remarks, 3D sensing more than doubled year-over-year. I think it looks like to me like it nearly tripled, maybe up about 170%. Can you give us some help on how to think about this for the next year? And I think you just mentioned that it was primarily driven by Android. So could you just generally talk about the other ecosystem seasonality in the back half of this calendar year?

[Oleg Khaykin, President & CEO]

Well, I think the -- it’s -- actually, I think it is a little bit more than doubled, right. Because I think what do we say last -- it’s more than double.

[Amar Maletira, CFO]

So, yes. More than doubled, exactly. So we -- so I'll give you a little bit more color and then Oleg take it from there. So we said roughly about $65 million plus or minus, would be the full year and we landed actually close to about $70 million in 3D sensing. So it's more than double to Oleg's point.

[Oleg Khaykin, President & CEO]

Close, because I think it's 25.

[Amar Maletira, CFO]

28.

[Oleg Khaykin, President & CEO]

28. Yeah, so we are being modest. You're right, it's much more than doubled.

[Michael Genovese, MKM Partners]

Right. So how do we think about it for the year? Like what kind of guide posts can you give us to model it for the year, but also for the next two quarters? Do you expect strength out of both ecosystems?

[Oleg Khaykin, President & CEO]

Well, I mean, so here is the thing. I think clearly it's going to grow. In terms of the amount of growth, I have to be a bit cautious here because I don't know how much of the de-Americanization of supply chain in China going to impact us ultimately. I mean clearly, we have the best technology, the best price performance, the best demonstrated ability to supply and deliver and support our customers. If it's all purely comes down to competitive metrics and the best provider wins, then we clearly should do extremely well. But we also have to be, I'm being, I'm hedging my bets and being a bit more cautious in terms of the, some of the [indiscernible] Asian supply chain to reduce the reliance on American companies.

So, we don't have an issue with the supply. But I think it's -- one thing I cannot predict is the political wins, and that's why we are being cautious. But in any case, we expect strong growth this year. Just how much it's going to grow is going to be really a function of where some of those trade wins are going to blow.

[Michael Genovese, MKM Partners]

Okay. I just want to follow-up on the same topic, because from listening to one of the VCSEL players, it seems like the, I'm trying not to say the name, but the non-Android big customer, it seems like they had actually pulled forward a little bit into the June quarter, maybe some early building this year. And you're calling out strength in Android, I'm wondering if you also saw strength in the iOS in the quarter?

[Oleg Khaykin, President & CEO]

So remember, I think you have to really take into account your lead times. If you're providing a VCSEL, your lead time is probably closer to three months to get the product through the fab into assembly zone. For us, the lead time is a couple of weeks. So the orders that you would, if you are a OEM, you would place orders much sooner with the semiconductor vendor and you place your orders much later with the let's say optical vendor. I actually prefer our situation more, because ultimately our orders are much closer to the actual demand. So we have a much lower risk of overbuilding inventory and we can respond very quickly to the ups and downs in the demand without -- and avoid overbuilding inventory.

[Michael Genovese, MKM Partners]

Okay, great. Thanks for that. And then if I could just ask one more. It's good to see, and it looks like you have pretty balanced strength between wireline and wireless test. I think you've got some questions on wireless. Could you just talk about sort of the drivers on wireline right now, which regions, what type of customers, you're seeing good demand out of?

[Oleg Khaykin, President & CEO]

So on wireline, as I mentioned, I mean this year, fiber has been extremely strong, right. And I would say, the biggest strength we've seen is in the [indiscernible] production. This whole conversion to 400 gig and a lot of the R&D in 800 gig is driving a lot of our lab and production requirements. So, I think lab is driven by, just everybody developing from semiconductors to modules to testing the OEM here at 400 gig and advanced development on 800 gig. And in production, there is a very strong demand for OTDR modules and obviously that's driving demand for the production test equipment. So I'd say, in fiber that is probably, where I would say in the past 12 months where fiber has been the strongest.

Then further, once all these things are happening with the 5G preparation, although it's probably just in the early stages, but it also pushing a 400 gig upgrade of the fiber optic networks. We are also seeing healthy demand for field fiber testing, put it up, especially in Europe and in Asia. And as a whole new set of fiber optic network is being laid out, Trans – Pacific, Trans-Atlantic, so on and national networks, we are also seeing healthy demand for the, our advanced fiber monitoring solutions, which is a big combination of software and hardware that monitors the whole fiber network.

So I would say the biggest driver in fiber is lab and production. The next one I would say is optical network monitoring solutions. And the next one is the installation and field equipment. As a lot of that infrastructure gets deployed, we expect to see, down the line, more demand for the kind of installer and construction fiber tools as they start doing the end customer connections.

[Amar Maletira, CFO]

And from a regional growth perspective, Mike, you talked about, NSE grew 6.7% and NE actually grew 10.1%, which was 100% organic growth and actually NE grew in all the regions, Americas, Europe and APJ, including China.

[Oleg Khaykin, President & CEO]

Yeah, so even with a relatively modest demand by North American customers, we are seeing a lot of other customers are pulling demand.

[Operator]

Your next question comes from Samik Chatterjee from JPMorgan. Your line is open.

[Oleg Khaykin, President & CEO]

Samik?

[Operator]

Samik Chatterjee?

[Oleg Khaykin, President & CEO]

I think there may be a problem...

[Joe Cardoso, JPMorgan]

This is Joe Cardoso on for Samik. Sorry about that. So just to dig into my first question. Can you tell us what you're seeing in terms of demand from service provider customers, specifically from a telecom and cable perspective? And then within that, can you touch on what you spoke to last quarter about cable hitting a stable level? Are we there yet? And if not, when do you expect us to reach that stable level?

[Oleg Khaykin, President & CEO]

So I think, let's, you've got to look at it geographically, right. So, I would say Europe and Asia, the service provider demand is, I would qualify as healthy. Latin America is healthy, North America is better than it was a year ago, but still far below the levels of the past. Although, we see sporadic, urgent requirements here and there for products as the need becomes acute. That said, I would qualify that it's no longer as dire as it was about a year ago and it's, I'd say, it's gradually improving. The good news for us is we are no longer as heavily reliant on major North American players for our revenue and growth and anytime they turn on the spigot, it clearly comes for us as the nice upside.

In terms of the cable, so as I said earlier, North American operators by and large have completed their purchases for upgrade to DOCSIS 3.1 last year. And I would say they continue to buy equipment on the kind of maintenance replacement level, but we are now starting to see obviously deployments happening in for DOCSIS 3.1 in Europe and Latin American. So there we saw fairly strong demand for DOCSIS 3.1. That said, those regions are not as big as North America for cable. So it's not enough to offset the decline in North America, but I think for the next couple of years, we see cable to be more of a kind of steady demand until the next standard, which would be the Duplex upgrade of the network coming down in about two to three years, maybe three years. I don't want to jump the gun.

Now that said, we are seeing different opportunities in cable providers that are driving some of our demand today. They may not be as big as the field installation, but they nevertheless present very good opportunities, which comes down to a network monitoring and increasingly fiber. I mean, something that was not the case in the past. Today, if you look at any of the cable providers, I mean, cable is becoming a misnomer to call them. I mean they're really fundamentally fiber networks with a little bit of coax at the very end.

As a result, we actually see good opportunities longer term to do a lot more fiber and fiber monitoring selling to cable providers. And with some of them, they are also looking at 5G spectrum and have a good opportunity to become wireless service providers. So, I think that's my outlook on the cable companies over the next couple of years. I think there is a lot of metamorphosis going on in the cable space.

[Joe Cardoso, JPMorgan]

And then my second question relates to the recent tension between US and China. A lot of the networking equipment suppliers this earning season kind of highlighted weakness in the quarter and then going into next quarter. So I just wanted to get your take on what you guys are seeing from your customers in the region and then if you guys are baking any conservatism into your first quarter guidance.

[Oleg Khaykin, President & CEO]

Well, on the NSE side, we have fairly limited exposure to China. We mainly sell lab gear and in our case, given where it's geographically developed and built, it's not as -- we're not as exposed to the import sanctions into China, as some of our North American peers, because the equipment we sell is predominantly originated and designed outside of North America.

Now where we do have exposure to China is on the -- some of the supply chain where we buy equipment and provided there is North American tariffs, importation of these products in North America, obviously it gives us some exposure. That said, our supply chain is fairly diverse and we can easily shift products from one geography to another. And we have a -- we've been mitigating that potential risk for the last couple of years. So in a way for us, it's really in the noise.

The only area where I do have concern is the -- our 3D sensing. So even though we are manufacturing in China and our products are developed there, it's really more of a backlash against the American supply chain versus the specifically import restrictions and that is the only thing I'm thinking of right now. Clearly, we have to take it with a healthy dose of pragmatism.

[Amar Maletira, CFO]

And we have factored some of it already in our Q1 guidance.

[Oleg Khaykin, President & CEO]

It reflects in our guidance, exactly.

[Joe Cardoso, JPMorgan]

Okay, thanks guys and great results.

[Amar Maletira, CFO]

Thank you.

[Operator]

Your next question comes from Tim Savageaux from Northland Capital Markets.

[Tim Savageaux, Northland Capital Markets]

Look, I wonder if you could give us some maybe similar medium-term commentary to what you just did on cable on the 5G side. And I know you mentioned pretty broad geographic strength in network enablement, I imagine that applies to 5G as well mostly with your equipment OEMs. But I wonder if you can comment on kind of end market network deployment dynamics across various regions, whether you see that kind of the same as last quarter, accelerating decelerating? A lot of the activity is focused on Asia. Do you have any comments on kind of the deployment progress among carriers across regions in North America and Europe as well?

[Oleg Khaykin, President & CEO]

Sure. So I would look at it for deployments, it's a bit of akin to the highway -- three-lane, highway three lanes in each direction, right. So you've got your fast lane that's very much China. I mean they are, it's full speed ahead and they are deploying network and they are experimenting with every flavor of 5G there is. Then I would say, there is the medium speed lane and that's -- I would actually put Korea in the high-speed lane as well, I mean, they're growing pretty fast.

The second lane I would put Japan and North America, where there is lots of trials. In case of Japan, they're actually looking to do some deployments in high-density areas ahead of the Olympics. So there, but these deployments and trials, different flavors, whereas Japan is heavily focused on consumer. I mean in North America, it's a combination of consumer, fixed wireless, as well as private 5G network.

So everybody is experimenting with different flavors of 5G to see which one will have the best economic rationale to deploy. And I think the economic rationale varies between China, Korea, Japan and North America. And then there is, I would call, the first lane, kind of the slow lane, I would put kind of Europe in that space, where they are just doing isolated trials or doing a lot of planning and I imagine Europe will be starting -- we're going to start seeing more of it happening in the next 12 months. So I'd say that's kind of our view on where things are taking place.

[Tim Savageaux, Northland Capital Markets]

Great. And if I could follow-up also on any -- focused on the gross margin side. I think you saw some pretty significant at least year-on-year, guess those are also completely organic increases in gross margin. Could you talk in more detail in terms of the drivers there, mix, I know you mentioned synergies and -- but I imagine that, that takes place as much on the operating expense or operating leverage line. If you could specifically address the drivers for the gross margin increases in any in the quarter and maybe the sustainability of this?

[Oleg Khaykin, President & CEO]

Sure. So I will start and then I'll turn over to Amar to provide you more color. So if you think about the gross margin, a couple of things drive it. I mean, first and foremost, there is mix. So when we talk about stronger growth in lab and production, those products fundamentally come at a higher gross margin. In terms of the margin profile, the closer you get to the consumer, the lower the margins, but the volumes are much higher. The more you get into the lab, the margins are much higher, but the volumes are lower.

So if we look at where we've had very strong demand is, we had a lot of strong demand in lab and production. It's a much more customized environment and it's a lot of customer-specific a requirements that we implement in our equipment. And thus the margins are high. Since those businesses have grew the strongest in fiscal '19, that obviously gave you some uplift in the gross margin mix.

The next one is volume. Our revenue again up significantly, our manufacturing operation remains fairly flat. So the cost of manufacturing overheads, the supply chain management, procurement, manufacturing engineering, all these other things is fairly fixed. So whether we ship $600 million of revenue, $700 million, $800 million, $900 million or $1 billion, it scales us almost perfectly with the revenue and as such the percentage of the very, the drag on the standard margin becomes smaller and smaller. So I would say that's kind of the second biggest kicker.

And of course the last one is, some of the synergies did come out of manufacturing in terms of both better material cost but also rationalization of some of the functions where we absorbed or undertook the functions previously done at locations and centralized it in our manufacturing organization. So I think this is kind of qualitatively, is the way to describe -- define the variance in margins.

Amar?

[Amar Maletira, CFO]

No, I think you covered it all.

[Oleg Khaykin, President & CEO]

Yeah, I think I provided all the color there is.

[Operator]

Your next question comes from Richard Shannon from Craig-Hallum.

[Richard Shannon, Craig-Hallum]

I actually like to follow-up on one of the first questions asked, regarding the Cobham, the acquired businesses including Cobham. And I think your answers referring specifically to that in 5G and that you saw a strong year, better than expected, and still growth in this current fiscal year, but not as high. Wondering if you can extend that discussion to the other segments within any, or maybe just any collectively about growth in this year versus last?

[Amar Maletira, CFO]

So, I can just -- so Richard, I think we will, we have this Analyst Day on September 12 and we'll give you more color on the full year guide as well as with the key drivers as well as for the next three years. So that's the plan. But at a high level, we do expect NE to continue to grow year-on-year, driven by both fiber and wireless. We also expect SE to actually, after multiple years of decline, we expect SE to be flattish this year, with the mature assurance business actually continuing to go down.

So for example, the mature assurance business was roughly 16% of the SE mix. In fiscal '19, we expect that to go to roughly about 10%. So there will be continuous decline in the mature assurance products even in fiscal '20. But that will be offset for the first time by the growth in our growth businesses. So NE continuing to grow and SE actually -- SE remaining flat. So overall NSE is expected to grow year-on-year.

On the OSP side, 3D sensing will grow double-digits. Again we will give more color in the next two or three weeks. And the core OSP business at least for first half again as you know, the visibility on that business is also limited, so the first half, we do not expect any key redesigns. So we are assuming that the first half, the core OSP business will be roughly in the 50 plus or minus the baseline revenue and we are expecting in calendar 2020 some of the reprint volumes to kick in.

We don't know whether that's going to be in the first half of calendar ‘20 or the second half, but that's how we are modeling. So 3D sensing business growing, core OSP business sort of flattish to decline and overall slight growth in OSP business and growth in the NSE business. So that's the overall color. We'll give you more details when we meet in two, three weeks.

[Richard Shannon, Craig-Hallum]

Okay, sounds good. I look forward to more details. And maybe just to follow-up on the fiber side here. It wasn't clear to me in your discussion with the other questions about 400 gig and 800 gig, whether that was addressing more datacom, or telecom, maybe if you could be more specific there? And then are there any other different trends between those two separate markets?

[Oleg Khaykin, President & CEO]

Yes. So, I mean the 400 gig, when we talk about [indiscernible] it's predominantly I think telecom thing, but there is also quite a bit of datacom interconnect between the data centers, PEM 4 and things like that. So that's the same products go into a testing, semiconductor devices and modules in production or as well as developing these products. So I mean, it's pretty much the same set of products. But I’d say also we are seeing in the near term, I mean there is already a lot of thinking going on upgrading our metro networks to 400 gig, that's obviously going to drive some demand for 400 gig products as well. When talking about 800, it's very much a lab, really leading edge R&D.

[Operator]

Your next question comes from Meta Marshall from Morgan Stanley.

[Meta Marshall, Morgan Stanley]

I wanted to, just on the fiber commentary, is the strength there kind of from one carrier that is switching from lame fiber to connecting it or is it more widespread? And additionally, you've noted over the past couple of quarters, but maybe some telcos were deciding whether that kind of last feed or last couple of feeds should be something like, do that fast or whether it would be fiber? And just kind of any changes you've seen in the dynamic there or any trend with G.fast we should be mindful of?

[Oleg Khaykin, President & CEO]

Yeah. So when we talk about the field fiber, which is the operators doing fiber, it varies by geography. If you look at Asia, a lot of it is really building out new networks, whether it's Trans-Pacific fiber or national fiber network, things of that nature. So, it's big systems with a lot of monitoring and kind of higher-end equipment. If we're talking about Europe, there you're probably seeing a bit more of the connecting -- customers connecting buildings in installation and things of that nature, or more like kind of last several miles. And Latin America is probably more like Europe in that respect. North America, I think it's mainly, I'd say, metro networks.

[Meta Marshall, Morgan Stanley]

Got it. And then any changes on G.fast and kind of any adoption there? Is that primarily just for kind of last mile? Or I know, it had more legs in Europe than North America. Any change to that?

[Oleg Khaykin, President & CEO]

Sure. So I mean, so, clearly cable is the biggest one in the US, and I have covered that already. On G.fast, we do see demand -- pretty nice demand in Europe. So it's still there. I mean, I don't know, I don't think there is going to be probably one or more generations at most -- maybe one more generation of G.fast after that, but it's clearly fiber is getting deeper and deeper in network. So I would say Europe is primarily depending on the countries between G.fast or fiber to the curb. And we are seeing probably longer term, more and more going towards fiber. But I think G.fast is still a pretty healthy market in Europe for us.

[Operator]

Your next question comes from Jun Zhang from Rosenblatt Securities.

[Jun Zhang, Rosenblatt Securities]

So, I just want to get some color about, you mentioned, you have very strong growth in the 3D sensing from Android market. And is that -- the growth more coming from the filter side or the diffuser product? And also, do you see any impacts from the ban of Huawei, so far?

[Oleg Khaykin, President & CEO]

So, I think clearly diffusers, when we acquired RPC, they already had a designed in pipeline that was extensive, and it's ramping very nicely. And by and large, they do provide the best technology, and the best performance. We are -- we are also seeing demand on the filter side, but that's probably, where I have more concern about the Americanization of supply chain.

That said, I mean, we are exploring various other means of either being a -- providing some licenses to some of the people to outright, doing manufacturing for them, and then let them do the back-end singulation and supplying various module manufacturers. So I think that's probably, filters is the area where I would -- where I'm being more conservative about.

Now the other thing is, when we look at these things, there is also a number of players decided to delay 3D sensing period, and we had a strong traction with those players. So I think in the end, in China, it's basically Huawei today. And I think OPPO and Vivo are kind of kicking the can down the road until the supply chain is more mature. I mean, clearly this is one of the things we're watching. But, we'll see how it plays out, given all the negotiations that are going on. We have other ways of monetizing our filter technology.

[Jun Zhang, Rosenblatt Securities]

Okay, cool. But you mentioned there are some redesign of 3D sensing for calendar-year 2020. Do you see any of the role you play -- you can potentially play a role in the back camera modules in the calendar-year 2020? I mean, from your -- the major client?

[Oleg Khaykin, President & CEO]

Are you talking about the, like a world-facing camera?

[Jun Zhang, Rosenblatt Securities]

Yeah, that's right.

[Oleg Khaykin, President & CEO]

Well, I mean we are pretty much in all the major designs. So, I mean, we are the technology leader. And I think we know that if they go to production, we will do very well. It's really a matter of timing. But one of the other things we are hoping for is, there has been also talk at some point in time, more and more time of flight, products coming out, and that will actually play very well into our favor. It would allow us to also, potentially supply our diffuser products into these modules over, by today we are fairly -- we are absent in the structured light for the diffuser product.

[Jun Zhang, Rosenblatt Securities]

Okay. What's the difference, if I compare ASP between the diffuser and theaters?

[Oleg Khaykin, President & CEO]

Are you talking about difference in ASP? Well, we don't provide that information. I'm sure you can get it from your sources.

[Operator]

Your next question comes from Dave Kang of B. Riley FBR.

[Dave Kang, B. Riley FBR]

Thank you. Good afternoon. Just a couple of questions on your fiscal '20 outlook. You expect north, not north, NE growth of double digits. Anymore color or maybe you used 10% over on there? And also on 3D as you expect double-digit growth. So if, Huawei is the main one, and if you're concerned about internalizing, then primarily the growth will come from the North American customer?

[Amar Maletira, CFO]

So let me just correct you. I never said NE will grow double-digit. I said overall NE will grow, SE will be flat, and we will give you more color on what the NSE growth will be. Typically, this business is, long-term NSE is a low-single digit grower, right. So, but there will be some quarters, for example, this quarter in fiscal Q4 that we repeated -- we just reported, we grew 10%. We expect our fiscal Q1 to be also a strong quarter for NE. So overall, NE for the full year will still be low-single-digit grower with SE actually remaining sort of flattish. So that's the commentary on NSE.

Now with regard to 3D sensing, we are going in with the view that as we have done in the past that when we see upside, then we will come and give you the upside. And that's what we have done in fiscal '19. We increased our estimates. When we saw the upside coming in, so we went from 55% to 60% to 60% to 65%, and then now we said we landed around 70%. So we are going to take a similar approach even in fiscal '20, when we provide the guidance. Because as Oleg mentioned, there is a lot of uncertainties and we don't want to put the cart before the horse here. And so, we will give you more color when we meet in two or three weeks. But we will not change the way we guide, is what I wanted to tell you.

[Dave Kang, B. Riley FBR]

Got it. What was the mix between, you said most of the sequential growth in the fourth quarter was Android, what was the mix between iOS versus Android?

[Amar Maletira, CFO]

We don't give that information, but most of the growth was Android, but there was also a little bit of growth in even iOS. So it was a mix of growth between iOS sequentially, between iOS and Android, but more so on the Android side. And we don't share that mix.

[Dave Kang, B. Riley FBR]

Got it. And my last question is on CapEx, what was it? And then how should we think about this fiscal year?

[Amar Maletira, CFO]

Yes. So the CapEx was roughly $45 million for the full year. So we landed about 4% of our revenue, roughly. You should expect us to be between 3% and 5% of our revenue going forward. The CapEx, the mix of CapEx will change in the last -- in the past periods, we used to put a lot of investments on the OSP side to go and build the capacity for 3D sensing. I think, what you will see us is, now shift the CapEx towards growth areas in NSE. We are feeling comfortable in -- investing in the wireless side.

So we will make investment in wireless CapEx to go drive productivity of our R&D teams. And so, the CapEx will shift between say, OSP into NSE. And also -- we are also implementing and upgrading our IT systems here. We've been working on this for the past one and half years, and so you will see some CapEx even on the corporate side. But overall, CapEx will be between 3% to 5% of revenue.

[Operator]

We have a follow-up question from Alex Henderson from Needham.

[Alex Henderson, Needham]

So just wanted to ask a question relative to the architectural, the deployment on 5G. It seems like most of what's being deployed right now is 4G, backbone 4G, backhaul, but 5G in the towers. So mostly around the -- the build around the towers. Does that have an impact on your relative positioning in terms of the timing of the spend or is that more a function of impacting the routing and switching and optical guides that are in that backhaul piece, that are still using the -- where they’re still using the 4G backbone?

[Oleg Khaykin, President & CEO]

So the, what you're describing, I mean, clearly, what's being done today is not standalone implementation, as it kind of overlay on 4G. And I think for -- in the foreseeable future, that's going to be the main deployment. That said, in many ways, where the 5G has, it's actually going to run fiber all the way to the antenna. So at least in the between base station and antenna, you're going to need more fiber than you had before. And you're right, it is largely leveraging the 4G backhaul. But even that backhaul, in some cases, needs to be upgraded to higher bandwidth, if you really want to add additional services.

So, in fact, I mean, this is why I said the 5G sales into the lab will continue to be very strong, because today it's all predominantly enough standalone, but there is also a lot of different flavors of it being required depending on implementation. And longer term, people are going to be looking at pure 5G network. So the reality here is, for many years to come, 5G standards are going to continue to evolve, a new development will need to take place, and that's why we are bullish on our 5G lab presence.

[Alex Henderson, Needham]

And then if I could just get a clarification. I thought you were talking about the NE growing higher than low-single digits with the SCPs flat, and but did you mean that the blended NSE was going to grow low single digits, when you guys spoke a moment ago?

[Amar Maletira, CFO]

So let me just state, so what we are seeing here is Alex, in Q1, we will be double-digit grower in NE business. And we do the same double-digit growth in our fiscal Q4 that we recently reported. For the full year, we have to be anywhere between low-to-mid single-digit grower overall for NE for the full year, right, and SE being flattish to slight growth. So overall NSE should be low-to-mid single-digit growth for fiscal year '20.

[Alex Henderson, Needham]

Does that imply that the back half is fairly flat?

[Amar Maletira, CFO]

Yes, yes. It might be flat at this point in time, based on our visibility that we have. We are assuming it is flattish, because remember we had a very strong Q4 of fiscal '19, right. The recently reported quarter was quite strong, growing about 10-plus percent. So we are assuming that the back half, to your point, you're absolutely right. We're assuming the back half will be flattish. As we move into the year, we'll get more visibility. But we do know that the, as Oleg mentioned, that we will see traction both in fiber and wireless. And at this point in time, we have visibility to fiscal Q1 and a little visibility into fiscal Q2. So I'll give you more color on how things will shape up in the second half, when we meet.

[Operator]

There are no further questions at this time. Bill, I turn the call back over to you.

[Bill Ong, Head of IR]

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

[Operator]

This concludes today’s conference call. You may now disconnect.