Ladies and gentlemen, thank you for standing by, and welcome to the Viavi Solutions Third Quarter 2020 Earnings Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a Question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today Bill Ong, Head of Investor Relations. Please go ahead, sir..

Thank you. Welcome to Viavi Solutions Third Quarter Fiscal Year 2020 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 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 slides which includes historical financial tables are available on Viavi's website.

Finally, we are recording today's call and we'll make the recording available by 4.30 PM Pacific Time this evening on our website. I would now like to turn the call over to Amar. 8.

Thank you, Bill. Our fiscal Q3 was a challenging quarter for Viavi as the COVID-19 pandemic impacted all businesses around the globe. Fiscal Q3 revenue at $256.2 million declined 3.4% year-on-year and was below the guidance range of $268 million to $288 million. NSE was below the guidance range, while OSP exceeded the range.

Viavi's operating margins at 14.8% increased 10 basis points year-on-year and were within the guidance range of 14.5% to 16.5%. EPS at $0.14 reached the guidance midpoint of $0.13 to $0.15 and was up by a $0.01 from a year ago. Now moving to our reported Q3 results by business segments, starting with NSE.

NSE revenue at $187 million declined 9% year-on-year and was below the guidance range of $204 million to $220 million. Our missed revenue guidance was largely a result of COVID-19 lock down. Within NSE, any revenue at $163.9 million was down 9.2% from a year ago, primarily due to declines in the mature access and cable field instruments.

While lab instruments across both wireless and optical combined was roughly flat. SE revenue at $23.1 million declined 7.2% from a year ago, primarily due to weakness in our mature assurance products. While our growth products with NSE were roughly flat. NSE gross margins at 64.2% increased 20 basis points year-on-year.

Within NSE, any gross margin at 63.6% declined 60 basis points year-on-year primarily due to lower revenue volumes. SE gross margins at 69.3% expanded by 540 basis points from a year ago due to a favorable mix within our growth assurance as well as data center product lines.

NSE's operating margin at 7.4% was below the guided range and decreased 270 basis points from a year ago, reflecting the lower revenue volume due to the impact from COVID-19 partially offset by good expense control. Now to OSP. OSP revenue at $69.2 million exceeded the guidance range of $64 million to $68 million and increased 15.7% year-on-year.

This increase in revenue was a result of better-than-expected demand in anti-counterfeiting products. OSP's gross margins at 52.6% increased 110 basis points due to a favorable mix of anti-counterfeiting products.

Operating margins at 35% exceeded the 31% to 33% guidance range and expanded 440 basis points year-on-year, primarily due to expansion in gross margin, as well as good operating expense management. Turning to the balance sheet, our total cash and short-term investments ending balance was $537.3 million.

Operating cash flow for the quarter was $39.1 million. In Q3, we repurchased approximately $33.1 million of Viavi stock at an average cost basis of $11.49 per share including commissions.

Of the $200 million authorized share buyback announced during September 2019 Analyst Day event, we have repurchased approximately $43.8 million of Viavi stock to date. We plan to continue to be opportunistic in our share repurchase. Earlier this week, we closed a secured revolving line of credit of $300 million.

We had a strong interest from several banks for this credit facility and it was oversubscribed by 70% from our original target. This secured credit facility combined with more than $530 million of cash on our balance sheet further strengthens our liquidity position. Additionally, we do not have any debt that is coming due for the next three years.

We have two convertible notes with our $225 million note at 1.75% coupon due in 2023 and our $460 million note at 1% coupon due in 2024 with conversion prices of $13.94 and $13.22, respectively. Now to our business outlook.

Due to the macroeconomic and business uncertainty as a result of COVID-19 global pandemic, we are not providing guidance for fiscal Q4. That said we expect Q4 revenue to be flat to slightly better than our fiscal Q3 driven by seasonal strength in NSE.

Looking further ahead, we believe most of the fiscal March quarter's NSE revenue shortfall was pushed out, but it remains unclear when these orders will be placed as our customers continue to be impacted by local shutdown.

For OSP, we anticipate our 3D sensing product revenue, which is less than 10% of Viavi's annual revenue to be impacted by weaker end market demand for high-end smartphones. However, we expect, anti-counterfeiting product demand to remain stable given that bank note reprint are typically countercyclical in recessionary periods.

Before I turn the call over to Oleg, I'm pleased to note that Viavi successfully transitioned to a new ERP system during our fiscal third quarter. We have been working on this initiative for more than a year.

This successful transition would drive further efficiency in our G&A and other functions while effectively responding to the changing business needs. With that, I turn the call over to Oleg..

Thank you, Amar. Fiscal Q3 was a challenging quarter for Viavi as COVID-19 pandemic migrated from China to Europe and then to the US impacting our operations and R&D centers globally. NSE demand experienced increasing headwinds as the quarter progressed and came in below our expectations.

OSP on and other hand saw a late quarter recovery due to customer order upsides and expedites and as a result came in above expectations. While the combined revenue came in below our guidance range, through disciplined OpEx management, we delivered the midpoint of our non-GAAP EPS guidance range of $0.14 a share.

The NSE business segment was most impacted by COVID-19 headwinds as our customers increasingly went into work from home and lockdown mode of operations. Many purchase decisions were either pushed out or placed on hold. That said, at this point, we are not seeing any meaningful order cancellations.

We estimate the overall impact of the pandemic on NSE revenue to be around $20 million. Absent that impact in the Q3 NSE revenue would have been near the midpoint of our guidance range of $204 million to $220 million.

Nearly half of NSE revenue shortfall can be attributed to customer and logistics shutdown that resulted in shipments or acceptance getting delayed since no one was available at the customer side to receive products. The other half was the result of demand slowdown with orders pushed out into Q4 and beyond.

This mainly impacted our field instruments product lines. We expect these orders to recover when customers return to their normal mode of operations.

COVID-19 also impacted SE revenue with assurance products down from a year ago as customers under lockdown were unable to provide on-site verification and acceptance thereby pushing out revenue recognition into the next quarter. This impact was more modest for enterprise and data center product revenues, which were roughly flat to a year ago.

Our lab production products which include 5G wireless and 400 gig fiber delivered as expected. R&D spends generally held up well during the Q3 and continued strong into Q4 as customers continue to invest in 5G and 400 gig technology rollouts.

Lastly, our NSE operations team has performed admirably and we did not experience any logistical or supply chain issues that would have impacted our deliveries. The OSP business segment responded well to the challenges of the pandemic lockdown and exceeded our guidance range expectations.

When our Chinese operations got impacted by the lockdown, our California operations made up the difference. When California enacted the shelter in place order beginning in mid-March, we were able to leverage our Chinese operations. And the counterfeiting revenues came in better than expected.

We saw increased security pigment demand at the end of the quarter. While the visibility remains limited as to whether or not this positive trends would continue, we expected a minimum, the core OSP business to maintain its $50 million per quarter run rate for the next several quarters.

Additionally, given the broad based financial stimulus measures announced by various governments, together with a healthy bank [from some of the region] and pipeline, we have a positive view on the medium term outlook for anti-counterfeiting products.

Our 3D sensing revenue came in below our expectations during the quarter as customers reacted to pandemic driven supply chain disruptions and reduced end market demand. We expect these trends to continue into Q4. However, we expect a seasonally stronger second half of calendar year 2020.

We expect the end market demand volatility and macroeconomic headwinds to persist in the near future. That said Viavi is well positioned to persevere. We have a strong balance sheet and liquidity, which combined with our market leadership and disciplined cost management, sets us up well to manage the impact.

Our major growth drivers remain intact as do our core products, some of which provide a counter cyclical benefit during recessionary times. Historically, in a down market, service providers place more focus on maintaining and improving efficiency of their existing networks versus a new construction, which benefits some of our NSE product lines.

In OSP, we expect stable demand for banknote reprint during the economic downturns, which was the result in steady demand for our anti-counterfeiting products. In conclusion, I would like to express a special thanks to my Viavi team for their extraordinary performance during these challenging times.

I also wish all our employees supply chain partners, customers and our shareholders to stay safe and healthy. I will now turn the call over to Bill..

Thank you, Oleg. This quarter we will be participating at the following conference virtually. The JPMorgan Global Technology Investor Conference on May 14. The Craig-Hallum Investor Conference on May 27 and the Stifel Cross Sector Insight Investor Conference on June 9. Ian, let's begin the question-and-answer session..

[Operator Instructions] Your first question comes from the line of Mehdi Hosseini of Susquehanna. Your line is open..

Yes. Thanks for taking the question. I wanted to get an update on the rollout of 400 gig and how do you see that the evolving over the next few quarters? Then I have a follow-up..

Sure. Well, I mean a lot of our customers are rolling out 400 gig modules. So when we talk about our 400 gig rollout that basically means that we are selling production test equipment, as well as some of the lab equipment to these customers, both the module manufacturers, as well as the system manufacturers.

And we are continuing to see very strong demand for router modules. And I think China is clearly one of the big 400 gig rollout destinations. Also we are seeing this demand continue into the Q4 and probably be on for the rest of the year. So, a very strong demand across all segments..

Perhaps if I may rework the question, as we are going to production would have a step-up the revenue be enough, if some of the incremental revenue that was supposed to happen in the March quarter and got pushed out into the second half? In another words can 400 gig productions be a strong enough to make up for some of the revenues that they're indefinitely pushed out?.

Well, first of all, I don't think I said any revenues and definitely pushed out, I think it's kind of pushed out to the near-term as the -- well, I mean, definitely we assume the customer start coming back to work and they will make a decision. So it definitely is probably too strong award.

As I said during my prepared remarks, we did not see any 400 gig push out in fact, both our 11 production 400 gig and 5G wireless all the products shipped as expected, and the customers to come in fact there is a strong demand for this product is because I think the all our customers seeing very healthy demand in the market even with the downturn.

So I don't think we're going to see any additional demand beyond what we are planning that would make up any shortfall. So I think the shortfall that we saw in the field instruments, I don't think it's going to be the difference will be made up by higher demand for 400 gigs. I think 400 gigs are continuing on its own trajectory..

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

Thanks. Hey, guys. So I was hoping you could talk a little bit more about the OSP counterfeiting business. Obviously, this is a very important product line in this environment and its demand seems to have a dynamic that's pretty independent of economic activity, which is nice.

But I think prior to this commentary, you had really thought about this is potentially several quarters out before you would see a pickup in this arena.

And so I'm trying to understand what it is that's caused to pull in? I don't normally think of people expediting orders for pigments and security products and to what extent do you think you're pulling from the back half potential reprint opportunity?.

Well, so this particular pull in, I mean, first of all, just give you a bit more color on this thing. So the -- most of the printing plants were just as heavily impacted by shutdowns. So in fact most of the printing facilities have been shut down for the last month and a half. Okay. Two months.

What the concerns are also becoming with significant reduction in number of flights. People are getting concerned about the level of inventories they hold on hand and some of it was really driven they wish to have a bit more supply chain security and having product closer to the source.

That said also what we're seeing initially happens, there is plenty of inventory. So initially when the notes are being distributed they come out of inventory, which depletes their inventory of finished notes.

Then to the extent these notes need to be replenished that's when the printing starts and that's when you want to have enough pigment on hand to make the ink as this thing progresses, it generates the demand for additional volume. So thus I would say our thesis that there is a lag of several quarters still holds.

But just as with a lot of other products, I mean we are somewhat guilty ourselves. We pulled in some of our critical components for our products to build up inventory internally fearing some of the supply chain disruptions.

That's why, we have not experienced any supply chain disruption, because we are well prepared and have all the critical components in-house to be able to meet the 400 gig and 5G demand..

So if I could just follow-up on that.

So, have we seen an increased churn and the currency installed base that's a result of COVID causing them to destroy builds or anything of that sort that that is to facilitating an acceleration of demand? Or is that just not occurring? I mean how do we reconcile the demand acceleration?.

Well, I think, I don't know how much extra currency got destroyed or released. I mean that kind of information you'll get from Central Banks. But generally in the past, whenever you had any type of fiscal stimulus part of it, it comes out in terms of physical notes.

And one of the things we did see is the paper notes are actually proving to be lower risk than the plastic notes. There has been, in some past there has been migration to miler type money and apparently that currency is proving to be more risky than the paper notes, which have some of the antibacterial properties and so on and so forth.

So for us, it's not an issue, because we don't really play on a miler plastic notes we are mainly supply inks into the pigments into ink they go on a paper notes and as in the past, I do believe we're going to see some of the fresh notes being released, either to stimulate the economy or replace some of the retiring notes..

Your next question comes from the line of John Marchetti of Stifel. Your line is open..

Thanks very much. Oleg, I was hoping you could just take a moment, it sounds like the lab business held up fairly well. I would have thought that in this environment with people working from home and some things like that might have been a little bit weaker, because you didn't have people in the labs sort of doing work.

I'm just curious if you can talk about that a little bit in contrast that with the field where again I would have thought as technicians are out there making sure networks are still running, we might have seen that actually be a little bit stronger on the fiber test side or things like that.

I'm just curious sort of how you look at those two in this current environment right now?.

Sure. Let me give you more color on that. So first of all, I mean, when we look at the new technology releases, right, which is now, we are in the midst of two big rollouts. One is the optical networking.

I mean these things are still being built and being shipped and from what we see, yes, there may be not all of the engineers are in a lab but many companies are running essential staffing in the lab and continue to do the development. So what we have seen is the new technologies that are being rolled out, continue to be aggressively pursuit.

And by -- even by the way, even within Viavi even though we have a lot of work from home, we do maintain some level of engineering labs activity somebody goes in a lab does the test or while other engineers can work remotely.

So in that respect, what we've seen and not seen the same thing happen in 2008, 2009, key new products, some of the better companies use that opportunity to continue to accelerate product launches, so they can come out stronger and pick up share during the downturn. So we are seeing exactly same thing.

Really the advanced products lab and production for 400 gig and 5G continue to be as strong as ever. In terms of the field operations, one of the things you see is, there are two types of technicians in the field. There are the ones they do the customer turn in and the go into your house and these operations.

Most of those are staying at home right now because most vendors have told those to basically stay at home. The area of the networks where most operators are working and continue to send their technician to is the maintenance of the core of the network.

So it's a smaller component of the field force and we continue to see shipments of instruments in orders to those parts of operations to be pretty strong, where we saw a big drop-off is really at the very edge which is dealing directly with the customer premises.

So, for the time being, if you want to get a new service, you're probably not going to get it. But what a lot of operators are doing is trying to increase effective bandwidth within their network and get more efficiency out of their existing core and plant to provide additional capacity to the existing customers.

So that's why, when we talk about field instruments, there are field instruments kind of the core maintenance of the network and then there is the kind of customer clients maintenance. The client maintenance is where we saw drop off in demand, whereas in the core of the network that business continues to be pretty good..

So just to add to that, John, in my prepared market I've said cable and access is where access which is on the DSO side is where we saw most of the decline year-on-year, as well as the GAAP within our guidance and what actually we reported..

And I don't know how it is where you live, but I know here in the Bay Area, you're pretty much told by your local service providers that they're not going to send any technicians to your house. So you kind of on your own. See if you're connected. It's great. If you are not, it's not so great..

So as there is some pause, even on the construction site given the lock down and construction is also an area where we sell to in addition to the maintenance at the edge of the network. So both those areas we see a pause..

Your next question comes from the line of Tim Savageaux of Northland. Your line is open..

Hey. Pardon me. Good afternoon. And kind of wanted to follow-on to that a little bit with regard to some of the dynamics at the edge and among service providers.

Maybe, well, first off can you quantify, do you expect a similar impact that you would attribute to lockdowns, doesn't sound like there's much in the way of supply chain disruption, but for the fourth quarter, I guess first question, and then, Oleg, more broadly, as you look at dynamics, like for example, cable operators reporting beyond record increases in subscriber at in the March quarter and general trends across networks to see increased network traffic.

I wonder for Viavi as a test supplier, what sort of impact that has on your business? And you wouldn't feel like it would be as positive some of the infrastructure, guys? But as you look at these dynamics among service providers considering increased traffic, increased subscriber at, I guess, how long do you expect that to last and what are you seeing kind of real-time to-date? And whether you have any positive exposure to increased network traffic?.

So, sure, I mean clearly increased network traffic is good news for us; it's not just increased traffic. It's also at the symmetry of traffic. One of the biggest challenges that we are seeing with some of our customers is the significant increase in the upstream traffic.

So I mean clearly, most people are used to have just downloading the data but now people are trying to, if we see significant increase in uploading. So one of the big challenges with capacities that service providers are dealing with is how to create more bandwidth for the upward.

And that means usually opening up some of the less desirable bands with more noise and things like that, which require a lot of troubleshooting. So I'd say as the amount of bandwidth demand is increasing and the mix of the bandwidth is changing. It's going to create more technical requirements.

I think in the short term, remember, it has been a very dynamic environment. It's a various stage when a lockdown starting at the end of February, some -- the beginning of March, some at the mid-March.

I mean there has been, it's been pretty chaotic and when people were suddenly or were told don't come to work go home, a lot of things kind of fell off the wagon. What we're seeing now as things are stabilizing, everybody is getting their bearing and figuring out, okay.

What is a must-have what is a nice to have, what are the priorities and as the situation stabilizes, even though there is still quite a bit of uncertainty as to which states are going to reopen when and how and who is going to come back to work that I expect at least we are seeing some of the normalcy and things are just kind of starting to get themselves figure out in terms of the operations returning back to normal.

Now, clearly one of the big things is recalling all the technicians back to work and that drives the -- a lot of the edge demand for us. We are seeing healthy demand on kind of midstream over the network. We are seeing healthy demand for the products that manage the core bandwidth, allocation and management.

The area that's still kind of remains a TBD is the Edge and the number of opportunities that are outstanding there, there are pending the resolution one, the rest of the workforce again comes back to work..

So for Q4, although, we are not giving any guidance, but we did give some color on what we're expecting from a revenue perspective, we expect overall Viavi revenue to be roughly flattish to slightly better than Q3, mainly driven by the seasonal strength in NSE.

And the seasonal strength is coming from the lab side of the business as well as, as Oleg mentioned in the mid haul and the back haul of the network. The access piece we are expecting it to continue.

We do believe that some of this demand is getting pushed out, because at the end of the day, the service providers will have to continue with the construction and maintenance of the access side, both on the fiber as well as on the cable side because the subscriber is demanding for higher bandwidth and it's also willing to pay up for the bandwidth.

So they will expect higher service level from the service providers. But going into Q4, I think it was more prudent for us to assume that this is going to be the same as what we saw in Q3 with strength in lab as well as in the mid-haul and the backhaul of the network..

Yes, the uncertainty around the edge of the network is where we have biggest reservations for this quarter until things open up..

And just to quantify the edge of the network is roughly about one-third of the revenue for NSE, right. So just to put things in perspective..

The sizable chunk. .

We do have another business, which is also field and that's on the avionic test, but that is less than 5% of the revenue. So just from an overall Viavi perspective..

Okay. If I could follow up real quickly with the question.

Over on the 5G side, you mentioned in this and I think that reference was to NEM development work kind of continuing a pace in the 5G and 400 gig optical but like from your perspective, are you seeing anything changing pushing out or maybe even pulling in with regard to overall carrier 5G deployment plan?.

Well, right now a lot of our end demand, I mean we do have already some carrier demand, but it's really more related to trial installation and testing. Bulk of 5G demand driven today by the NEM who still very aggressively ramping up their product launches and preparing for production.

So that's where we're seeing the bulk of demand coming today, but we are also starting to see more and more interest from the service providers in placing orders for kind of, I'd say, mid stream and the kind of core of the network monitoring for the 5G.

The other thing is also there is a lot of interest in the ORAN, which is the Open Radio Access Network.

As all the operators are insisting on interoperability across all the different vendors and there is -- we are seeing strong demand emerging from both the NIMs as well as the service providers to provide level of independent third party testing to ensure compliance and interoperability between different parts of the network in different vendors..

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

Thanks very much. First question on the OSP upside at the end of the quarter, the sort of pull-ins.

Was that all on the core OSP or was any of that on the 3D sensing as well?.

No. It was all in the core OSP, Mike. And on the 3D sensing, 3D sensing came in a little below what we had forecasted. If you recall, we have adjusted our forecast in our guidance in February for some of the impact to 3D sensing, mainly on the supply chain side as COVID-19 was impacting China.

So we have factored that in and -- but we came a little below that forecast for 3D sensing. But it was more than offset by the strength we saw in anti-counterfeiting, as well as some of the expedited orders..

Okay. So I guess can you help us just think about 3D sensing for fiscal '21 in general terms? I think there's going to be some kind of content increase at the customer, but obviously there are macro concerns.

And I don't know if there is any share concerns or not, but just at a high level how should we think about the market in 2021?.

So I think we are pretty comfortable with our market share. I think the biggest headwinds in 3D sensing are just fundamentally lower expected volumes of higher-end phones. There is going to be some content increase. I mean there is talk of the world facing cameras.

Now, it's obviously a subject towards the relative mix is going to be between phones with only one 3D sensing module versus having both rear facing and the world facing modules. So I mean we are clearly happy with whatever the mix is going to be because we are playing in both sides of it.

And I think for us, the model allocation or model mix aside, the biggest thing that we worry about is the ultimate total market demand. That's the risk that we are seeing for ourselves..

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

Hi, good afternoon. Thanks for taking my question. Oleg, if I can just ask you for what's you read, you kind of mentioned that the revenue shortfall here as partly logistics partly kind of lower demand.

But as you kind of talking to these customers, what's your read in terms of which customer groups are more likely to be value expanding plans for the year and kind of the -- in the backdrop of a weaker macro and particularly we've seen some telcos increased their CapEx guidance for the year, which I know you're more aligned to kind of expenses, but clearly shows that we spend a bit more, but do you see that benefiting the core of the network or the wireless side more? Thank you..

Well, I think the -- so I think we are not seeing anybody reevaluating their spending. I think it's really issue of timing rate for most of the, I'd say, European, North American and some of the Asian operators.

I think the issue here is really more on the Edge, because those are the technicians, they have been sent home and we don't know what the rate they're going to be brought back and how quickly they going to be brought back. So that's where we saw the slowdown in spend.

What, however, there is one area where I'm more concerned about and it's not a big part of our sales, but it's still a part of our sales is the Latin America, South America and Central America. There has been significant devaluation of their local currency.

So everything in the dollar denominated spend has been -- has become a significant burden for them. So, I do think we're going to see a reduction in spend in those regions as they deal with the significant currency devaluation..

Okay, got it. And if I can just follow up with Amar, the -- kind of what's the best level of OpEx to think about in which you will look to run the business before you kind of see the demand recovery come through.

And can you shed some light on how to think about kind of fixed cost here versus variable because when I look at the gross profit decline quarter-on-quarter. I think there was a 73% margin on the lower revenue.

So just trying to think about what the cost actions can do in terms of limiting that?.

Yes, sure. So I think our OpEx, we were -- when you think about our OpEx versus the guidance we came in all roughly about $10 million below what we, what was implied in our guidance for Q3.

Now, when you think about it in one-third of that was mainly because of a lower travel and entertainment expenses and marketing expenses as most of the events were getting canceled. But we very effectively shifted to online media and I think that's becoming very, very effective as we have more symposiums and events happening online.

So one-third of that was because of that. One-third was mainly because we were able to quickly take a proactive action in freeze hiring. Although we -- I would say we are very, we are still hiring in targeted areas where we believe there is a long-term secular growth and so we'll continue hiring in those areas.

But generally we said let's freeze hiring. So one-third of that savings came from. And then the other one-third was mainly as a result of some efficiency programs that we had in place and that will continue in the company. So that's how you should look at how we actually brought down our OpEx, right.

So it was half of it was actions that we took in the past, as well as proactively. And the other half was travel entertainment, et cetera, which I think is a variable expense that will come back as the revenue comes back.

Now, when you think about our overall business at the total Viavi level, we have roughly 60% of our expenses fixed and about 40% plus roughly sort of variable and even on the 60% fixed, when I talk about 60% fixed, it's fixed over six-month period, but anything in nine months, 12 months. Everything is variable rate.

So I've just taken a six-month window and said what that would be. We have efficiency programs that we continue to run that we discuss during the Analyst Day. So we'll continue to run those. And so we believe that we will very effectively manage our OpEx down as the revenue comes down.

And so that we will still deliver to the operating profit requirement. Overall for fiscal '21 as we are looking out, we are not assuming a V-shape recovery. I think that would be not prudent to do it. So we are assuming a U ship recoveries thinking that more of the same for the next two quarters.

So first half of fiscal '21 and then sort of a recovery starting to happen in fiscal '20 for calendar first half of 2021. And so from that perspective, if you think about our overall business, as Oleg mentioned, we will see some pressure on the edge of the network. And I think that demand probably will come back in the first half of calendar 2021.

And so overall NSE, we think that it has low single-digit decline so to speak. On the OSP side, we believe that 3D sensing will see pressure, although we will be on multiple skews. And it will be multiple sockets. But given the end market demand will be low.

So we are assuming that there will be pressure on 3D sensing, but that will be more than offset by our under-counterfeiting. So OSP should be roughly flattish on a year-on-year basis in fiscal '21 compared to fiscal '20.

So when you think about the dynamics, I think we will be operating at an OpEx level that you saw in Q3, and I think that should be -- that plus as the revenue come back revenue comes back, we will scale the OpEx to that extent on the variable side.

Now, when you think about our manufacturing, I think we have on the COGS side, we have a business where in our -- let's say in NSE business, we have more variable costs in our OpEx than in a COGS than fixed cost. Right. It's roughly let's say 80% is sort of variable, roughly 20% is fixed.

It's almost opposite in the OSP side where we have roughly 70% fixed and about 30% variable. So overall, we have a good mix on the COGS side on our variable versus fixed mix. Roughly 40% is fixed at the Viavi level and roughly about 60% variable.

So we have a lot of good leverage there in terms on the COGS side as we -- and I think that's the reason we're able to deliver good operating gross margins even when the volumes actually came down in our NSE business. Hopefully, that gives you enough of color..

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

Yes. Just wanted to follow up. And what was your reported CapEx for the March quarter and how are you planning your CapEx within for June and for the June quarter and the second half of calendar year? And I have a follow up..

Yes, so in all -- for our reported CapEx maybe was about $10.3 million for fiscal Q3. And we are -- we are very prudent in how we spend our CapEx.

We spent about 3% to 5% of CapEx as a percentage of revenue in our business and what you should expect is we will continue to focus on making sure that we are maintaining a strong but very focused investment program, which are targeted in our secular growth areas as we talk about in 5G, 3DS build out as well as fiber.

And so all our investments will be continue to be guided based on what our strategic and operational and financial discipline that we are sort of exercise in the last three to four years.

So we will manage the CapEx range of 3% to 5% going forward more towards the mid to low and versus the high-end and we will continue to do that in the next three to four quarters. Our whole philosophy is that we want to remain invested in areas where we think there is potential growth. And we know what, there is one.

So as we emerge out of this recessionary period. We want to be much, much stronger than we are. And as you saw, we also not only have a strong cash balance. But we also put a $300 million credit facility in place and it was all subscribed by multiple banks who are very interested in actually lending money to us.

So again this is just a back stock for us..

Okay. And then, I just want to better understand your forecasting.

Is the booking or the mix of backlog different between the NSE and OS? With any -- would either segment require your customers to book will in that sense?.

No, I think the NSE business is mainly a book ship business but within NSE we have our SE business and there is an assurance business which is software business where we have good backlog position. So when you think about some of the resilient business we have, that's one of them.

Lab also comes in with the larger backlog compared to the field instrument business. And then in OSP, Optical Security and Performance business. it's a sort of..--.

All within the quarter. A lot of the orders. I mean we get in the NSE market, I think we get a kind of a six-month base forecast, but it can be go up or go down during the quarter. And on 3D sensing, we get a kind of a longer-term forecast.

But the real forecast is really looking no more than like two to four weeks because we have a very short lead time in getting. So to get a general forecast, but I mean it can go up and down throughout the quarter. So I would say, a big chunk of our business, I would say is within the quarter book ship..

Okay. So when you say that edge, which is a third, NSE you expect to be rather a slow for two to three quarters.

It's just this in your assumption that it would take some time for people to go back to work? And the work from home would phase out? Is that right way to think about how you are forecasting your business?.

Correct. So if you think about our field instruments. It's very much a book ship business within the quarter. I'd say probably 80% of the demand happens within the quarter.

Now clear, that we know the customer program is when they placed -- planning to place the orders, but the time between the time they place an order and the time they receive the product is within three months. So that's why we don't really have, I would say long term. We have almost a real-time demand.

Unlike with some of the capital products that in network service providers, by from the likes of Cisco and others, there they have orders well in advance.

And it's a longer-term orders because part of their capital spend most of the instrumentation falls under OpEx spend and as such the timing between -- the time we receive an order in the time we ship it is usually less than the quarter..

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

Thanks. So I just wanted to check a couple of things that you said. So you are saying that OSP is going to be in around the $50 million range excluding 3D sensing is what I heard you imply.

Is that correct?.

No, Alex. If you're referring to fiscal '21, we expect the core OSP business to be higher than the $50 million average. Because we do believe that anti-counterfeiting business is counter cyclical and we will see an increased demand in our core OSP..

Right.

But I thought you had said that that was going to be around $50 million in the upcoming quarter or is that not right?.

And well in the --..

We said at the least..

At the least, yes..

Okay. So I mean that's down sequentially from where it was. That's excluding 3D. So it's down sequentially..

It excludes 3D sensing. So, Alex, are we talking about fiscal Q4 because we are not giving any particular guidance of fiscal Q4. I was giving color on fiscal '21 just directionally..

I see, okay. So, but it does sound like that spike that you had at the end of the quarter is probably not persisting in that OSP excluding 3D. It should be down and I would assume that if your revenues are flat, but that would imply a little bit up in NE. And if that's the case, you got a mix shift to lower margin product within it.

And then the second point, I think you said --..

No. I think you can make us jump to a lower margin product..

Well, the operating margin levels definitely lower on NE than it isn't OSP..

But you're right, from that perspective, yes, but sequentially if you are NE, NSE mix goes up, you will also see higher absorption and higher operating leverage on the fixed cost of on, yes, on the NSE..

Exactly yes. All right. And then the other piece of that would be the -- it sounds like the 3D sensing is down sequentially. I mean clearly the guide out of light is not a good indicator for you guys.

Everybody on this system is just talk to Momentum yesterday and they're guiding down quite sharply in the June quarter, you're talking about much more flatter kind of sequential declines..

First of all, I mean, remember, we have a different dynamic order than they do, because if you're buying a semiconductor product like laser you have a much longer lead time, right. We, our demand are much closer matched to what the customer actually builds and ships..

All right. So that would be just to make sure everybody is thinking about it correctly, that would be -- did it may be down, but it's not going to fall off the table, the way other people think about..

Exactly, exactly. So we are shipping almost just in time. So I mean we, so for example, in the Q3, you might have seen a bigger drop from us because we can respond on the dime whereas if you order semiconductor products, you're going to have to accept it because you place those orders six months ago, and they are coming out, right.

Whereas for us, it's more a way -- you don't get as much uptick when things really turnaround, you also don't get as much downdraft when things go down the other way. It's really more matched to the actual end market shipments..

I see. One last question, if I could. Clearly, you guys have an acquisition policy that's been tremendous for you guys. Acquisitions you've done have been wildly successful. Lot of companies been reluctant in terms of giving you the pricing that you talked about.

I assume that in this environment that you would take advantage of that the depressed conditions in the similarly depressed prices to take advantage of it, is it reasonable to think that the, your appetite for acquisitions is higher in this environment or are you conserving cash and therefore choosing not to go that route?.

Well, I'd say our appetite always stays the same; it's just got to make sure that the deal is right and the price is right. So I think, I don't think we are shying away from doing a deal in this environment. Now we feel comfortable about our fundamental business cash generation.

Also, we have pretty decent balance sheet and we have with the new credit facility, we have more dry powder. So if the right opportunity comes along, absolutely, we will definitely take a look at it..

Is there any change in the people you've talked to about willingness?.

I think there is still some denial. I think it usually takes a few quarters for things to percolate and settled down..

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

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

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