Viavi Solutions - Q4 2024
August 8, 2024
Transcript
Operator (participant)
Hello everyone. My name is Emma. Welcome to the Viavi Solutions fourth quarter and full year 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. I will now turn the conference over to Vibhuti Nayar, Viavi Solutions Head of Investor Relations. Please go ahead.
Vibhuti Nayar (Head of Investor Relations)
Thank you, Emma. Good afternoon, everyone, and welcome to Viavi Solutions fourth quarter and full year 2024 earnings call. My name is Vibhuti Nayar, Head of Investor Relations for Viavi Solutions, and with me on today's call is Oleg Khaykin, our President and CEO, and Ilan Daskal, our CFO. Please note, this call will include forward-looking statements about the company's financial performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations and estimations. We encourage you to review our most recent annual report and SEC filings, particularly the risk factors described in those filings. The forward-looking statements, including the guidance that we provide during this call, are valid only as of today. Viavi undertakes no obligation to update these statements.
Please also note that unless we state otherwise, all results discussed on this call, except revenue, are non-GAAP. We reconcile these non-GAAP results to our preliminary GAAP financials and discuss their usefulness and limitations in today's earnings release. The release, as well as our supplemental earnings slides, which include historical financial tables, are available on Viavi's website at www.investor.viavisolutions.com. Finally, we are recording today's call, and we will make the recording available on our website by 4:30 P.M. Pacific Time this evening. Now, I would like to turn the call over to Ilan.
Ilan Daskal (CFO)
Thank you, Vibhuti. Good afternoon, everyone, and now I would like to review the results of the fourth quarter of fiscal year 2024. Net revenue for the quarter was $252 million, which was at the midpoint of our guidance range of $246 million-$258 million. Revenue was up sequentially by 2.4%, and on a year-over-year basis was down 4.4%. Operating margin for the fourth quarter was 10.9%, which was above the midpoint of our guidance range of 9.5%-11.8%. Operating margin increased 160 basis points from the prior quarter, and on a year-over-year basis was down 80 basis points.
EPS at $0.08, at the high end of our guidance range of $0.06-$0.08, and was up $0.02 sequentially. On a year-over-year basis, EPS was down $0.02. For the full fiscal year, revenue was $1 billion, down 9.6% on a year-over-year basis, primarily due to conservative spend by service providers and NEMs. Operating margin for the full year was 11.5%, down 410 basis points from fiscal year 2023, and full year EPS was $0.33, down $0.22 from the prior year, primarily due to lower year-over-year revenue. Moving on to our fourth fiscal quarter results by business segment.
NSE revenue for the quarter came in at $182.2 million, which is at the lower end of our guidance range of $179 million-$189 million. And on a year-over-year basis, NSE revenue was down 7.9% for the quarter. NE revenue for the fourth quarter was $158.5 million, which is a 9.7% year-over-year decline as a result of continued conservative spend by service providers and NEMs. SE revenue was $23.7 million and up 5.8% from the same period last year, partially supported by revenue that was pushed out from Q3. NSE gross margin for the quarter was 62.1%, which is flat on a year-over-year basis.
NE gross margin was 61.3%, which is a decline of 40 basis points as compared to the same period last year. SE gross margin was 67.5%, which is an increase of 190 basis points from the same period last year and was driven by product mix. NSE's operating margin for the fourth quarter was 1.8%, which is an improvement of 360 basis points sequentially and 400 basis points lower than the same period last year. NSE's operating margin was at the low end of our guidance range of 1.4%-3.6% due to lower revenue. OSP revenue for the quarter came in at $69.8 million, which was above the high end of our guidance range of $67 million-$69 million.
was up 6.2% on a year-over-year basis as a result of strengths across all products. OSP gross margin was 53%, which is an increase of 640 basis points from the same period last year, and was primarily driven by higher revenue, favorable product mix, and production ramp at our new manufacturing facility in Chandler. OSP's operating margin was 34.8%, which is up 50 basis points sequentially, and 530 basis points increase on a year-over-year basis as a result of the higher gross margin fall through. OSP's operating margin exceeded the high end of our guidance range of 31%-34%. Moving on to the balance sheet and cash flow.
Total cash and short-term investments at the end of Q4 was $496.2 million, compared to $486.1 million at the end of the third fiscal quarter of 2024. Cash flow from operating activities for the fourth quarter was $26.2 million, versus $23.5 million in the same period last year. During the quarter, we purchased 1.3 million shares of our stock for about $10 million. For the full year, we purchased 2.3 million shares for about $20 million. We have approximately $215 million remaining under our current authorized share repurchase program.
The fully diluted share count for the quarter was 224.2 million shares, down from 224.6 million shares in the prior quarter, and versus 225.5 million shares in our guidance for the fourth quarter. CapEx for the quarter was $3.8 million, compared to $7.4 million in the same period last year, when we were completing the construction of our new facility in Chandler. In June 2024, we initiated a restructuring and workforce reduction plan to improve operational efficiencies and better align with the current business needs. We expect approximately 6% of our global workforce to be impacted and estimate to incur approximately $15 million of restructuring charges in connection with this plan.
As a result of this initiative, we anticipate to achieve, by the end of fiscal 2025, an annualized cost savings run rate of approximately $25 million, which will mainly benefit our operating expenses. Moving on to our guidance. We expect that the first half of fiscal 2025 will continue to experience a conservative spend environment by service providers and NEMs. That said, we believe that we are nearing the bottom of the down cycle, and we expect a gradual recovery in demand in the second half of this fiscal year. Given the lingering softness, we are guiding for the first fiscal quarter of 2025 revenue in the range of $235 million-$245 million.
Operating margin is expected to be 10.8% ±90 basis points, and EPS to be between $0.05 and $0.07. We expect NSE revenue to be approximately $164 million ±$4 million, with a break-even operating margin ±100 basis points. OSP revenue is expected to be approximately $76 million ±$1 million, with an operating margin of 34% ±100 basis points. Our tax expenses for the first fiscal quarter are expected to be about $8 million ±$500,000 as a result of jurisdictional mix.
We expect other income and expenses to reflect a net expense of approximately $3.5 million, and the share count is expected to be about 224.2 million shares. With that, I will turn the call over to Oleg. Oleg?
Oleg Khaykin (CEO)
Thank you, Ilan. The end market spend environment continues to be conservative, particularly the North American service providers. Despite these headwinds, our revenue came in at the midpoint of our guidance, with stronger OSP revenue partially offsetting weaker NSE demand. Our EPS was at the higher end of our guidance range. Starting with NSE, the fiscal fourth quarter NSE revenue came in at the lower end of our guidance range. NSE revenue declined 8% on year-over-year basis, driven by the softer demand from service providers and wireless NEMs. We believe that decline in NSE demand is bottoming out, and we should start to see a recovery in the second half of the fiscal year. A bit more color on that.
The first is field instruments demand remained largely at the maintenance levels due to the absence of major network build-outs and upgrades by Tier 1 service providers, particularly in North America. That said, the investment in data center fiber internetworking by Tier 2 operators, together with recent comments by major service providers regarding their fiber plans, leads us to expect a pickup in field instruments demand in the second half of fiscal 2025. Our wireless demand continues to be impacted by sharply reduced R&D and production CapEx spend by major wireless NEMs, who have reduced investment in response to significant cutbacks in 5G deployment by wireless operators. One positive recent trend we are seeing is the emergence of many new customers pursuing O-RAN development. However, their cumulative spend is still relatively small. Other parts of NSE are faring much better. Fiber Lab and Production demand was slightly up.
We expect the upcoming transition to 1.6 terabits and ramp of PCI Express 6.0 to drive recovery and growth during fiscal 2025 for Fiber Lab production. Mil-Aero business continues to be a bright spot, seeing year-over-year growth in revenue driven by strong customer demand for communication, avionics, and positioning, navigation, and timing products. We expect this business segment to enjoy strong demand throughout fiscal 2025. SE segment grew year-over-year, helped by enterprise orders that were pushed out from Q3. We are seeing a lot of interest in our AIOps products and expect it to be a growth driver for fiscal 2025 and beyond. As we look at Q1 fiscal 2025, we expect a seasonally weaker demand, driven by similar dynamics as in Q4.
Continued demand weakness from the service providers in wireless and wireless NEMs, leading to overall weaker NE and seasonally weaker SE revenue, offset by continued strength in Fiber Lab production and Mil-Aero business. Looking ahead at fiscal 2025 for NSE, we expect the conservative spend environment to persist for the remainder of calendar 2024 and a gradual demand recovery in the first half of calendar 2025. Now turning to OSP. The fiscal fourth quarter OSP grew on a year-over-year basis, mainly driven by higher demand for anti-counterfeiting and 3D sensing products. Overall, OSP results exceeded the higher end of our guidance range. Looking ahead, we expect OSP to be sequentially up in the September quarter, mostly driven by seasonally stronger demand for 3D sensing products. Overall, we expect fiscal 2025 OSP demand to be similar to fiscal 2024.
To summarize, the fiscal 2024 was a challenging year for Viavi and the industry. While we expect the soft market environment to persist for the remainder of calendar 2024, we anticipate the start of gradual recovery in first half of calendar 2025. I would like to thank my Viavi team for managing through this challenging environment and express my appreciation to our employees, customers, and shareholders for their support. With that, I'll turn it over to Vibhuti.
Vibhuti Nayar (Head of Investor Relations)
We're ready for the Q&A. Emma?
Operator (participant)
Thank you. We ask today that you limit yourself to one question and one follow-up. Thank you. Your first question comes from the line of Ruben Roy with Stifel. Your line is open.
Ruben Roy (Managing Director)
Thank you. Hi, everybody. Oleg, thanks for the detail around how you're thinking about sort of the near-term environment and then you know, sort of first half of next calendar year. I guess, can you drill in a little bit on you know, sort of how you're thinking about inventory levels at your customers, I guess by field instruments and then also lab instruments? And then I had just one or two quick follow-ups. Thank you.
Oleg Khaykin (CEO)
Sure. I mean, there's really no inventory to speak of. I mean, all of our deliveries for field instruments to our customers are just-in-time, and it's mainly coincides with whenever they are doing any kind of major expansion project or technology upgrade or things like that. There's also, obviously-
Ruben Roy (Managing Director)
Right
Oleg Khaykin (CEO)
When I say we see our revenue at the maintenance level, you know, there is this constant churn, that big chunk of our quarterly revenue is just churns. And it's just basically law of large numbers, big install base, you know, the batteries die, equipment gets damaged, and they periodically replace whatever needs to be replaced. And, you know, it's been a fairly consistent number for the past several quarters, which, you know, makes me feel a bit better because it just shows you that the first thing customers come back to is they start replacing what's been damaged. And as they start looking at the major new projects, and we've heard obviously from AT&T, but also we're seeing, you know, tier 2 players like, there was Lumen recently had a call and there's others.
There's a lot of interest for developing fiber internetworking between all those hyperscale data centers, and these are the players that are actually running projects today, and they're placing orders. You know, clearly, so from that perspective, you know, I don't know to what extent they have equipment inventories for, you know, networking gear, but I imagine that is also winding down. You know, clearly as they start talking about the resuming their expansion and technology upgrade, that is what we view as a positive news for us. On the 800 production, that is also pretty much for new equipment, and it usually comes in when they are developing next generation product. They start placing orders in the fiber area and the high speed compute area.
You know, high-speed compute is driving PCI Express 6.0 and the, you know, upcoming 1.6 terabits. I mean, the budgets are open and the CapEx is flowing, and we are seeing, you know, purely as soon as the equipment is available, they want it. So in that respect, we feel pretty good. But there's also, probably further away in the second half of the fiscal year or first half of the calendar 2025, the 1.6 terabits is flowing into the module manufacturing, and we are seeing a lot of interest from the, major AI players to, drive upgrades in their, contract manufacturing factories to be able to, deploy 1.6 terabit, modules and products.
For the first time, it's really the data centers that are driving the transition to the higher speeds rather than service providers. When we saw 400 Gig, 800 Gig, they were driven by equipment vendors to service providers. This time, it's very much the data centers that are driving the transition to the higher speed, you know, speeds of the products. That's why we're feeling much more bullish on our Fiber Lab and Production equipment. So that's kind of, you know, more color on those two areas.
Ruben Roy (Managing Director)
Yeah, very helpful. Again, and you hit my follow-up on the 1.6 terabit side. So thanks for that. I guess then I'll shift over to just a quick follow-up for Ilan on the restructuring. Ilan, you talked about, you know, the OpEx savings through the fiscal year. Maybe you can put a finer point on, you know, sort of how you're thinking about that, you know, between, you know, R&D and projects, you know, versus, you know, sales and marketing, and how we should kinda think about modeling that through the year in terms of the savings, you know, as it hits the model. Thank you.
Ilan Daskal (CFO)
Sure. So thanks for the question, and obviously, as I mentioned earlier, in the prepared remarks, most of it would be a reduction of the overall operating expenses. We don't see any of our, you know, major R&D project being impacted or delayed due to this initiative. So these are, you know, across the board of the operating expenses, but none of, you know, the initiatives that we drive, you know, in terms of development, will be impacted. And also, you know, as I mentioned earlier, the full realization, you know, will be by the end of the year, so it's more of a 2026 kind of net spend there.
Ruben Roy (Managing Director)
Got it. Thank you.
Ilan Daskal (CFO)
Thank you.
Operator (participant)
Your next question comes from the line of Ryan Koontz with Needham. Your line is open.
Ryan Koontz (Managing Director)
Great, thanks for the question. Certainly appreciate your comments about 5G. That doesn't sound like it's coming back around anytime soon. Wanted to double-click a little bit on your comment around data center interconnect with fiber players. Are you seeing demand there from the data center operators who are leasing dark fiber, or are they leasing actual, you know, connectivity and bandwidth from the service providers on a wholesale basis?
Oleg Khaykin (CEO)
So, I mean, it varies across different data centers, operators. But I mean, for the biggest ones, they basically build data centers, and then they pick a vendor who lays fiber and they lease those fibers from them. And what's a little different is, you know, when a service provider lays a fiber, there's a lot of dark fibers, and they generally don't connect the dark fiber until they need it, maybe years later. What we're seeing with data center, they're laying fiber, and they also initially started doing the same thing, just lay the fiber, connect a few strands, and, you know, I'm gonna lease them, and then when I need it, you turn it on.
What they are finding is that the need to turn on additional fibers and additional bandwidth comes a lot faster than everybody thought, and more importantly, it becomes also much more sensitive, the quality of performance of that fiber, right? In terms of the latency, you know, the speeds and things like that. So they're actually putting pretty strict service level agreements as to what performance that fiber needs to deliver. And that actually plays very much to our strength, because what they are realizing is traditional built fiber is fairly unreliable, and you cannot turn it on as you need it, right?
So, we are now working with the data center operators and with the people who provision fiber to bridge this gap to make sure as the fiber gets deployed, you actually characterize it, and you know exactly what you're getting for. See, and then you can monitor it throughout the life, and when you need to turn on the next wavelength, it happens very quickly, which usually means you actually connect everything, and by just turning on, it becomes a software switch, rather than rolling a truck and starting to connect the fibers and then finding out that things may not work or things like that. So we're seeing the level of evolution and forethought in deploying fiber network truly changing the traditional paradigm that the service provider has been doing.
I guess it's the Tier 2 players who are responding more proactively to the demand of data center operators, and they're the ones who are winning the business. And I think they view it as their new business model going forward.
Ryan Koontz (Managing Director)
Interesting. Thank you. Thank you for that, Oleg. And just following up on another big segment, your within the broadband sector, I know that's been pretty depressed. You've talked about previously some push-outs in cable. Are you seeing any signs of life in cable? And obviously, we're seeing—I assume you're seeing some push-outs in fiber and BE and these sort of things that will be driving the fiber access industry. Any comments around broadband?
Sure, the on, on cable. So the cable upgrade is underway. But unlike in the previous things where they would just buy everything in one quarter and just kind of roll it out, they're doing it over multiple quarters, which leads you to a smaller bump up in demand within the quarter, but it, on the other hand, it provides for a smoother shipment over the multiple quarters. And I think part of it is because, since the Fiber-to-the-Home players have slowed down or stopped their deployment, I think the pressure is a bit less. However, you know, I saw comments, you know, and, and AT&T does appear to be serious about resuming their aggressive push Fiber-to-the-Home next calendar year.
I expect the competitive pressure on cable to accelerate, and we will probably see more aggressive spend by them as well. You know, the other area that cable was concerned about is the fixed wireless, and so far, it has not been a factor in terms of competitive pressure on them to do anything. As you pointed out earlier, I mean, as I said as well, 5G deployment, I think, will be the last piece that's gonna start recovering. You know, I think earliest will be the end of our fiscal year or kinda middle of next year, because I'm not seeing any kind of meaningful movement there.
Oleg Khaykin (CEO)
In fact, all the major NEMs have really kind of gone into hibernation mode, where they are continuing to do kind of advanced research, but not much in terms of the accelerating new products to market.
Ryan Koontz (Managing Director)
That makes a lot of sense. Thank you. And, just one last quick comment on the operation side. Looks like your inventory on your balance sheet was down quite a bit. Any comments around that? Are you able to kind of sell what you forecasted, and what will be driving the step down in inventory in-house?
Oleg Khaykin (CEO)
Well, I think, you know, the, as we all know, during the supply chain shortage, you had to agree to a lot of product, like, kinda NCNR, non-cancellable, non-refundable. And of course, a lot of semi companies have kinda shoved it all down our throats, so we built up some components inventory. We have been pretty much working diligently all that inventory down. But also, you know, our anti-counterfeiting manufacturing, we are holding quite a bit of raw materials. And, now as the anti-counterfeiting demand is starting to come back, we've been consuming the raw material as well as the semi-finished goods. And, you know, we've been, you know, bringing inventory more in line with our kind of current run rate demand.
Ryan Koontz (Managing Director)
Perfect.
Oleg Khaykin (CEO)
We haven't been buying much new stuff, let's put it that way.
Ryan Koontz (Managing Director)
Yeah.
Ilan Daskal (CFO)
Yeah, it's more to categorize it-
Speaker 9
Got it
Ilan Daskal (CFO)
As a more normalized level now. I mean, and it will now-
Speaker 9
Okay
Ilan Daskal (CFO)
Fluctuate, you know, relative more to revenues as opposed to kind of-
Oleg Khaykin (CEO)
Yeah
Ilan Daskal (CFO)
Prior cycle.
Oleg Khaykin (CEO)
That's right.
Speaker 9
Yep. Great stuff. Thank you. That's all I've got.
Ilan Daskal (CFO)
Thank you.
Operator (participant)
Your next question comes from the line of Mehdi Hosseini with SIG. Your line is open.
Mehdi Hosseini (Senior Equity Research Analyst)
Yes, thanks for taking my question. The first one has to do, Oleg, can you tell us how, how the quarter progressed, especially in terms of, booking? Was there significant erosion throughout different business units, service providers, CSPs, and so forth? Or did it start weak and just carry through? And I have a follow-up.
Oleg Khaykin (CEO)
Well, you know, actually, I'd say as different from the prior quarters, and I mean, what we are seeing is the forecast that we kinda assume early in the quarter largely holds. So we've been seeing fewer decommits or cancellations. The only big cancellation we had in... And it was not really a cancellation, our major customer reduced their order by a third.
Mehdi Hosseini (Senior Equity Research Analyst)
Yeah.
Oleg Khaykin (CEO)
Which was on the wireless NEMs. Had that order came through, actually, we would have beaten the high end of our guidance on NSE, and it was really a major wireless NEM decided to take less product, you know, because of slowness in the market. We don't generally kinda rely on book-to-ship ratios because, you know, the way our market works, demand works, the June quarter and December quarter are usually stronger, and we get a lot of bookings within the quarter.
Mehdi Hosseini (Senior Equity Research Analyst)
Yeah.
Oleg Khaykin (CEO)
And the September and March are generally weaker, and we get, you know, a lot less bookings within those quarters. So I look more and more like the way I gauge the relative health of the funnel is that what kind of bookings we enter the quarter and expectations and how well do they hold up or, you know, there's a left to go. You know, we forecast the bookings, and then we track how many of the bookings show up as they're supposed to show up. And the way it makes me feel a little better is they're actually showing up.
Mehdi Hosseini (Senior Equity Research Analyst)
Okay.
Oleg Khaykin (CEO)
Whereas before, they would get pushed out or get canceled. So I think the booking environment, while the revenue may be lower, the booking environment is now more predictable and more robust-
Ryan Koontz (Managing Director)
Yeah.
Oleg Khaykin (CEO)
So we can plan better our quarter.
Mehdi Hosseini (Senior Equity Research Analyst)
Great. And then if I just double-click on OSP, should I assume that image sensor, what is being reflected in the guides for the September quarter, would that show any year-over-year growth?
Oleg Khaykin (CEO)
You're talking which segment? The 3D sensing or anti-counterfeiting?
Mehdi Hosseini (Senior Equity Research Analyst)
3D sensing. 3D sensing.
Oleg Khaykin (CEO)
3D sensing. Well, it's actually lower in revenue year-on-year because we have now going to the new ASP schedule. So there's a, you know, pricing roadmap, so the ASP is lower. The volumes are slightly the same, maybe a little higher, but the problem is the volume growth is not enough to offset the ASP erosion that-
Mehdi Hosseini (Senior Equity Research Analyst)
Okay
Oleg Khaykin (CEO)
just went in effect for the next year. So, but one, you know... And of course, it's still very much driven by a single customer, which where we have a very high level-
Mehdi Hosseini (Senior Equity Research Analyst)
Yeah
Oleg Khaykin (CEO)
of penetration of product. So it's very much driven by their demand and volumes. One thing we're also noticing there that is positive, the demand is now being a little bit better linearized across the year, and I think it's mainly driven by contract manufacturers who don't wanna be heavily overstressed in the September-December quarter, and then having a lot less demand in the March and June. But still, I think September-December quarter is a much higher volume.
Mehdi Hosseini (Senior Equity Research Analyst)
Okay.
Oleg Khaykin (CEO)
One other development, I think we are now seeing kinda if we call them signs of life or interesting new trends, mainly the China, China Android players are-
Mehdi Hosseini (Senior Equity Research Analyst)
Yeah
Oleg Khaykin (CEO)
- toying with the 3D sensing. It's still very small volumes, just a handful of platforms, but if this becomes a major trend and adoption, this would be actually a big positive for us in 3D sensing. And there's also, you know, rumors that, you know, Samsung may be trying to make another go at it, but after having so many years of false start, I will hold off on that one, as the outlook.
Mehdi Hosseini (Senior Equity Research Analyst)
Sure.
Ilan Daskal (CFO)
Maybe I will let you know, it's about 2.5... Sorry, maybe I just said it's about $2.5 million year-over-year for, you know, for the first quarter.
Mehdi Hosseini (Senior Equity Research Analyst)
Right.
Ilan Daskal (CFO)
So partially, it could be another dynamic of pricing, et cetera, that Oleg mentioned, but also, you know, we'll have to monitor the supply chain that Oleg just discussed, you know, and maybe it kind of more linearized, and, you know, over the course of two, three quarters, it will, it will kind of offset itself.
Mehdi Hosseini (Senior Equity Research Analyst)
Sure. Just for proof of modeling, you, the implied, midpoint of your guide implies about a 9% sequential growth in OSP. Is that driven by both 3D sensing and counterfeiting?
Oleg Khaykin (CEO)
Well, I think the anti-counterfeiting business is starting to rebound. I mean, a lot of the inventories have been consumed, so we have a-- I mean, there's an uptick in there, but also 3D sensing has higher numbers, but you have to discount it for some of the ASP erosion. So-
Mehdi Hosseini (Senior Equity Research Analyst)
Yes
Oleg Khaykin (CEO)
You know, you probably would be in the closer to an $80 million range between the two of them. But of course, it's both segments are doing better, demand-wise, volume-wise, than in the prior year.
Mehdi Hosseini (Senior Equity Research Analyst)
Okay. Well, thank you.
Oleg Khaykin (CEO)
And you know, when the anti-counterfeiting—for us, it's very important for anti-counterfeiting to start recovering because that's where, you know, a lot of big iron is sitting in terms of the manufacturing assets. So clearly, driving a better absorption on a stronger anti-counterfeiting demand has a bigger impact on the operating margin of the OSP business unit.
Mehdi Hosseini (Senior Equity Research Analyst)
Got it. Thank you.
Oleg Khaykin (CEO)
Mm-hmm.
Operator (participant)
Your next question comes from the line of Michael Genovese with Rosenblatt. Your line is open.
Mike Genovese (Senior Research Analyst)
Great, thanks. I just have one question, which is, you know, Oleg, you've spoken a lot about how AI and data center investment, you know, can improve or help field test over time. I just wanted to kind of more directly connect the dot on how it could help field test. So, you know, is the Lumen announcement about their investment in AI, is that key to the second half recovery, or other things like that? Do we expect other service providers to announce something similar? I guess there's a few questions in there, but if you could kind of run with those thoughts, I would appreciate it.
Oleg Khaykin (CEO)
Well, sure. I think, I think all of that is goodness. Actually, those are all positive things. I mean, to be fair, I mean, Lumen, to give them credit, even when they were really, beaten down in the last 12 months, they've actually been... You know, when I talk about the Tier 2s being more aggressive, I think Lumen has been one of the, more proactive and more, innovative companies in that space in terms of how what technology they deploy and how they roll out their value proposition. And I mean, we like, Lumen because they actually, listen to a lot of good, innovative ideas, and they're, and they're one of the, you know, more innovative players in terms of implementing, things that truly differentiate them from the, your run-of-the-mill fiber operator.
So, you know, I'm not going to say any more on that, but Lumen, you know, they didn't just start it. They've been doing it for the past year and a half, even when they were beaten down into the pulp. They continued with the innovation.
Mike Genovese (Senior Research Analyst)
I guess there's any more. I mean, I guess you did touch on this a bit earlier, but any more color or, or comment, prediction on, you know, this AI investment, you know, creating more, whether it's optical or fiber, you know, whether so, so optical kind of core or fiber access demand. So that's why I, I zeroed in on Lumen there, because it seems like their AI investment will-
Oleg Khaykin (CEO)
So, uh,
Mike Genovese (Senior Research Analyst)
-do that.
Oleg Khaykin (CEO)
So yes, because what I was talking about is the WAN, and particularly, if you look at 1.6 terabits, I mean, traditionally, you know, driving from 10 Gig to 100 Gig, 100 Gig to 400 Gig, 400 Gig, maybe to 800 Gig. Traditionally, the drive to adoption of the higher speeds was driven by NEMs supplying into service providers. 800 Gig was kind of like mixed between service providers and data centers. 1.6 terabits is being driven all by data centers.
What we are seeing is the rate of fiber bandwidth consumption, you know, whereas let's say a service provider will lay a fiber and then maybe every couple of years they would turn on another fiber strand, and they generally only connect one, and then they roll the trucks to connect the others as they need it. What we are seeing with data centers is more strands being enabled from get-go. They just may be sitting dark, but they actually pay for connecting all the strands. So then as they need it, they turn them off quicker. And the reason they are doing it is the time between lighting up fiber and lighting up the next fiber, the time is much, much shorter. And they see their traffic grow much faster than the service provider.
So in that respect, I see them looking at the fiber interconnecting between their data centers are completely different than the service provider would look for their metro and core network. And I view it as a positive for us because that basically means much more frequent changes and need for a much faster responsiveness.
Mike Genovese (Senior Research Analyst)
Thanks. I appreciate the color.
Oleg Khaykin (CEO)
Mm-hmm.
Operator (participant)
Your next question comes from the line of Meta Marshall with Morgan Stanley. Your line is open.
Speaker 9
Hi, this is Karan Juvekar on for Meta. So first question, just on the NSE side, I know you're sort of expecting a conservative spend environment throughout the calendar year. I guess as you look into the first half of next year, where you expect some uptick, I guess. Are you expecting sort of a step function recovery in revenues or a more gradual recovery? And I guess just parsing out between Europe, European and U.S. carriers, just any trends to be mindful in terms of how you're thinking about a recovery. I know North America is the most challenged today, and how you expect the recovery there to play out?
Oleg Khaykin (CEO)
When you said service, what function? Do you mean like a NE, NSE or?
Speaker 9
No, no, just like-
Oleg Khaykin (CEO)
Uh, uh-
Speaker 9
The recovery being a step function or sort of more gradual.
Oleg Khaykin (CEO)
Oh, step function. Got it. Got it.
Speaker 9
Yeah. Yep.
Oleg Khaykin (CEO)
I think it's, you know, so look at it, so there's the basic things like field instruments. I think that's being a, I would say, not a big step, but like lots of little steps, 'cause those are driven by projects. So I think it's a gradual recovery. You know, and I would say, you know, amazingly, Europe has not been that bad. Yes, they slowed down, but nowhere near as bad as North America, and North America has been crickets, basically for the last two years. So I think in terms of a step function, clearly, if AT&T will continue to proceed with their plans to accelerate and resume their Fiber-to-the-Home, in a way, it will be a bit of a step function for the fiber instruments.
And usually, if somebody as big as AT&T restarts a deployment, it sends a, you know, a shock through the industry, which means the cable guys are gonna have to accelerate, the wireless may have to do something more, because then it creates a nice competitive whirlwind, that everybody needs to start responding. So, it generally, just as when they stop spending, everybody else stops spending, when they start spending, others are gonna follow usually. So, but, you know, I don't wanna, create expectation of a step function. I'd rather go with a gradual recovery in the base demand. Where I see a greater acceleration is really the Fiber Lab and Production, and we do think 1.6 terabits will be a big driver in the first half of next calendar year, okay?
In terms of the clearly, as North America starts to recover, I mean, Europe follows pretty quickly. But the good news is Europe did not really get down as much as North America, so I expect the recovery in Europe to be a bit more mild. But what's also really interesting is we're seeing a lot more aggressive plans in Latin America, which is, you think, always will be the last ones, but they are actually in many ways been playing catch up, and we're seeing some of the more interesting opportunities, especially for our AIOps and some of the other products coming out of Central and South America as well.
Speaker 9
Okay.
Oleg Khaykin (CEO)
Asia has been pretty solid all along.
Speaker 9
Okay, okay, that's very helpful. And then I know you mentioned, earlier that sort of on the OSP side, inventories are sort of depleted. But I just like, I wanted to get a little bit more color on trends you're seeing there. What sort of drove the upside? Is it around inventory builds or new prints? And just expectations on that moving forward, that would be helpful. Thank you.
Oleg Khaykin (CEO)
You're talking about our internal inventories, right? Not the inventories of the service providers. Which inventories are you talking about?
Speaker 9
Like the OSP side inventories, so yeah, your own.
Oleg Khaykin (CEO)
OSP, yes. So, as I mentioned earlier, we are seeing some recovery in the anti-counterfeiting demand, and it's really driven—I mean, a lot of the inventory that was built up in the channel during COVID, because they also order a lot of material and products to keep on hand. Finally, a lot of it has been wound down and consumed, so the orders that are coming back is really more in line with the demand and consumption, and the restocking or anything like that.
Speaker 9
Okay. That's helpful. Thank you.
Oleg Khaykin (CEO)
Sure. Thank you.
Operator (participant)
Your next question comes from the line of Tim Savageaux with Northland Capital. Your line is open.
Tim Savageaux (Senior Research Analyst)
Hey, good afternoon. Couple questions. First, on the guide, I think if I heard you right, 'cause you would expect to see kind of a double-digit million sort of sequential increase in OSP. And I guess you're saying you would have seen something closer to that were it not for the ASPs and that comment about, you know, $80 million or... Initially looking at it, you think maybe something—so there's some negatives in the currency business, but it sounds like maybe not. Did I get that right?
Oleg Khaykin (CEO)
No, there's no negatives in the current business. I think the people were just talking about 3D sensing demand. I mean, we have a new pricing in place and clearly with the ASP erosion, it's taken down some of the revenue because the volumes are not that much more than they were a year ago. So, that was what I was talking about, yeah.
Tim Savageaux (Senior Research Analyst)
Yeah. No, I get that-
Oleg Khaykin (CEO)
It would have been closer.
Tim Savageaux (Senior Research Analyst)
I get that relative... Yeah, I get that relative to last year. I was just talking sequential, but I think we're talking about the same thing. And a similar-
Oleg Khaykin (CEO)
Right
Tim Savageaux (Senior Research Analyst)
Question on NSE, NSE coming down sequentially, and it looks like that, you know, could be some seasonality that you see typically there, but is there any particular product or end markets driving that sequential decline in NSE for Q1 2025?
Oleg Khaykin (CEO)
I think it's really more seasonality. I mean, just weaker demand, but I mean, clearly, we normally would have gotten some orders. I think I'd say wireless NEMs is probably one area where the demand is lower. And I would say just general, you know, the service provider field instrumentation, just, you know, demand is weaker.
Tim Savageaux (Senior Research Analyst)
Okay, thanks. And then, back on the kind of AI data center side, and I don't know if you break it out or look at it this way, but I think it'd be interesting to get a sense for within the NE segment, you know, what sort of revenue level can you attach to, you know, data center overall or fiber-driven data center, whether that's, you know, 800 Gig tests going to 1.6T in lab and production. You'd assume, you know, a good bit of that's probably data center driven, and you've mentioned the potential for more field instrumentation driven by that.
But, you know, if you had to take a swing at it, would you say, you know, data center has the prospects of getting up toward, you know, 10% of your NE business over time, or is it there now, or some sort of order of magnitude?
Oleg Khaykin (CEO)
You know, I'm not going to get into this thing 'cause, I mean, any number I give you will ultimately a BS number anyhow. So, I mean, there's-- I don't think there's really any good research or understanding because, I mean, one thing I, I would-- I can tell you is the 1.6 terabits is next year will be driven all by data center, right? Whereas when we went from 400 to 800, it was primarily driven by carriers and NEMs supplying carriers. So I think, you know, I don't really try to supply data center or carrier node. I mean, fundamentally, it's all driven by technology. But I would just say that 1.6 terabits will be driven by data center demand.
I mean, if you want to ascribe that revenue to that, I mean, maybe eventually we, as things stabilize, we can start doing segmentation on the end market use. But usually the same line, just like for 800 Gig, the line that was built originally for service providers ended up supplying data centers. When the service providers start spending, you know, you can't really... Because it's a multi-use technology. So we, we think of it more as to who will be the lead customer driving it. And, you know, for the first time, I think data centers will drive the next technology node.
In terms of the build-out of the networks, it is still the service providers fiber, but it's the Tier 2 service providers who are providing those fiber interconnect between all the data centers, rather than the big players like, say, AT&T or Verizon. So, I mean, whether it's data center today or they take some of that fiber and give it to, in the future for 5G towers, I mean, it's a multi-use, so we don't really sweat trying to figure out what's the end market demand.
Tim Savageaux (Senior Research Analyst)
Okay, I understand. Let me take one last desperate attempt at that question and say, Art, if you were to replace 800 Gig and with—replace data center in my question or AI data center with 800 Gig, might be a little bit easier to give us a sense of the, the size of your 800 Gig business relative to your, your overall test business in, in network, in any?
Oleg Khaykin (CEO)
I have the numbers, but now you're asking me to go into the segment reporting that we don't report. Because, I mean, there's a-- at any given time, we have a 400 Gig, 800 Gig, and now, later this calendar year, we're gonna have 1.6 terabits. I mean, those things are, it's just like segment charts. They keep, you know, one goes down, the other one goes back up, and there's a substitution. So I, I don't think I'm gonna go into, that level of detail.
Tim Savageaux (Senior Research Analyst)
Fair enough. Thanks.
Operator (participant)
Your next question comes from the line of Mehdi Hosseini with SIG. Your line is open.
Mehdi Hosseini (Senior Equity Research Analyst)
Yes, sir. Thank you. A couple of housekeeping items. Given the fact that the $25 million of annualized cost saving is gonna materialize second half of fiscal year 2025, should I keep the OpEx kinda flattish from here? And the implied OpEx for the September is $120 million. But I'm just wondering, how should I model that for the rest of the fiscal year?
Ilan Daskal (CFO)
Generally, yes. You know, there are several, you know, puts and takes. Obviously, some of it has to do with merit increase and variable employee costs, but generally, yes, you're right.
Mehdi Hosseini (Senior Equity Research Analyst)
Okay. And what about the fiscal year tax rate?
Ilan Daskal (CFO)
So, you know, we got it for about $8 million, then, you know, for the remainder of the year, it will depend on the jurisdictional kind of mix. So obviously, as you know, as long as the North American kind of region will recover, then obviously it lowers our effective tax rate. You can see that, you know, in the first quarter, it's still, you know, at $8 million, which is a higher than normal effective tax rate, but that's kind of the thinking.
Oleg Khaykin (CEO)
Yeah, I think you should look at the absolute dollar amount of taxes, 'cause they're really driven by statutory kind of things.
Ilan Daskal (CFO)
Yeah.
Oleg Khaykin (CEO)
And, ironically, the more money we make, the lower percentage in taxes we pay. 'Cause in North America, we have NOLs and a lot of other offsets that, you know, will effectively lower our tax rate.
Mehdi Hosseini (Senior Equity Research Analyst)
Okay. Got it. Thank you, guys.
Ilan Daskal (CFO)
Mm-hmm. Thank you.
Operator (participant)
This concludes our Q&A portion of the call. I turn it back to Vibhuti for final comments.
Vibhuti Nayar (Head of Investor Relations)
Thank you, Emma. This concludes our earnings call for today. Thank you for joining, everyone. Have a good afternoon.
Operator (participant)
You may now disconnect your-