Good afternoon, my name is Christine and I will be your conference operator today. At this time, I would like to welcome everyone to the VIAVI Solutions Second Quarter Fiscal 2019 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..

Thank you, Christine. Welcome to VIAVI Solutions' second 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 our current expectations. We encourage you to review our most recent 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..

Thank you, Bill. VIAVI's revenue at $306.9 million grew 49.4% year-on-year and exceeded our revenue guidance range. Both NSE and OSP posted record revenues. NSE revenue at $223.7 million was driven by the NE business segment with notable strength in our wireless as well as our lab and production business.

OSP revenue at $83.2 million reflected solid demand in our anti-counterfeiting bank note business. VIAVI's operating margin at a record 20.8% exceeded the high-end of our guidance and expanded 690 basis points year-on-year as a result of higher revenue combined with a significant operating leverage in our cost structure.

EPS at $0.22, which is a new quarterly record exceeded the high-end of the guidance and more than doubled from a year ago levels of $0.10. Now moving to our reported Q2 results by business segment, starting with NSE. NSE revenue at $223.7 million grew 42.3% year-on-year. Within NSE, our NE revenue at $195.5 million grew 60.2% year-on-year.

This was a result of inorganic growth from our acquired businesses and a solid growth in our lab and production fiber and optical test business. SE revenue at $28.2 million declined 19.9% from a year ago levels driven primarily by the expected declines in our mature assurance products.

The mature assurance business in the quarter was about 17% of SE revenue. NSE gross margin at 65.3% expanded 200 basis points year-on-year due to higher revenue volume and favorable product mix.

NSE's record operating margin at 14.7% expanded 760 basis points from a year ago levels driven by the operating leverage from the addition of the acquired AvComm and Wireless business, growth in our core NE business, cost synergies from the integration of the acquired businesses, and continued OpEx management. NSE's book to bill ratio was above 1.

Now turning to OSP. OSP revenue at $83.2 million grew 72.6% year-on-year on the demand strength of anti-counterfeiting bank note products and 3D sensing optical filters. OSP's gross margins at 50.2% declined 420 basis points from a year ago due to higher mix of the lower gross margin 3D sensing products.

However, OSP's operating margins at 37.4% expanded 130 basis points year-on-year as a result of higher revenue and operating expense controls. Now turning to the balance sheet. Our total cash and short-term investments ending balance was $502.7 million. Operating cash flow for the quarter was $41.5 million.

In our fiscal Q2, we repurchased 8.5 million of VIAVI stock at a cost basis of $9.65 per share, including commissions. Of the $200 million authorized share buyback, we have repurchased shares worth approximately $145.9 million as of the end of fiscal Q2.

We will continue to be opportunistic in repurchasing of VIAVI stock to offset earnings dilution from stock based compensation. Now to our guidance. We expect fiscal third quarter 2019 revenue for VIAVI to be $257 million plus or minus $10 million; operating margins at 13% plus or minus 1%; and EPS to be in the range of $0.11 to $0.13.

We expect NSE revenue to be at $200 million plus or minus $8 million with operating margins at 8.5% plus or minus 1%. We expect OSP revenue to be at $57 million plus or minus $2 million with operating margins at 29% plus or minus 1%.

The lower operating margin guidance for OSP reflects the expected under-absorption of manufacturing costs from planned idling of 3D sensing filter capacity and expected lower demand for our anti-counterfeiting product. We are maintaining our 3D sensing revenue forecast of $60 million for fiscal year 2019.

Due to the seasonal nature of 3D sensing consumer business, the majority of 3D sensing revenue was delivered in the first half of fiscal year 2019. We expect the remaining revenue to be shipped in the second half of our fiscal year 2019. Our tax expense is expected to be approximately $4 million to $5 million.

We expect other income and expenses to reflect a net expense of approximately $2 million to $2.5 million. Share count is approximately 231 million shares. With that, I will turn the call over to Oleg..

Thank you, Amar. Fiscal Q2 was a record quarter for VIAVI across many key metrics. The restructuring of the NSE business segment along with the OpEx optimization over the past three years have created a strong operating leverage to VIAVI.

The operating leverage has resulted in $63.9 million in operating profits reflecting a year-on-year increase of more than 120% from revenue which grew nearly 50%. In NSE, both core NE business and the recently acquired AvComm and Wireless have delivered strong performance.

A recovery in North American carrier spending, demand for 5G test equipment and continued strong demand for 100 and 400 gigabit Ethernet lab and production test equipment were the principal drivers behind the strong NSE revenue.

Our SE business segment came in line with our expectations although we did experience some weakness and order push outs in the data center business. We expect SE revenue to remain steady at current levels for the remainder of fiscal 2019. Moving on to OSP.

The anti-counterfeiting business had a strong fiscal first half driven by robust bank note redesign demand. As we have stated in prior earnings calls, we expect the second half of fiscal year 2019 to be weaker with quarterly core OSP revenues moderating to about $50 million.

Our 3D sensing business also had a strong first half of fiscal 2019 driven by expansion of facial recognition technology deployment into multiple Smartphone models. We also saw the initial ramp from several new Smartphone customers. Our earlier guidance, we expect the second half of fiscal 2019 to be seasonally down.

That said, we remain optimistic about our growth opportunities in 3D sensing as both the technology penetration and content performed - continue to increase. We had a strong finish in calendar 2018.

As we start the new calendar year, we expect the same secular trends namely 5G wireless, fiber, 3D sensing, an increasing military and public safety spend to drive our performance. In conclusion, I would like to thank my VIAVI team and express my appreciation to our customers and our shareholders for their support.

I will now turn the call over to Bill..

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

[Operator Instructions] Your first question comes from the line of Vijay Bhagavath from Deutsche Bank. Your line is open..

Yes, it's Vijay Bhagavath. Thank you. Yes, hey Oleg, Amar, good afternoon..

Hey, good afternoon, Vijay..

Hey Vijay..

Yes, hi. I think my question is around two part. First is Oleg, if you could give us kind of a state of the state in terms of what are the demand trends? What are your sales people customers telling you just globally if I could and then when would be an early inflection for you around on 5G.

Get that question a lot from clients so that when would you start getting paid and monetize your 5G portfolio..

Vijay, you are coming in kind of sort of muffled.

What was your first part? What did our sales people tell us about what?.

Yes, I think the first part is around, you know, just demand trends when you talk to your key customers and sales people [Multiple Speakers]..

Okay, sure, sure. So I think in general let's start with the service providers. Clearly, if we just take us - let's take North America aside, the momentum and spend outside of North America remained strong and steady for all of our NSE products.

In the December quarter, some of the weakness that we saw in North America in the September quarter was remedied as many of the same customers who kind of pushed out the purchase decisions in the September quarter came back in December quarter and placed orders.

So we were pleasantly surprised by a rebound in the North American spend and it was fairly broad across multiple customers. So in that respect, I do not see any material changes in momentum or spending patterns aside from seasonality in the service provider sector.

The only thing I would point out in the service provider sector to the extent, the service providers are also wireless service providers and they are now looking at 5G deployment and trials, we are seeing a heightened interest in our both lab and field instrumentation and services from those players.

So we do think the 5G will drive a nice incremental spend in calendar 2019 among the service providers and it's a good opportunity for us to position VIAVI as the RF field instruments provider in addition to our fiber and copper products. So that is on the NSE side, right..

Yes, I know, please go ahead..

So on the OSP side, clearly, you guys are all aware of the Smartphone slowdown in the calendar 2018. We largely have factored it in our forecast and as a result, we did not feel the need to make any modification to our forecast and clearly, had there not been a slowdown, we would have had a significant upside to our OSP revenue.

Instead we rather came in pretty much where we expected to be. We had a fairly strong second half in the anti-counterfeiting demand, which we have forecasted.

Clearly, the 3D sensing was a bit weaker, but it was within our expectations and we are also now seeing the beginning of the ramp among on the other mobile phone manufacturers and although it's very small - just kind of started in the second half of the year, but we expect that business to grow throughout calendar 2019 and beyond..

A quick follow-on for Amar. Is 20% the new norm for operating margins? The Street was kind of in the high-teens and you guys printed close to 21%. What are your thoughts there on getting into this 20% as the new norm? Thanks..

We would like to drive it as a new norm going forward, but you know, let's, so this is one thing that we have been consistently talking about for the last few quarters, the restructuring that we drove, the cost structure that we have created. There is a huge operating leverage in the model.

So the quarters where we have higher revenue coming in, lot of it drops to the bottom line and that is what you have seen in our fiscal Q2, which is the December quarter.

We had both the businesses, NSE as well as OSP posting record revenue levels, very high volumes and also the OpEx structure that we had created basically landed - we landed at 20% operating margins with NSE at 14.7% operating margins.

Now going forward, I think we should - we are still sticking to a range of 17% to 19% and there will be quarters where we will probably exceed the range as you just saw, but clearly, you know, as the revenue comes in, because of the very high operating leverage in the model, we should expect good operating margin improvements going forward.

Again, it all depends on the mix too and for example if 3D sensing volume goes up, say two years from now and becomes a significant portion of our overall revenue, it does create a little bit of headwind to the operating margin, but it is very operating profit dollar accretive..

And - well said, Amar and I will add as we were checking back, this is all about scale here. There is no secret in terms of what drives the operating margins. Our operating model is pretty much where we need it to be.

We obviously still have some additional opportunities as we continue to implement some of our long-term G&A optimization with a new IT systems roll out and things like that later this year.

We will continue to improve our leverage in the G&A and as I said, for us it's really shifting toward really focusing, driving top line both organically and inorganically because that is really what drives the operating leverage for VIAVI to get to north of 20% to be the new normal, but as Amar said, at this point in the foreseeable future, we stick with our 17% to 19%..

So, if I can just add one more point. In addition to reducing our cost restructuring we also shifted our cost structure in such a way that now we can scale the business quite efficiently and that is the key message that we want to communicate here..

Your next question comes from the line of Alex Henderson from Needham & Company. Your line is open..

I was hoping you could talk a little bit about the process lifecycle of the 5G development. Obviously, you start off in developing interior to the development companies that are developing the chips and the boards. You move to a field test type architecture over time, but through multiple steps.

Can you talk about where you are in each of those steps and how that - where the customers are in terms of their decision making moving from original board design to testing in the lab to testing at the service provider to field deployment to mature..

Sure, so we are not doing much at the point of chip design or the board design, it's really more the companies like Keysight and Rohde & Schwarz that play in that area, maybe National Instruments as well. So when we talk about 5G, you may see them kind of leading with the sales in that region.

Where we enter the 5G product cycle is at the system level. So once the big OEMs who build base station and radios start designing and releasing the product, that is where we come in because we provide large test systems to emulate the 5G network around their product to be for them, to be able to test their product at a system level.

So that is where we enter. Then the next step, as these products go into field trials, we also provide a more skinny down products to do the field testing for the service providers in their labs where they put in multiple OEM products and then they test in a simulated environment and validate it.

The next step comes in is the network build out and what we are hoping to do with our leadership in the system level segment of the lifecycle is to develop a family of products which will position us as the RF field instrument provider to many of the customers who are deploying 5G and that is where the products that we just announced in the Q2 such as CellAdvisor 5G come in and that will provide us with a much longer term revenue stream in the 5G deployment.

In addition to the system test, there comes a time when OEMs will also scale into mass production. At that point, you will need additional test demand, more the production testing for high volume base station manufacturing. So we play very much at that point between the system OEM and the service provider both in deployment and the field operations..

So where are we in terms of the customers along that chain implementing [Technical Difficulty] the 5G products?.

So we are now clearly getting a lot of demand from OEMs who are releasing their systems and as you can imagine, they're making a lot of changes, so they need a lot of test systems.

So I would say there is - we are seeing very strong demand from OEMs, but we are now also starting to see demand from service providers labs to do the field trials and the evaluation of various products. So we are right at that point in time..

So if I were to scale the size of those various - each one has their own demand curve around it, what is the scale of the first versus the second versus the third? When do we get into this steepest part of the demand curve?.

Well, I think, I don't think you have a steepest part of demand current, instead you have multiple waves. So if you add them all together, it kind of creates more smoothed out stream because, initially today, you are selling boxes with the initial software.

Later on in the lab, you sell additional releases as it - because standards continue to migrate. So you keep selling additional releases for the various standard implementation. It's more of a software sale rather than hardware but as you go into the field instrumentation, that becomes I will say 10-year cycle of roll outs.

So that is really what we are shooting for to position the core, we have a business to be a major player in the field instrumentation.

So I would say in the lab test in terms of the OEMs, you are probably going to be seeing next several quarters a lot of demand for systems just to do the system testing where you ship a lot of boxes and in the follow on years, you will see a lot more software sales that will go in the existing installed base with additional standard releases..

I see. Thanks..

So there is really no just one peak and then trough for many years. It's multiple like I would say multiple bell curves adding together at upgrades a fairly smooth revenue..

But in general, the field market is much larger than the lab market..

Yes..

It is roughly 80/20..

That is right..

Right, so we should be seeing an acceleration in demand once we go to the field market, which is probably back half of this year and into next year?.

I don't know if it's acceleration in demand, it's more like sustaining demand because remember field market is much bigger, but it's also the spend happens over many more years. Okay? Whereas the lab market is driven very much by the transition points in technology and then a lot of the follow-on in software sales.

So for example, today we are still - a big chunk of our revenue is still for the 4G and LTE software upgrades to the existing system as well as the new 5G system shipping. It's not all 5G that is driving our revenue..

Okay, thank you..

Your next question comes from the line of Michael Genovese from MKM Partners. Your line is open..

Hey guys. I guess I think some of this has been asked, but I maybe ask it in a slightly different way.

In terms of the upside in NE in the quarter, how much would you describe as being just a budget flush, the seasonal type of budget flush as opposed to the upside being more indicative of something, you know more sustainable happening and how much of the upside was more in the organic side and how much was more on the acquisition side?.

So let me start with the last question first, right.

So when you look at the upside of roughly about $24 million, we gave a guidance of roughly $200 million and we came in at $224 million, more than 50% of the upside actually came from any NSE organic business, our core business and most of it on the NE side of the business, so on the core instrument side of the business and the balance came from our acquired entities mainly Wireless driven by the momentum in 5G.

So when we think about - and I will just give some color and I'm sure Oleg is going to jump in here, when you think about what is going on and what we saw in our December quarter is when you go back to the September quarter, if you recall, we said that there was sort of a pause in spend in North America whereas all the other regions were spending.

But North American service providers, both Tier 1 and Tier 2 just there was a pause in spend. What we saw in our fiscal Q2, which is the December quarter, is that actually the spend came back..

Yes, I would say, rather than a budget flush, it was a delayed spend because there was not like something that money popped out of nowhere. It was effectively the things that were in the funnel and finally the funds got released a quarter later.

So it was not something like a bluebird that came out of nowhere, we have some money to spend, what do we buy, it was actually the money just funds materialized for a lot of the programs that were in the funnel that we were expecting maybe in the September quarter, but there was some budget flush here and there..

Okay, that is helpful. And then I guess I want to ask on the 3D sensing side, couple of questions.

One, you are maintaining your guidance, I'm just wondering if - I don't know if you could get into this level of granularity though, the mix of the sort of operating systems that make up that, that guidance is changing and then related to that question on Android, is there any update, I mean is Android for this next year, is it going to be a kind of a low-volume market on very, very high-end phones or is there any sense that it is moving sooner to more of a mass market opportunity?.

I wouldn't say it's very high-end phones, there is actually a lot of models. I think the question will be more driven by consumer adoption of these phones rather - and these features rather than which models, because actually, there are quite a few Android models out there that are bringing out these features.

My sense is, it's still going to be - I don't think it's going to be the level of volume that we see with other operating systems, just because it's the first year, but I would say, really the biggest driver will be just consumer acceptance of these features, it's not going to be - it's not a shortage of a models being released.

It's really the acceptance of the features by the market. We certainly hope it's a good one..

Did you want to comment at all on that mix shift within your guidance for this year if there is a mix shift?.

So I'm not going to be very specific on this for obvious reasons, but clearly, we are maintaining $60 million of revenue guidance, Mike. for the full-year.

70% to 75% of that $60 million was recognized in the first half and the balance is recognized in the second half and within the second half, we are seeing the Android-based 3D sensing filters, there's a little bit of uptick there. We are seeing some traction there and for the lead customer, we are maintaining the same guidance.

So we were conservative to begin with when we put the $60 million and we are holding to that number, but we do see some traction on the Android-based customer and hopefully as the whole year rolls through, we should see this momentum continue..

And I would also add that in Android ecosystem, we get a twofer. We have a very strong position in both engineered diffusers as well as filters.

So we actually have a greater content in terms of the product content per phone in the Android phone than in our other phones, but that said, it could well be that in the future, we may be able to penetrate all ecosystems with our diffusers as well.

So I think bottom line is - we are - the only thing I can ask from my team is win everywhere they go and then we will just sit back and see what the market decides. So if market accepts it and things are great, we will do very well, but it will not be for the shortage of design wins or losing any particular phone model..

Thanks so much..

Your next question comes from the line of Samik Chatterjee from JP Morgan. Your line is open..

Thanks for taking my question. This is Samik here. Oleg, I just wanted to understand, you have kind of discussed the strong spending from the North America service providers that you saw come back and kind of help you this quarter.

Can you talk about what you saw in some of the international markets, is there a similar trend there where you are seeing strength of what you expected or is this kind of something that you expect will kind of materialize in the coming quarters? Can you just help us on that?.

Well, I mean, let me just be clear on North American market. When you say strong, I mean it's as strong as would you call a dead cat bounce. It's just - the prior quarter was so weak and there were so many postponements that relative to that, it looks strong.

It's not strong by any measure, if I compare it to two, three years ago the way they were spending, but it is let's put it this way, at this point in time, we have so diversified ourselves from North American market that any recovery or any growth in the North American spend will provide us with a significant upside to our quarterly run rate and that is actually the point I want to emphasize.

We have seen the last year or year and a half, North American market being very pragmatic in terms of spending to the extent they do need to continue to improve the service and bring on new services, they will need to play some catch-up.

So to the extent they spend materializes although sporadically or on a sustained basis, it's going to be very good for us. So in that respect I would say December quarter was more of a catch up on the September quarter although there were a few instances where capital - CapEx materialized and they had to spend.

So we benefited from then as well, but I think overall, it was really just more of a postponement of September quarter coming in December..

And sorry, was the trend different in kind of the international markets with some of your customers or largely consistent with North America?.

Say again, please. Repeat..

Was the trend consistent with the international customers or - kind of what you saw in North America was that consistent with international as well?.

Well, the international customers it's pretty much steady and nice growth I would say in spend over the last couple of years. So, I mean in the way we have not seen the same idiosyncratic behavior that we have seen in the North American market with the international markets.

I mean I would say Europe, Latin America, Asia Pacific has been fairly steady and consistent they - it's just a part of their business model to every quarter they spend a certain amount on network maintenance and things like that.

What we have seen in North America in the past couple of years is just - really just kicking the can forward by many operators and delaying spend as much as possible and now it's getting to the point where they simply have to do something otherwise their network readiness continues to decline.

So I certainly hope that in North America we will see some of the reversal to the downward spending curve that we have seen in the last two years and to the extent that happens, it will be a tremendous leverage to our operating model..

Okay. Thank you..

Your next question comes from the line of Jun Zhang from Rosenblatt Securities. Your line is open..

Thanks. So my first question is that the 5G revenue contribution. So I think in the last quarter you gave us some guidance for the 5G testing business.

Could you update that the revenue guidance for that? And second also you mentioned there is some order push outs from data center clients and could you give us more color about that and when do we expect that market to recover? Thanks..

Yes, I will take the first one and Oleg will take the second one on the data center client push out. So we did not give any specific guidance on the 5G or wireless business.

What we did say is our combined business that we acquired the AvComm and Wireless businesses combined, we said that we will be at the high-end of the guidance range on the revenue about $245 million. We feel good about it.

In fact, I think we are exceeding even the high-end of the guidance range given the execution we are seeing on the - specifically in our wireless business and the momentum in 5G, so that is good. So we feel positive about the revenue trend in that business.

Also, I will just add here that we are tracking to the cost synergies that we had committed to the Street, about $15 to $20 million.

In fact for year one, which is fiscal 2019, we are in fact ahead of the of the plan and we have started also to reinvest some of it back into the business so that we can go and capture market share and gain market share as the momentum for 5G continues. So I will turn the call to Oleg on the data center client push out et cetera..

Yes, so I mean that one is really more of a - we have some fairly sizable deals that is just taking longer to execute, but we have seen the data center spend in general being more cautious in the fourth quarter than in the prior years.

Usually, we have seen a lot of budgets being used up in the fourth quarter and this time around we saw a more cautious data center spend environment than the usual. That said, revenue-wise impact is not that material, it was more material for our enterprise and cloud business unit, or the Company-level, it was not a very material change.

It was more of a sentiment that we have seen in that segment that we haven't seen before..

Great, thanks a lot..

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

Thanks guys.

Maybe building on Alex's question and just kind Oleg, the commentary that you gave there about kind of leveraging the lab expertise you guys have into the field implementation kind of opportunity and I just wanted to make sure like do you guys have all of the products that you would need for that today to kind of take a bigger share in field implementation or are those products that you are developing or leveraging kind of relationships there.

And then maybe the second question for me is on the RPC Photonics acquisition, just any color on kind of revenue contribution that you would expect from them in calendar 2019?.

Okay, so the first question, in terms of the wireless field, when you start from virtually zero, any kind of increase is a very high percentage. So I'm not going to talk in percentage terms because it is clearly going to be big.

Now what we have is that we have a very strong position at the - in the lab, both at the service provider lab as well as the OEM, right and that is - we are well north of 80% in that area.

What we have in terms of the - being able to capitalize on the field deployment part of instrumentation is we have already some instruments that we have announced, namely CellAdvisor 5G, which really talks about analysis of the - what is going on inside the beams and it's a very powerful tool for the network deployment.

We also have a family of fiber tools that are specifically optimized for the deploying the 5G infrastructure that we bundled together and obviously also our meter tools that are also come with the software load to optimize them for 5G network deployment.

So it's taking our existing products, adding software into them that supports a 5G deployment, developing all new instruments for 5G that we have already - one of them has already been released, but also then, looking at our Assurance Software and modifying it and putting it into the 5G deployment.

So I would say we are probably about 60% to 70% of the way in having our full kind of 5G fields toolkit solutions released and with the rest of them coming out in the next six months. So, I feel we are in very good position to be able to offer significant assistance to our customers on the service provider spend to deploy 5G.

And clearly, if we succeed in that case, we will create a whole new annuity for this Company outside of fiber and copper to include RF and wireless and clearly that is the big bet that we are making in positioning VIAVI for the next 10 years.

Regarding RPC, do you want to comment?.

one is their technology leadership in the engineered diffuser area for 3D sensing.

Number two strong design wins within the Android-based Smartphone customers and number three is it really increases our addressable market in the 3D sensing filters in the Android ecosystem and so you think about it again Android-based 3D sensing features are still in the initial stages.

We believe that it will ramp in calendar 2019 and beyond and earlier we had one unit, which is one filter for a say front-facing. Now we will have two units which will have the engineered diffuser as well as the filter in the front-facing. And now if the world facing feature gets added, you will have two more, so it's just multiplies.

So it's early right now, but it's too early to give you any guidance since the Android ecosystem as I said is in early stages, but as it starts ramping up, this can be really meaningful. Now the ASPs are not the same, but it is really meaningful increase to our revenue..

So yes, if Android 3D sensing really - market adopts it and it scales up strongly throughout the calendar year 2019, it will be a meaningful chunk of our revenue exiting the year..

And we want separate RPC versus our 3D sensing. We will give you one 3D sensing revenue guide et cetera so that it will be easier for us because it's also interconnected here..

Got it. Understood. Thanks guys..

Thank you..

Your next question comes from the line of Dave Kang from B Riley FBR. Your line is open..

Thank you. Good afternoon. First of all congratulations on nice results especially considering taxes were higher than expected.

So my first question is regarding taxes, why were they higher than expected and regarding $4 million to $5 million per quarter, should we use that for fiscal '20 as well?.

So on taxes, thanks for asking the question you know. Higher the profit and depending on where the profit lands, if it lands in tax jurisdictions where we don't have NOLs, we pay higher taxes. So it's just a result of higher EBIT, we had a record operating profit, quarterly record operating profit in the history of this Company and so higher taxes.

Now you know, typically our tax is roughly around 17% to 18% of PBT and that is something that you should use going forward and it will be roughly in that range..

Got it. And then moving to wireless....

Dave, Dave?.

Go ahead..

So let me just - so for this particular quarter, it is lower than what is in that range and this is again because of where the profits are landing, right. It all depends on where the profits land..

Got it, got it.

And then on the wireless side, who are your main competitors in China/Asia? And my understanding is that or is it fair to assume that it's really - regarding 5G activities, is it more China/Asia - are they leading North America/Europe?.

So from a competitive perspective in the labs, we basically have a significant market share, so we won't go where it is - we do system testing in the lab for 5G and we see the roll outs and field trials happening across all the regions, but specific regions like Japan, as an example or South Korea is a little bit ahead, but we do see that in North America too and Europe is probably catching up..

Well, I will tell you the most significant competitor to our 5G portfolio was VIAVI before we acquired the Cobham assets and we exited that business.

We are the second biggest player and we felt we were sub-scale and we just could not keep up with the level of investment and customer demand and there are some small companies maybe they offer a sliver here and there, but really in the end, when customers want a partner who can keep up with all the standards with all the performance requirements, I think in the system test, we have by far the most compelling solution and I mean otherwise you would never be north of 80% market share in that particular segment..

Got it. And then moving to 3D, so regarding diffusers, how should we think about ASP and margins.

I know you don't want to talk specifically, I mean, can we assume maybe it’s like maybe 40%, 50% of - as far as ASP is concerned, 40%, 50% of filters and what about margins?.

So listen, if you are market leader, the last thing I want to talk is about pricing and margins because I'm sure you are not the only ones on our call listening to it. So let's leave it at that. It's for us to know, we guided and it's for our competitors to guess from the sidelines. So we wouldn't be in this business if it was not attractive.

So I think I will leave it at that.

One thing I would add, actually, just to clarify on your prior question on the competition, the biggest single competitors to the system level test is the internally developed solutions, so all the major OEMs actually have their own internal developed solutions and that is usually who you compete against in the offering..

Got it. Thank you..

Your next question comes from the line Alex Henderson from Needham & Company. Your line is open..

Thanks. I was hoping you could talk a little bit about the OpEx lines. You had a little bit of an acquisition in there, you have got some other things moving around, your R&D looks like it's picked up a little bit.

Can you talk about how you are thinking about the expenditures going forward, are you going to keep them fairly stable at these levels, are you going to continue to push up on R&D investments? Do you need to build out SG&A internationally? Any pieces of the puzzle would be helpful. Thanks..

Yes, so from an OpEx perspective, we'd like to keep it at the same level. As I mentioned earlier, Alex, we have built a cost structure where we can scale efficiently. So, if your revenue is growing say X percent, your OpEx will grow much lower than the revenue growth rate. That is how we are looking at it.

So our philosophy is we do dynamic reallocation of expenses, making sure that if an R&D spend is needed, we want to double down in one area, we make sure that we reallocate our expenses from an area that we don't believe it will grow to an area that will grow.

So a good example is also cost synergies that we are driving in the acquired businesses, some of it we basically funneled it back into the business so we can go invest to drive growth. So think about our OpEx line to be roughly flat.

When I say roughly flat, there will be some variation here or there depending on how revenue will come in and how - if the revenue and bookings go up dramatically, we will have to pay higher sales commission. That is a good cost to have, but otherwise the OpEx should be relatively flattish..

And I think it's also fair to a point that this is a first calendar quarter. So there's a lot of regulatory accruals fall in this quarter. So some of skews the first quarter OpEx..

So as you can see, if you do the math, sequentially, the OpEx will be sort of flattish coming from December quarter to the March quarter although within those numbers as Oleg mentioned, you have higher cost coming in from payroll taxes and benefits that since we are just beginning the calendar year.

So typically payroll taxes and benefits go up at the beginning of the calendar year, but offsetting that will also be some of the efficiencies that we are driving..

And the lower commissions..

And the lower commissions et cetera..

If just look at the R&D line, did $43.8 million in the December quarter.

Is that kind of a low watermark at this point going forward or because of the acquisition kicks in there or will you have some seasonal declines, seasonal up and downs in that business or in that spend?.

So I won't go specific on any of the OpEx line items, but typically we will keep it sort of flattish. In some cases, we might reduce G&A expense and reinvest into R&D expense.

Those things will happen, but overall, our intent is to keep the OpEx sort of in control and sort of flattish going forward and there will be ups and downs within that depending on the quarter..

And keep in mind that not all of our R&D is fixed, there is always what we do is we have a certain R&D level, but then we have some additional budget that we spend on third parties to kind of absorb the peak, especially in the software development.

If we have a, like a particular third party we want to accelerate certain problems may spend more in the quarter and then that gets pulled back in the future quarters, but, as Amar said, it's going to be roughly flattish..

One last question on this line - you have now been almost a year into the acquisition.

Are you pretty much through with the synergy benefits from integration or are there further cost savings yet to accrue as a result of things that you are exiting buildings or streamlining OpEx expenses or what have you?.

Yes, so it's a good question. So we said $15 million to $20 million of savings over a three-year period. So we are on track to achieve those Alex and in the first year, we saw roughly about 30% to 40% of that, but we are ahead of that plan.

So we will be ahead of our plan - internal plans as well as what we communicated by the end of fiscal year 2019, which is our June quarter.

So a lot of savings will be within our numbers, we will see some savings in fiscal 2020 and some savings in our fiscal 2021, especially when it goes to - we are trying to still integrate the systems, integrating systems, closing down entities, closing down real estate those things take time and those are in our '20 and 2021 numbers.

We continuously drive savings even in our COGS, you don't see that because in some cases we are also ramping up revenue without adding costs. So there's lot of things going on. So to answer your question in summary, we are ahead of our plan in terms of the timing and achieving our cost saving synergies.

You saw some of it already hit our numbers and it's already in our December quarter numbers and will continue to be in our second half of 2019 numbers and we plan to continue to execute on the cost savings synergy numbers that we provided to you guys about a year ago..

Great, thanks..

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

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

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