Arista Networks Inc (ANET) Q3 2018 Earnings Conference Call Transcript

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Third Quarter 2018 Arista Networks Financial Results Earnings Conference Call. During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. (Operator Instructions)

As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section at the Arista website following this call.

I will now turn the call over to Mr. Charles Yager, Director of Product and Investor Advocacy. Sir, you may begin.

Charles Yager — Director, Product and Investor Advocacy

Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me on today’s call are Jayshree Ullal, Arista Network’s President and Chief Executive Officer; Ita Brennan Arista’s Chief Financial Officer; and Andy Bechtolsheim, Arista’s Chairman and Chief Development Officer.

This afternoon Arista Networks issued a press release announcing the results for its fiscal third quarter 2018. If you would like a copy of the release, you can access it online at the company’s website.

During the course of this conference call Arista Networks’ management will make forward-looking statements, including those relating to our financial outlook for the fourth quarter of the 2018 fiscal year, industry innovations, our market opportunity, the benefits of recent acquisitions and the impact of litigation, which are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically in our most recent Form 10-Q and Form 10-K and which could cause actual results to differ materially from those anticipated by these statements. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call.

Also, please note that certain financial measures we use on this call are expressed on a non-GAAP basis, and have been adjusted to exclude certain charges. We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings press release.

With that, I will turn the call over to Jayshree.

Jayshree Ullal — President and Chief Executive Officer

Thank you, Charles. Thank you, everyone for joining us this afternoon for our third quarter of 2018 earnings call. I am pleased to report that we had a record Q3, once again, surpassing the consensus estimates. We exceeded our guidance comfortably with a non-GAAP revenue of $563.3 million, as we grew 28.7% year-over-year, despite tough comparisons from Q3, 2017.

Our non-GAAP earnings per share was $2.11 with services contribution at 13.8% of overall sales. From a geographic perspective, our customers in the Americas contributed 72% of total revenue, while the rest of our international theaters performed quite well. We delivered non-GAAP gross margins of 64.6%, exceeding our forecast due to product mix.

Our top 10 customers included all five verticals. Cloud Titans contributed extremely well in Q3, and ranked as our number one vertical followed by cloud-specialized providers and enterprises tied at the number two spot, and financials and service providers tied at third place. Our new customer acquisition and million-dollar customers continues to be solid as well, and the adoption of CloudVision and FlexRoute software exceeds our expectations.

We closed our first two acquisitions in Q3, both Mojo Networks for cognitive WiFi and MetaMako for low-latency based in Sydney, Australia. The acquisition of MetaMako plays a defining role in deepening Arista’s heritage with next-generation low-latency platforms. MetaMako’s ultra low-latency focus based on unique FPGA designs delivers 5 to 50 nanoseconds with the predictable 70 picosecond time stamping accuracy.

Last month, Arista, introduced the new 400-gigabit fixed switches. The 7060X4 series. This is based on the new Broadcom merchant silicon, Tomahawk 3, with significant routing and buffering improvements. It includes 12.8 terabits capacity in a single RU form factor, with superior price performance, power efficiency, density and buffer memory. All supported with our proven single-image EOS.

EOS also brings differentiated traffic management, load balancing and resilience, and it eases the qualification of our customers in cloud scale network. We expect to early customer trials to begin this quarter in Q4, and mainstream production in 2019.

I would like to take this opportunity to invite Andy, our Chairman and Chief Development Officer to elaborate more on the details. Andy?

Andy Bechtolsheim — Chairman and Chief Development Officer

Thanks, Jayshree. 400-gig ethernet is the next step in the evolution of ethernet, delivering four times better scalability and density and up to two times the price performance and power efficiency of our existing 100-gig ethernet products. One of the great things about 400 Gig-E is that it really showcases our ability to rapidly bring new switch silicon to market that is fully supported by our market-leading EOS network operating system.

This means that customers can deploy the latest Arista 400-gig ethernet switches in the production networks with confidence. Going forward, we expect rapid evolution of new merchant silicon for 400-gig. Our ability to quickly release new switches based on the latest merchant silicon with fully supported EOS software is a key competitive advantage with short merchant switch silicon life-cycles.

While we are very excited about the 400-gig growth opportunity, we do expect to see a lot of 400-gig qualification activity in the first half of 2019, with initial 400-gig production deployments in the second half. The 400-gig ramp in 2019 is also constrained by the volume availability of 400-gig optics, which so far are only available in prototype quantities.

Please keep in mind that customers are not waiting for 400-gig to build out their networks. We are still in the midst of a major network upgrade cycle to 100-gigabit ethernet, which is expected to continue to ramp strongly next year with industry analysts expecting shipments of more than 16 million 100-gig ports in 2019 compared to less than 1 million 400-gig ports. So, clearly, it will take some time for 400-gig to ramp up.

In summary, we at Arista are very excited about the benefits 400-gig offers to our customers, and we expect to take a leading role in the roll-out of 400-gig ethernet in 2019 and beyond.

Jayshree Ullal — President and Chief Executive Officer

Thanks, Andy. I really appreciate your tenacity in driving optics and 400-gig. And I think you do that, not only for Arista, but the entire industry. What is clear to us is that we are in the midst of a multi-year cycle for high performance cloud networking for both 100-gig and emerging 400-gigabit ethernet spines.

And so, as I reflect upon our 2018 strategy, we are executing well across many fronts, including innovative platforms, the migration from securities being a silo to a holistic segmentation, our partnerships with VMware in micro-segmentation and our multi-cloud zone segmentation support for Zscaler, Amazon, AWS, Google, GCP and Microsoft Azure. We’re also coping well with the 10% tariff effective by USTR on September 24, 2018 now affecting our networking products.

With judicious planning by our manufacturing teams, we are reducing our dependency on China source components gradually, and increasing our manufacturing capacity outside China next year. Meanwhile, we have implemented a short-term tariff fee of 3.3%, as we are absorbing some of the incurred costs with the expectation that we can mitigate them in the future.

It has been 10 years since Arista started shipping products. And as I reflect over the next half decade, I am very proud of Arista’s leadership, our Board, our employees, plus our teamwork and execution from start-up phase in 2008 to the prestige of becoming an S&P 500 company this year.

I don’t think any of us could have accurately predicted the pace and magnitude of Arista’s results. In Q3, 2018, we exceeded a cumulative of 20 million cloud networking ports. To give you a perspective on this exponential traction, it took us five years to attain our first million ports of 5%, which means we shipped 95% in the next five years between 2013 and 2018, which I think is quite a ramp indeed.

In particular, our cloud customers have transformed the phase of networking forever by mandating Arista as the gold standard in technology, quality and support. We continue to experience momentum, not only in this vital sector, but the propagation of these cloud principles to next-generation data centers LAN, WAN, campus enterprises and service providers with NFV peering and routing attributes, turning legacy pence into places in the cloud OpEx, as we call it.

Now with that, I’d like to turn it over to Ita, our CFO for greater details on Q3 2018. Ita?

Ita Brennan — Chief Financial Officer

Thanks, Jayshree and good afternoon. This analysis of our Q3 results and our guidance for Q4 2018 is based on non-GAAP and excludes all non-cash stock-based compensation impacts, acquisition-related charges, and certain lawsuits related costs.

A full reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release. Total revenue in Q3 was $563.3 million, up 29% year-over-year and above our guidance of $540 million to $552 million. We were pleased with overall demand in the quarter with ongoing strength across the business.

Service revenues for the quarter were approximately 13.8% of revenue, down from 14.4% last quarter, which had included an unusually high-level of renewal activity. International revenues for the quarter came in at $157 million or 28% of total revenue, up slightly from the prior period, reflecting strength in our in-region international businesses. Our international base is still relatively small and will experience some volatility on a quarterly basis as the business develops.

Overall gross margin in Q3 was 64.6%, up from 64.5% last quarter, and above the midpoint of our guidance of 63% to 65%. This out-performance versus guidance primarily reflected a slightly higher revenue mix from our non-cloud customers. Operating expenses for the quarter were $155.1 million, up from $143.9 million last quarter. R&D spending came in at $105.6 million, or 18.7% of revenue up from $92.3 million in the prior period, reflecting incremental headcount and higher prototype and NRE spending in support of new products.

Sales and marketing expense was $41 million or 7.3% of revenue, up from $39.9 million last quarter due to increased headcount. Our G&A costs were 1.7% of revenue and excluded from acquisition-related legal and accounting fees as described below. Our operating income for the quarter was $209 million or 37.1% of revenue. Other income and expense for the quarter was a favorable $8.6 million and our effective tax rate of 21%.

This resulted in net income for the quarter of $171.3 million or 30.4% of revenue. Our diluted share number for the quarter was 81 million shares, resulting in a diluted earnings per share number of $2.11, up 30% from the prior year. We completed the purchase accounting for the Mojo and MetaMako acquisitions in the period with immaterial amounts of revenue and expense included in our non-GAAP results for the third quarter.

For those of who focus on our GAAP results, we recorded $3.4 million of acquisition-related expenses and $5.9 million of acquisition-related tax charges in the period, which we consider to be one-time in nature and which together with $1.6 million of amortization of acquired intangibles have been excluded from our non-GAAP results.

Now turning to the balance sheet. Cash, cash equivalents and investments ended the quarter at approximately $1.7 billion down from $1.9 billion last quarter. As a reminder, although the 405 million charge related to the settlement of our lawsuit with Cisco was recorded as a non-GAAP expense in Q2 ’18. The cash payment for this amount did not occur until the third quarter.

Excluding the Cisco payments, we generated $286 million of cash from operations in the period reflecting strong net income performance and improved working capital metrics. DSOs came in at 53 days, up from 46 days in Q2 reflecting the timing of billings and collections in the quarter. Inventory turns were 3.2 times, up from 2.7 in Q2.

Inventory decreased to $216.3 million in the quarter, down from $245.4 million in the prior period. This reflects reductions primarily in raw materials buffers as we continue to optimize our supply chain. In addition, we maintained a further $19.3 million of inventory deposits recorded in other assets compared to $25.3 million last quarter.

Our total deferred revenue balance was $529.9 million, up from $448.6 million in Q2. Product deferred revenue increased by approximately $38 million in the quarter largely related to customer certification of features reintroduced into the product following the expiration and invalidation of certain lawsuits related patent.

Accounts payable days were 39 days, up from 26 days in Q2 reflecting the timing of inventory receipts and payments. Capital expenditures for the quarter were $4.5 million.

Now turning to guidance. As we look to the fourth quarter and beyond, we believe that we remain well positioned with our key cloud customers and continue to grow our presence across our other verticals. The midpoint of our revenue guidance for the fourth quarter of $582 million to $594 million results in revenue growth for the full year 2018 of approximately 40%.

Turning to gross margin and the impact of the recent tariff announcements. The operations team is working diligently to optimize our supply chain and mitigate the incremental costs for both Arista and our customers. We expect the supply chain modifications to take effect throughout 2019 as we ramp new sources of supply.

In the interim, we’ve introduced a tariff adder, whereby we will pass a portion of these costs to our customers pending completion of the task. We expect the impact on gross margins in the fourth quarter of 2018 to be somewhat muted as we shift backlog and assume free-tariff finished goods and component inventories.

Based on everything that we know now, we would reiterate our typical gross margin range of 63% to 65% knowing that tariff impact et cetera will limit our ability to outperform to the 64% midpoint of this range. With this as a backdrop, our guidance for the fourth quarter, which is based on non-GAAP and excludes any non-cash stock-based compensation impacts, amortization of acquisition-related intangibles and certain lawsuit related costs is as follows.

Revenues of approximately $582 million to $594 million, gross margin of approximately 63% to 65%. Operating margin of approximately 35%. Our effective tax rate is expected to be approximately 21.5% with diluted shares of approximately 81.3 million shares.

I will now turn the call back to Charles. Charles?

Charles Yager — Director, Product and Investor Advocacy

Thank you, Ita. We are now going to move to the Q&A portion of the Arista earnings call. Due to time constraints, I’d like to request that everyone please limit themselves to a single question.

Questions and Answers:

Operator

We will now begin the Q&A portion of the Arista earnings call. (Operator Instructions) Your first question comes from Rod Hall with Goldman Sachs. Your line is open.

Balaji Krishnamurthy — Goldman Sachs — Analyst

Hi. This is Balaji on for Rod Hall. I had a question on the competitive landscape as you move into the 400-G deployments, and maybe if you could describe how you would characterize the changes clearly Cisco is keeping up with you guys at this point or at least it looks like they are keeping up and they’ve also had a lot of engineering engagement. So, is there any difference there and maybe also just commentary on the optics supply shortages that you said. Is there any difference between OSFP and QSFP-DD?

Jayshree Ullal — President and Chief Executive Officer

I’ll kick it off Balaji and then I’ll hand it to, of course, Andy, who is much more deeply entrenched in this. We haven’t seen any significant change in competitive landscape, as the market leader in 100-gig ethernet, I think, everybody’s declared their products and introductions just as they did in 100-gig. Time will tell what the real capabilities of these products are and how we match, but we’re very confident of our outstanding capabilities and differentiators.

Particularly, and don’t underestimate the importance of combining the right silicon with the right operating system and differentiated features. Inconsistent drivers and discontinue unduly of OS can be extremely cumbersome for customers. So, ease of qual is very important as well. We also firmly believe that internally developed ASICs are not keeping up with merchant silicon and are often not competitive in the 400-Gig market.

Andy, you want to add to that?

Andy Bechtolsheim — Chairman and Chief Development Officer

Yeah, the other thing is the demand for 400-gig clearly comes primarily from the cloud where we have a strong footprint and there’s literally no demand from legacy and the price for 400-gig. Cloud customers in particular has little time for experimenting with new software platforms and greatly prefer to go with trusted solutions.

Balaji Krishnamurthy — Goldman Sachs — Analyst

And what about the optics? Andy.

Andy Bechtolsheim — Chairman and Chief Development Officer

The optics are not yet in volume production and it remains to be seen how quickly they ramped last year. You realized there’s a ramp up cycle for those for the whole supply chain the optics and then they have to order the parts, they have to make the mark — and so on, they are waiting for purchase orders. So, our current belief is that the supply will only reach what you would consider volume in the second half of next year.

Jayshree Ullal — President and Chief Executive Officer

And we are very new — Switzerland are neutral. Andy and the team are supporting both OSFP and DD-QSFD. So both have advantages, depending on where you’re starting from, so Arista will support both.

Balaji Krishnamurthy — Goldman Sachs — Analyst

Thanks.

Operator

Your next question comes from Erik Suppiger with JMP Securities. Your line is open.

Erik Suppiger — JMP Securities — Analyst

Yeah, thanks for taking the question. Two points. One just on the last one. Is your impression that your competitor for the 100-gig is using internal silicon, internally developed silicon, or is it based on Broadcom’s well. And then secondly on the tariff front, I just want to be clear, you’re adding on a 3% charge for you US customers. Is that how you’re approaching the tariff impact?

Jayshree Ullal — President and Chief Executive Officer

Okay. So, let me try and take on both questions and I’ll hand it to Ita for further clarification if needed. On the competitive front, obviously, we’re not the experts on implementation, but it’s, to the best of our understanding the announcement was only made yesterday. Some of the models use internal silicon and some of them use non-Broadcom merchant silicon, so they are not really a direct comparison to Arista’s introductions. And on the tariff side, yes, we are applying a universal 3.3% adder worldwide because a lot of our components are affected worldwide as well as our PCBs, so it’s not just US.

Erik Suppiger — JMP Securities — Analyst

Very good. Thank you.

Jayshree Ullal — President and Chief Executive Officer

Thanks, Erik.

Operator

Your next question comes from Srini Pajjuri with Macquarie Securities. Your line is open.

Srini Pajjuri — Macquarie Securities. — Analyst

Thank you. Jayshree, obviously, you said before many times that the cloud CapEx, the correlation between your business and the overall CapEx is not very high, but there definitely a lot of concerns in the investor community about CapEx slowing down over the next few quarters. I just want to hear your thoughts about what you’re seeing out there in the market. What are your customers telling you about next year, if anything, and given where we are in terms of how high the CapEx is, if it were to slow down. What do you think, what kind of impact do you think you’ll see in your business?

Jayshree Ullal — President and Chief Executive Officer

Sure. It’s a great question, Srini, even though it gets asked many times, it still remains one of the most popularly asked question. As you know our cloud customers have been adopting Arista unabated for over five years, it’s not a one quarter phenomena. It’s a 25 quarter phenomena. We don’t see any near-term signs of that changing nor the predicted concerns. It is true that we don’t track one-to-one with the cloud CapEx and remember now that, despite the lumpiness of the Cloud Titans and we have many of them, we are comfortable with the continued spend because there are multiple use cases. And we expect this to continue this quarter and early 2019, given our typical to quarter visibility.

Srini Pajjuri — Macquarie Securities. — Analyst

Thank you.

Jayshree Ullal — President and Chief Executive Officer

Thank you, Srini.

Operator

Your next question comes from Ittai Kidron with Oppenheimer. Your line is open.

Ittai Kidron — Oppenheimer — Analyst

Thanks and congrats ladies and Andy on a good quarter. I had two small ones. First of all, you haven’t talked about Campus that little product thing that when (inaudible) in the quarter. So, maybe you can help us talk about business activity there, volume, trial activity, pipeline, how does that look. And then just clarification, Ita, on the tariff again. I just want to make sure if these tariff, if you didn’t put on the adder, would your revenue guidance would be 3% lower than what it is. I mean, I’m just trying to assume whether the guidance really captures an extra 3%, just from a tariff perspective? Thanks.

Jayshree Ullal — President and Chief Executive Officer

Yeah, I mean, I think in Q4, in particular, we have got backlog that was booked prior to tariff. I don’t really think we can disaggregate and start, trying to carve out that 3%. And as we go forward, obviously, the goal is to remediate the cost as much as possible and start to kind of normalize that for us and for customers over time. So, I wouldn’t, try to say it’s somehow an adder to the top line.

Ita Brennan — Chief Financial Officer

It’s more an offset to — otherwise we take a bigger hit in margin. So, we’re absorbing some of the cost and passing on some is the way to look at it, Ittai. So Ittai, to address your CapEx question, as we’ve often said, lot of excitement on the architecture, lot of excitement on the acquisition of Mojo not material in revenue this year or the first half of 2019, there has been a consistent statement and that is true. Having said that, what we have since our last update, we have introduced the X3 Spline as we call it. This is used both in Campus use cases and in data center cases comes in a modular and fixed form factor and that has been very well received as an earn and is in early trial in the Campus, customers excited about that.

Ittai Kidron — Oppenheimer — Analyst

Very good, good luck.

Ita Brennan — Chief Financial Officer

Thank you.

Operator

Your next question comes from Sami Badri with Credit Suisse. Your line is open.

Sami Badri — Credit Suisse — Analyst

Hi, thank you. Could you tell us what drove the strength in deferred revenue. Just any color on the material step up?

Jayshree Ullal — President and Chief Executive Officer

I think the biggest driver relates to, as we’ve came out of the lawsuit, we had actually invalidated from patents and we’ve had some patents expire and that gave us access to some technology that we redesigned out of the product previously. And now we’ve obviously put that back into the product because we have access to that technology, and for some customers there is a need to requalify that new design that new product and we’re engaged in doing that currently.

Sami Badri — Credit Suisse — Analyst

Got it. Thank you. And then just a follow-up is regarding tariffs and your campus switching roll-out. Have you heard from customers opting into the Arista networks switches on mainly the campus switching side, simply because pricing is more favorable to adopt it rather than some of the competing products that might be seeing a higher tariff rates. Any kind of color around that and customer behavior?

Jayshree Ullal — President and Chief Executive Officer

I mean I think the general answer is, no. The tariff is not a reason to choose or not choose Arista products and in particular on the campus, majority of our business almost all is data centers. So, there is no correlation to be made on data center products or campus products to the tariff, Sam.

Sami Badri — Credit Suisse — Analyst

Got it. Thank you.

Jayshree Ullal — President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Jeff Kvaal with Nomura Instinet. Your line is open.

Jeff Kvaal — Nomura Instinet — Analyst

Yes, a question and a clarification from me please. Andy, I’m wondering if you wouldn’t mind comparing and contrasting what we ought to expect out of this 400-gig upgrade cycle versus 2017 to 100-gig is it as powerful, do you expect to gain as much share, any thoughts along those lines would be helpful. And then, Ita, I guess I wasn’t quite clear is it sounds as though the Cloud Titan mix was better in Jayshree’s initial remarks, but then it sounds like the mix was away from Cloud Titan in your gross margin explanation. So, if you could clarify that for me, I’d be grateful?

Jayshree Ullal — President and Chief Executive Officer

Yeah, let me just pick that one up first, I mean, it was very slightly mixed toward the non-cloud and if you look all the gross margin it was like 10 basis point I wouldn’t — it wasn’t a big shift one way or the other.

Andy Bechtolsheim — Chairman and Chief Development Officer

Okay. And then on your question on the 400-gig expectations. I would like to refer you to the market analysts like Dell’Oro and others that have modeled and predicted these in fair detail. One thing I can mention here is that the crossover in bandwidth shipped between 400-gig and 100-gig is currently projected to be in 2021. So, it will take some time for 400-gig to come up to the same level of bandwidth as the 100-gig.

100-gig, if you look at these reports it’s ramping extremely strong and based on the fact that it’s fully available fully qualified for optics (technical difficulty) volume et cetera. So, large cloud company or customer that wants to deploy a new data center, really has no choice. They will deploy this 100-gig today because that’s the only way they can buy hundred thousands of optics and so on in each quarter.

With on the 400-gig side, it will take some time to get to those kind of volumes. In addition, I would like to observe that for brownfield data centers, meaning, if you upgrade an existing data centers, it’s easy to stay with the same speed throughout the data center. So, most likely those data centers will stay with 100-gig for some time. For a greenfield data center, you have a choice. You can start with 400-gig but again, only when those components available in sufficient volume.

Jeff Kvaal — Nomura Instinet — Analyst

Okay. Thank you all.

Jayshree Ullal — President and Chief Executive Officer

Thank you, Jeff.

Operator

Your next question comes from James Faucette with Morgan Stanley. Your line is open.

James Faucette — Morgan Stanley — Analyst

Hi, thanks. I just wanted to ask one clarifying question to build on Ittai’s question for Ita that in the formulation of guidance for the December quarter, how much is contemplated to contribute from the acquisitions that closed in the third quarter, and then taking advantage of Andy being here on the call today. Andy, can you talk a little bit about the number of hyper-scale customers what you consider to be hyper-scale customers that Arista has and how that’s changing. I guess, more importantly, how are the requirements changing for the newer customers in terms of what they’re looking for from Arista and how is that the same or different from your traditional customers? Thanks.

Jayshree Ullal — President and Chief Executive Officer

Yeah, James, I think on the acquisitions. Again, I’d remind you that Mojo is a SaaS model. So, that’s going to be a ratable rev rec model for us. So, that’s a relatively small contribution. On the MetaMako side that’s already being rolled into our kind of financials vertical. It’s now becoming part of the offering there and it’s definitely been impactful with customers and opportunities to customers, but we’re not planning to really track that separately and I’ll tell you that the combined impact on the quarter is small, right, you got the Mojo stuff is a SaaS ratable revenue amount and then we have kind of single digit coming out of the MetaMako side of the house, it’s a small contribution at this point.

Andy Bechtolsheim — Chairman and Chief Development Officer

Yeah, on the cloud customer question we cannot disclose the name of our cloud customers, but I think we have said repeatedly that the competitive environment in this market hasn’t really changed. Obviously, every cloud customer is extremely concerned about network, reliability, resilience up-time et cetera. And my belief is that our fundamental competitive advantage is our EOS operating system, which delivers those qualities.

James Faucette — Morgan Stanley — Analyst

Thanks.

Operator

Your next question comes from Mitch Steves with RBC Capital Markets. Your line is open.

Mitch Steves — RBC Capital Markets — Analyst

Hey, guys. Great quarter. I just had two actually small ones. So, first, just on the cloud enterprise financials. So, of those three, is it still the case that cloud is kind of the fastest growing segment, and then enterprise I’m not looking for exact growth rates, just kind of a trajectory. And then secondly, how much was the acquisition actually benefiting you guys is it just a few million. Just looking for way to get a number on that?

Jayshree Ullal — President and Chief Executive Officer

Let me take the vertical question, there is no doubt that the cloud segment both the Tier 1 and Tier 2 cloud has been growing faster than any others, if you put those two together. However, the enterprise is the fastest because it’s starting off a much smaller base, and we’re accumulating customers and million dollar accounts very rapidly there, and there’s a lot of interest on both the data center side, where we are succeeding and installing and the campus side, which we hope to convert into success next year. And your second question was? Yeah, I mean, I think, three, the acquisitions contributed very little, right. The MetaMako and you came in kind of —

Ita Brennan — Chief Financial Officer

Two weeks, yeah.

Jayshree Ullal — President and Chief Executive Officer

September, and again the Mojo acquisition was probably got a whole month or a little bit more than that, but again it was fast ratable model, right. So, they contributed very little to Q3.

Mitch Steves — RBC Capital Markets — Analyst

Got you. So, I guess, the clarify required to be less than a point for next quarter. Is that roughly correct?

Jayshree Ullal — President and Chief Executive Officer

And again like I said, we’re not really going to start tracking this individually, particularly, as we roll the products into the portfolio. I think for Q4, what is that was, it’s single digit contribution, low single-digit contribution.

Ita Brennan — Chief Financial Officer

And perhaps it will help to mention. If you look at both of these as tuck-in acquisitions, one is going to help our campus overall and one is already helping our financials since we are in high-frequency trading and low-latency applications already.

Mitch Steves — RBC Capital Markets — Analyst

Okay, perfect. That’s very helpful. Thank you.

Jayshree Ullal — President and Chief Executive Officer

Okay. Thank you.

Ita Brennan — Chief Financial Officer

Thank you, Mitch.

Operator

Your next question comes from Jason Ader with William Blair. Your line is open.

Jason Ader — William Blair — Analyst

Yeah, thank you. I wanted to ask about the federal vertical. We have picked up that you guys are starting to gain some traction there. So, can you talk about where you are with federal, what type of momentum that you’re seeing and where could this business be in a couple of years?

Jayshree Ullal — President and Chief Executive Officer

Yeah. No, I think, this is becoming more and more committed to the federal market not only in the US, but worldwide. We have completed a lot of important certifications, so we see this as a big opportunity and one we fully intend to invest in, obviously, will be responsible about reporting wins and losses until something’s public, we won’t really comment on rumors or protest, so can’t say anything about specific wins and losses, but definitely an important segment for us worldwide. We’re doing well in many parts in many international theaters as well.

Jason Ader — William Blair — Analyst

Thank you.

Jayshree Ullal — President and Chief Executive Officer

Thanks, Jason.

Operator

Your next question comes from Alex Kurtz with KeyBanc Capital Markets. Your line is open.

Alex Kurtz — KeyBanc Capital Markets — Analyst

Yes, thanks, and congrats on a solid quarter here Jayshree and team. Just a clarification about the cloud business, I think, historically, you’ve talked about Microsoft kind of this 10% to 15% range, I think, your expectation is above 10% this year. Is that still how things are shaping up?

Jayshree Ullal — President and Chief Executive Officer

Yeah. Thanks, Alex. Although the Cloud Titans is a composition of many customers, Microsoft, has always been our number one customer, and I believe it will continue to be our number one in a very solid fashion in 2018 and will be well over 10%.

Alex Kurtz — KeyBanc Capital Markets — Analyst

Okay, great. Jayshree could you take us through some of the early deals with the Campus products and I know it’s early days, but just how enterprise customers reaching you on these products and sort of deal size, scope of projects compared to what you’ve done in enterprise before just kind of compare and contrast what you’ve seen so far?

Jayshree Ullal — President and Chief Executive Officer

Alex, it’s probably a little early for the level of detail you’re looking at, but I promise I’ll answer that question next year better, but when I have been personally involved in this, the pattern match I see is many of them have like the data center, an architectural need to shift and change, where they’ve got the classic three-tiered model and they want to move to the leaf-spine or often a single-tier spline model and then have different device edge connectivity. So, they’re looking to make that change and sometimes it’s a brand new building they’re going to construct next year or you are after or it’s a brownfield.

The second pattern I’m seeing is that they’re already very comfortable with Arista’s spines or spline and they’re using our EOS and they’re going, oh jeez, I don’t need to build a separate campus box, I can use the same spine or spline and enable campus features on that box, whether it’s BGP routing or VXLAN or tunneling or security features, so architecturally and the third thing we’re seeing is CloudVision for the campus is something they are very excited about.

We demonstrated some of that capability at the Gartner Conference to John McCool and Jeff Raymond and the team have done a fantastic job there, and I think you will see these three being the anchors, the design is changing, the cognitive management plane architecture and our data center customers really want to expand their footprint with us into the campus.

Alex Kurtz — KeyBanc Capital Markets — Analyst

Thank you.

Jayshree Ullal — President and Chief Executive Officer

Thank you, Alex.

Operator

Your next question comes from Aaron Rakers with Wells Fargo. Your line is open.

Aaron Rakers — Wells Fargo Securities — Analyst

Yes, thanks for taking the question, and congratulations on the quarter as well. I wanted to ask, maybe a longer-term strategic question around the Metamako acquisition. I’m just curious as you kind of fold that into the product portfolio and clearly a little bit differentiated and its usage of FPGAs. How do you see FPGAs fitting relative to merchant silicon. And with that acquisition is there a certain subset or addressable market that you can now address that previously you couldn’t what size would that be?

Jayshree Ullal — President and Chief Executive Officer

I think, Aaron, your question is very thought-provoking. As you know Arista’s core being is to adopt and massively deploy merchant silicon in a extensible software, but there are use cases that require deeper programmability. One example even before Metamako would be the P4 programmability we do on the Barefoot silicon, and the FPGA definitely allows us to go capture more state and improve our latency and really get to the heart of the application in many of these customers in certain verticals for electronic trading. Andy, you may want to comment on this, I know, you’ve been deeply involved.

Andy Bechtolsheim — Chairman and Chief Development Officer

Yeah, meaning, you can’t beat the latency of an FPGA for those types of applications which include both Wall Street type applications and also very precise traffic monitoring and network visibility kind of applications. So it may not be the biggest market, but it’s a very important one. It’s a key market for many of our customers.

Aaron Rakers — Wells Fargo Securities — Analyst

And do you see this broadening across the product portfolio over time?

Jayshree Ullal — President and Chief Executive Officer

I think it would depend on how big the market gets. But I think at this point, we’ll keep it focused on the specific application driven use cases.

Aaron Rakers — Wells Fargo Securities — Analyst

Okay, thank you.

Jayshree Ullal — President and Chief Executive Officer

Thank you, Aaron.

Operator

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

Samik Chatterjee — JPMorgan — Analyst

Hi, thanks for taking my question. I just wanted to understand relative to 400-gig you mentioned kind of the differentiation that you have relative to some of your competitors like Cisco, et cetera. How should I think about how this plays into the competitive dynamics with white-box particularly is the technology from those manufacturers keeping up or should I think of 400-gig being an opportunity for you to gain share?

Jayshree Ullal — President and Chief Executive Officer

Samik, I think, the white-box is a bit of a tangential discussion on any speed. There is really two types of players who deploy white-box. One is a captive deployment in cloud customers that are looking to build their own and they’re going to do the same thing whether its 10-gig, 40-gig, 100 gig or 400-gig. And the second is maybe experimental HPC clusters et cetera, what people may try this, we don’t see 400-gig and white-box really that connected. In fact, that is one place, I would tell you that the requirement for predictable performance and not compromising speeds will require the best hardware and the best software combinations. So, that’s not a combination that comes to mind as the first use case for 400-gig.

Samik Chatterjee — JPMorgan — Analyst

Got it, got it.

Jayshree Ullal — President and Chief Executive Officer

Thank you, Samik.

Samik Chatterjee — JPMorgan — Analyst

And then just, if I can follow up on the —

Andy Bechtolsheim — Chairman and Chief Development Officer

I’m sorry, Samik, we’re just restricted to one question. Can we take the next one?

Operator

Your next question comes from Fahad Najam with Cowen & Company. Your line is open.

Fahad Najam — Cowen & Company — Analyst

Thank you for taking my question. Can you remind us how your traction in the routing market is going, and if you’re hitting your target, I think, if I recall, you indicated that you expect at least to hit $50 million in annual revenue from routing. Are you still tracking to that target or you’re exceeding that can you — any commentary on the routing adoption?

Jayshree Ullal — President and Chief Executive Officer

Sure, I will give you some year-end numbers, the way we track it don’t really do it by revenue. We do it by customers and FlexRoute licenses. We’ve got three routing licenses that we track on and we are doing well and the acceptance of that license particularly in the cloud service provider and enterprise markets. It’s going well, but I would like it to go even better especially in the service provider market, I think, we can do. We can have more improved results.

Fahad Najam — Cowen & Company — Analyst

So, any update in terms of do you think you’re taking share in the routing market right now as it or is this still in cloud?

Jayshree Ullal — President and Chief Executive Officer

We don’t — we do believe we are displacing designs taking share would mean we track it that market, we don’t participate in the classic traditional router market, but we are absolutely taking share and applying routing onto our switching platforms and increasing our switch market share in routing use cases.

Fahad Najam — Cowen & Company — Analyst

Thank you very much.

Jayshree Ullal — President and Chief Executive Officer

Thank you.

Fahad Najam — Cowen & Company — Analyst

Thank you.

Operator

Your next question comes from Simon Leopold with Raymond James. Your line is open.

Simon Leopold — Raymond James — Analyst

Great. Thanks for taking my question. I appreciate the commentary, Andy, offered on the 400-gig market and the timing being biased toward the second half of the year. I’m wondering if you have your own perspective on how to size this particular market, partly because I’m confused when I look at the quoted data from Dell’Oro versus the IHS, they seem to be a very broad range as high as 1.5 billion for 400-gig in 2019 seems hard to believe, so I was hoping to get your perspective on that, and also some clarification on, you talked about the starting price at $1,800 that’s a low price. Just want to understand what’s the customer getting for that? Thank you.

Andy Bechtolsheim — Chairman and Chief Development Officer

Yeah, I believe, that the lower numbers include optics connected to the ports. So, you have to — when we talk about $800 that’s purely the switch board, excluding the optics, that’s a very important difference. The optics cost more than the switch board typically, in some cases, significantly more. So, there is a gap there, right. But going back to your question, I think, the best thing you can do is read multiple market research reports. Some of them talk more through the cloud people in particular or more on top of the cloud developments and perhaps others. There is just a lot of momentum we’re at now on 100-gigabit, which is also reflected in these reports. And the reality is the 400-gig can only be deployed once the optics and all the systems are available in high volume, because the volume deployment for a large cloud customers like a 100,000 puts a quarter, right, and you can buy a 100,000 optics right now in a quarter. So, it takes a while for the supply chain to simply catch up with those kind of numbers. And with 100-gig, all the optics and all the systems are available in high volume today and ramping. So, it takes time. But both are growing and they’re incremental to each other, I wouldn’t say one is displacing, the other one is ready.

Jayshree Ullal — President and Chief Executive Officer

I think it’s a really important point that Andy made. If you go pattern match with how we did on 100-gig, there’s some striking parallels. We had some early trials in 2015, 2016, but it took 12 to 18 months for the market share lead we took and got because the whole ecosystem had to come into play, something similar happen with 25-gig as well. Until the entire ecosystem comes to place, which takes six to 12 months, you don’t see that ramp. So, I think, all the market studies are pointing to that ramp in 2020 or 2021.

Simon Leopold — Raymond James — Analyst

Thank you. That makes a ton of sense. I appreciate it.

Jayshree Ullal — President and Chief Executive Officer

Thanks, Simon.

Ita Brennan — Chief Financial Officer

Thanks, Simon.

Operator

Your next question comes from James Fish with Piper Jaffray. Your line is open.

James Fish — Piper Jaffray — Analyst

Congrats on the quarter, ladies, and Andy. This one is more for you. It kind of looks like Q4 guide implies a low to mid single-digit sequential increase for product revenue compared typically a low double-digit increase. Is there a reason for the caution or conservatism and or is it more related to the tax impact there? And specifically as well, is there any concern around hyper-scaler spending as you look into Q4 in 2019? Thanks.

Ita Brennan — Chief Financial Officer

Yeah, I mean, I think the — if you look at the guidance, we are largely at the upper end of the guidance with 27% year-over-year growth rate. I think that’s in line with kind of what we had said as the expectations and there’s nothing, there’s anything unusual about the guidance in that sense. I think we’re comfortable where we are from a business perspective and pretty much in line actually with what we’ve laid out kind of right from the beginning certainly from the middle of the year. So, I don’t think, there is anything unusual about the guidance, it’s not really trying to reflect any particular key driver.

James Fish — Piper Jaffray — Analyst

And any clarity around the hyper-scaler spending for Q4 in 2019?

Ita Brennan — Chief Financial Officer

Yeah, I mean, I go back to what Jayshree said, I think for what we have visibility to, I think, we’re comfortable where we are, we think we’re well positioned. And we are doing well — we haven’t seen anything different in the business in that kind of that time-frame that we have — that we have the visibility. It’s kind of been business as usual.

James Fish — Piper Jaffray — Analyst

Got it. Thanks.

Operator

Your next question comes from James Suva with Citi. Your line is open.

James Suva — Citi — Analyst

Thanks very much. When we think about your campus deployment, I know, you take a little — we’ll take a little bit kind to see how successful it is or not. Can you at least update us about, are you first targeting like your top 20 accounts or your certain regions or are you going to all your sales force at once? And then maybe for Ita, a question about the tariffs. I would have thought that the ITC band would have positioned Arista quite favorably for the sourcing and supply chain of how you do things. Is that correct, but still you just need to 3.3% tariff increase? Thank you.

Jayshree Ullal — President and Chief Executive Officer

Yeah. So just to — James to address your campus question now, the most natural conversation is with our customer base across all five verticals, because they already know us and love us and are familiar with us and can see use cases. The next natural conversation is with the acquisition of Mojo. We’re actually getting exposure to new customers and some of the interest in WiFi is separate from our customer base. So, that’s also a second motion. And from a sales and go to market both Anshul and Manny are really focusing on campus as a mainstream effort. There is no sideshow going on here and so we’re building an entire sales expertise and especially SE expertise. So , where we are putting special emphasis is not all of our sales team understands WiFi and radio management. So, we do have specialized SE expertise there. But the rest of the sales is across the entire sales and marketing focus, it’s nothing unique to campus.

Ita Brennan — Chief Financial Officer

And to your other question, Jim, I think we’ve certainly diversified our supply base and our sourcing. I mean more than maybe we would have, if we hadn’t come through some of the IT field. There is still work to do. I mean we would still sourcing in China, there are certain components that are still being sourced in China such as. We do have work to do to mitigate couple of cost, that’s off the top of mind for John McCool and his team to get that done as quickly as possible.

James Suva — Citi — Analyst

Thank you so much for the details and clarifications. Greatly appreciated.

Jayshree Ullal — President and Chief Executive Officer

Thank you, Jim.

Operator

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

Alex Henderson — Needham & Company — Analyst

Thanks. I was hoping you could talk a little bit about the international portion of your business. Obviously, you have very tough comps here and tough comps for the next couple of quarters. But could you parse a little bit between the slowdown in that business, between economic conditions versus the comps and just give us a little bit of color between Europe and APAC?

Jayshree Ullal — President and Chief Executive Officer

Yeah. You’re absolutely right, Alex, I think tough comps is the issue. We did very well organically in our overall geography. However, some of the volatility was defined by where the global customers and their spend resided. So, Asia-Pac was strong, EMEA was little weak, but the US was strong across the board. So, just turned out that way depending on where the Cloud Titans and the top 10 providers spend, but the organic business is still intact and doing well.

Ita Brennan — Chief Financial Officer

Yeah. And, I think, you’ve seen this when we filed the queue, but we do have some volatility back and forth between EMEA and APAC over the last couple of quarters, right. Just because again the base is still relatively small, but when you win it probably (technical difficulty) there are couple of deals one or the other.

Alex Henderson — Needham & Company — Analyst

If I could just ask one clarification. Jayshree, did you guys say low single-digit millions or low single-digit percentage in terms of the contribution from acquisitions, it wasn’t clear which one you’re referring to?

Ita Brennan — Chief Financial Officer

Millions.

Jayshree Ullal — President and Chief Executive Officer

Millions. Millions, Alex.

Ita Brennan — Chief Financial Officer

Still relatively small.

Jayshree Ullal — President and Chief Executive Officer

Single-digit million.

Alex Henderson — Needham & Company — Analyst

Excellent. Thank you.

Jayshree Ullal — President and Chief Executive Officer

Thank you, Alex.

Operator

Your next question comes from Hendi Susanto with Gabelli. Your line is open.

Hendi Susanto — Gabelli — Analyst

Thank you and great Q3 performance.

Jayshree Ullal — President and Chief Executive Officer

Thank you, Hendi.

Hendi Susanto — Gabelli — Analyst

So, Jayshree, Arista defined cognitive campus as the next frontier. I would like to understand more about your go-to-market strategy, how similar how different it is with your core go-to-market and whether you will have some closest partners?

Jayshree Ullal — President and Chief Executive Officer

Yeah, that’s a very good question, Hendi. Obviously, the low-hanging easiest go-to-market is the one we already have and we’ve now got a nice healthy base of over 5,000 customers, we’re going to leverage that. However, that will be a necessary, but not sufficient condition to participate in the campus. We are expanding, and one of Manny’s initiatives is, in fact, to complement our direct customer focus with the elite channel strategy focus, we’re not going to taper all the channels, but we’ve already had some channel capability and experience in our international theaters. But we will be adding more to that. So, the combination of our own sales and marketing investment in the campus and the channels will be a very important one to step in 2019.

Hendi Susanto — Gabelli — Analyst

Thank you, Jayshree, and great job.

Jayshree Ullal — President and Chief Executive Officer

Thank you, Hendi.

Operator

Your last question comes from Woo Jin Ho with Bloomberg Intelligence. Your line is open.

Woo Jin Ho — Bloomberg Intelligence — Analyst

Hey, great. Thanks for squeezing me in. A couple if I may. So, Jayshree, when you came out with 100-gigs switch you guys innovated on the network architectures of the cloud, are there any consideration similar to that with 400-gig switching? And then, Ita, in terms of the deferred revenue uptick, how much of that was the IT related that needs to be queued and how should we think about the deferred revenue draw-down hit in the P&L over the next couple of quarters?

Ita Brennan — Chief Financial Officer

Yeah, I mean, I think again the product growth is really relates to the requalification as to when exactly that comes back, it’s difficult to tell and again that balance will move with new stuff versus old stuff, et cetera. So I’m not trying to forecast that if you like as part of this. I will say, we are not contemplating a significant downward move in that in our Q4 guidance, right, but other than that, I think, it’s too early to try and forecast beyond that.

Jayshree Ullal — President and Chief Executive Officer

Woo Jin, just to wrap up the last question of the Q3, if you look at the way we approached 100-gig, we approached it from a network design perspective, heavy software differentiation, bringing high availability, agility, automation, analytics into our 100-gig platforms mix and match of both modular chassis and fixed form factor. You can expect us to adopt a similar strategy for 400-gig over the next year.

Woo Jin Ho — Bloomberg Intelligence — Analyst

Great, thank you.

Jayshree Ullal — President and Chief Executive Officer

Thank you.

Charles Yager — Director, Product and Investor Advocacy

This concludes the Arista Q3 2018 earnings call. I want to mention that we also posted a presentation which provides additional information on our fiscal results, which you can access on the Investor section of our website.

Operator

Thank you for joining. Ladies and gentlemen, this concludes today’s call. You may now disconnect.

Duration: 53 minutes

Call participants:

Charles Yager — Director, Product and Investor Advocacy

Jayshree Ullal — President and Chief Executive Officer

Andy Bechtolsheim — Chairman and Chief Development Officer

Ita Brennan — Chief Financial Officer

Balaji Krishnamurthy — Goldman Sachs — Analyst

Erik Suppiger — JMP Securities — Analyst

Srini Pajjuri — Macquarie Securities. — Analyst

Ittai Kidron — Oppenheimer — Analyst

Sami Badri — Credit Suisse — Analyst

Jeff Kvaal — Nomura Instinet — Analyst

James Faucette — Morgan Stanley — Analyst

Mitch Steves — RBC Capital Markets — Analyst

Jason Ader — William Blair — Analyst

Alex Kurtz — KeyBanc Capital Markets — Analyst

Aaron Rakers — Wells Fargo Securities — Analyst

Samik Chatterjee — JPMorgan — Analyst

Fahad Najam — Cowen & Company — Analyst

Simon Leopold — Raymond James — Analyst

James Fish — Piper Jaffray — Analyst

James Suva — Citi — Analyst

Alex Henderson — Needham & Company — Analyst

Hendi Susanto — Gabelli — Analyst

Woo Jin Ho — Bloomberg Intelligence — Analyst

More ANET analysis

Transcript powered by AlphaStreet

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Viavi Solutions (VIAV) Q1 2019 Earnings Conference Call Transcript

VIAV earnings call for the period ending September 30, 2018.

Nov 2, 2018 at 3:35AM
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Viavi Solutions (NASDAQ: VIAV)
Q1 2019 Earnings Conference Call
Nov. 1, 2018 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Viavi Solutions first-quarter 2019 earnings call.  [Operator instructions] Thank you. Bill Ong, senior director of investor relations, you may begin your conference.

Bill Ong — Senior Director of Investor Relations

Thank you, Chris. Welcome to Viavi Solutions first-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.

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Viavi undertakes no obligation to update these statements. Please also note that unless we state otherwise, all results except revenue are non-GAAP. We reconciled these non-GAAP results to our preliminary GAAP financials and discussed their usefulness and limitations in today’s earnings release. Effective fiscal-year 2019, Viavi adopted the new accounting standard code 606 for revenue recognition.

We have recast our financials for fiscal-year 2018 in order to have equivalent and meaningful financial comparisons. Please see our supplemental earnings slide desk posted on Viavi’s Investor Relations website for more financial details. Finally, we are recording today’s call, and we’ll make the recording available by 4:30 p.m. Pacific Time, this evening on our website.

I would now like to turn the call over to Amar.

Amar Maletira — Chief Financial Officer

Thank you, Bill. Viavi’s revenue at $268.5 million grew  40.6% year on year and exceeded the midpoint of our revenue guidance. The growth in revenue was driven by both NSE, with the acquisition of AvComm and Wireless, and OSP strength in 3D sensing and anti-counterfeiting products. NSE revenue was $190.7 million, coming in at the lower end of $187 million to $203 million guidance range.

A weaker-than-expected demand from field instruments in North America was partially offset by a strong demand for wireless as well as our lab and production products. OSP delivered a strong performance, with revenue at $77.8 million, exceeding the $70 million to $74 million guidance range due to higher-than-expected demand in both anti-counterfeiting and 3D-sensing products.  The overall Viavi operating margin at 16.3% expanded 260 basis points year on year and exceeded the 14% to 16% guidance range helped by favorable mix and good operating-expense management. EPS at $0.15 was at the high end of our guidance range of $0.12 to $0.15 and grew $0.05 from a year-ago level of $0.10.  Now moving to our reported Q1 results by business segment, starting with NSE. NSE revenue at $190.7 million grew 39.7% year on year.

The primary growth came from the AvComm and Wireless acquisition, where the 5G wireless business was particularly strong this quarter. NE grew 47.4% year on year, reflecting the acquisition but also saw broad-based strength in lab and production instruments, particularly fiber in both 100-gig and 400-gig Ethernet products. Field instruments demand, however, was disappointing due to weaker North American service provider spend.  SE revenue grew 5.2% from a year-ago levels as a result of double-digit percentage growth in our data center products, while revenue for Assurance products was roughly flat year on year. The mature issuance business, as expected, continued to decline year on year and in the quarter was at about 16% of SE revenue.

As indicated in our last earnings call, please note that ASC 606 revenue accounting changes resulted in an unfavorable impact to SE revenue, estimated at $8 million to $10 million for this fiscal year of 2019. NSE gross margin at 63.6% declined 60 basis points year on year due to the mix change resulting from our acquisitions in NSE. However, NSE’s operating margins at 8.6% increased 570 basis points from a year-ago levels driven by operating leverage from the addition of the acquired AvComm and wireless businesses and continued cost management in our core NSE business. NSE’s book-to-bill ratio was slightly above one.

Now turning to OSP revenue. OSP revenue at $77.8 million increased 43% from a year-ago levels on the strength of 3D-sensing optical filters and anti-counterfeiting bank note redesign product demand. OSP gross margins at 50.6% declined 710 basis points from a year ago due to higher mix of 3D-sensing products. Our 3D-sensing products have lower gross margins than our core anti-counterfeiting products.

That said, the 3D-sensing business is accretive to the overall Viavi operating margin and operating profit. Now turning to the balance sheet. Our total cash and short-term investments ending balance was $659.5 million. Operating cash flow for the quarter was $27.6 million.

In September, we issued a notice to fully redeem the 0.625% 2023 senior convertible notes. In October, our fiscal Q2, we completed the redemption of approximately $142.7 million aggregate principal amount of this note. In connection with this redemption, holders who elected to convert received in aggregate of approximately 231,800 shares of common stock and approximately $111.8 million in cash, while the balance of the notes were redeemed in full for cash. As of today, Viavi has the 1% 2024 notes and the 1.75% 2023 notes for a total outstanding debt balance of $685 million.

Lastly, this afternoon, Viavi filed an S-3 automatic shelf registration statement with the SEC. The shelf registration statement is typically valid for three years. We are using this window of opportunity prior to filing our first-quarter 10-Q to file an S-3 now to provide flexibility in the future and also to reduce the administrative burden of having to recast additional historical periods to reflect the newly effective ASC 606 revenue standard. Now to our guidance.

We expect fiscal second-quarter 2019 revenue for Viavi to be $280 million plus or minus $10 million, operating margin at 16.5% plus or minus 1% and EPS to be in the range of $0.15 to $0.17. We expect NSE revenue to be at $200 million plus or minus $8 million, with operating margin at 8.5% plus or minus 1%. We expect OSP revenue for fiscal second quarter to be at $80 million plus or minus $2 million, with operating margins at 36.5% plus or minus 1%. For the full fiscal year, we now expect an incremental increase in 3D-sensing revenue from Android-based smartphone customers.

As a result, we are raising our forecast for 3D-sensing revenue from $50 million to $60 million for fiscal-year 2019. The majority of 3D-sensing revenue is still expected to ship in the first half of fiscal-year 2019. Our tax expense rate is expected to be approximately 17%. We expect other income and expenses to reflect a net expense of approximately $2.5 million.

Share count is approximately 231.5 million shares.  With that, I will turn the call over to Oleg.

Oleg Khaykin — President and Chief Executive Officer

Thank you, Amar. Despite a continuing challenging spend environment faced by our NSE business in North America, I’m pleased with the fiscal Q1 results and our Q2 outlook. Starting with NSE. The wireless business continued its strong performance driven by the initial 5G trial demand.

As operators proceed with the 5G field deployment later in the calendar 2019, we expect to see continued strong demand for our 5G product by NAMs and service providers. Lab and production test equipment continue to increase year on year driven by 100-gig and 400-gigabit Ethernet. Robust growth in lab and production was dampened by a decline in our field instruments. North American carrier spending continues to remain challenging.

Also, as expected, our cable products in North America also saw orders decline, as our customers largely completed their procurement cycle. That said, cable demand from Europe, although a smaller market than North America, is now starting to materialize. Our SE business segment, post-restructuring, continues to perform to our expectations. Moving onto OSP.

As we stated back in spring, we expected the anti-counterfeiting business to recover in the second half of calendar 2018. The strong fiscal Q1 results and fiscal Q2 guidance for OSP reflect incremental bank note redesign demand from major end customers. We do not yet have the visibility from our customers into the currency redesign orders for the second half of fiscal 2019. As such, we conservatively plan our base case anti-counterfeiting revenue scenario for the second half of fiscal 2019 to be about $50 million per quarter.

For 3D-sensing business, we expect a strong first half of fiscal 2019 driven by a lead customer deploying facial-recognition technology into multiple mobile devices. We are also seeing increased activity from our customers in the Android ecosystem and anticipate increased revenue from them in the second half of fiscal 2019 but not at the level to offset the expected seasonal decline from the elite customer. Lastly, this afternoon, we announced the acquisition of RPC Photonics. RPC is a technology leader in engineered optical diffusers used for 3D sensing and other related applications.

RPC products go into the projector part of the 3D-sensing module. With Viavi’s strong presence in the camera portion of the module, this acquisition significantly increases Viavi’s opportunity in 3D sensing. In summary, fiscal 2019 is off to a good start. As we look ahead, we expect fiscal Q1 business trends to continue into fiscal Q2.

As we outlined before, four major trends expected to continue to be the primary drivers of our business. The first one is fiber everywhere. The continued densification of network is driving fiber demand everywhere, including wireless and cable networks. The second one is 5G.

5G wireless testing and deployment continues to gain industry momentum and we are positive about the business outlook for our recently acquired Wireless business. The third one is increased military and public safety budget, as we see as an opportunity to upgrade communication infrastructure and it is a positive long-term driver for our avionics and the radio test products. And lastly, the 3D sensing. The application now starting to proliferate into the Android ecosystem, with new augmented reality and virtual reality apps and eventually into the automotive applications.

Our recent RPC Photonics acquisition further strengthens our position in the 3D sensing market. In conclusion, I’d 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.

Bill Ong — Senior Director of Investor Relations

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

Questions and Answers:

Operator

Certainly [Operator instructions] Your first question comes from Vijay Bhagavath with Deutsche Bank. Your line is open.

Vijay Bhagavath — Deutsche Bank — Analyst

Yeah, thanks. Hey, good afternoon, Oleg, Amar. Yeah, hi.

Oleg Khaykin — President and Chief Executive Officer

Hi, Vijay.

Amar Maletira — Chief Financial Officer

Hi, Vijay.

Vijay Bhagavath — Deutsche Bank — Analyst

Yeah, hi. My question is on what are the milestones we need to monitor heading into next year for the NSE business, in particular for field instruments? I know there are some big product cycles coming up with fiber deep and 5G and field instruments. So guide us and help us in terms of the key milestones to monitor.

Oleg Khaykin — President and Chief Executive Officer

Well, I think, the first one is clearly, we are monitoring the North American spend. I mean, I’d say, I’m very happy with the customer spend environment in EMEA, in Asia-Pacific and our traction that we are gaining in those markets, as well as the Latin America, which is also showing signs of recovery. The biggest kind of base case concern that I have is with the major service providers in North America. At this point, as much as — as well as we’ve been doing everywhere in the world, a lot of that great performance have been offset largely by decreased spend in North America.

So we are going to continue to monitor to see to what extent they’re going to continue to start reinvesting in their network. The other big one, of course, is 5G. I mean, for us, even though the actual deployment is some time off, we make our money on the early stages of the network development, network testing, field trials and things like that. That’s where we make our initial revenue with lab equipment.

Once it goes into production, I mean, clearly, we are looking to carve out a meaningful share for our field instruments in the RF space, which is the area where we are largely absent today. And the third one, I think, is continuous fiber. I’m pretty bullish on the fiber continuing to grow and we’re seeing it now, obviously, in the wireless networks, in cable networks. And we’ve had very good traction and execution in the fiber space around the world.

And just the mere fact we’re seeing very strong demand for autumn, 100 gig, 400 gig deployments, it’s just a precursor for the future deployments in fiber deeper into the network at the later time.

Vijay Bhagavath — Deutsche Bank — Analyst

Perfect. A quick follow-on for Amar. How should we think of product mix and margins heading into the rest of the year and into next year? Thanks.

Amar Maletira — Chief Financial Officer

Yes, I think, when you look at just for NSE, we guided to about 8.5% at the midpoint of the guidance. The product mix of — so before I get to the margins, the product mix, as we go drive more wireless in the lab as well as our lab and production instruments, which also goes into the lab on the fiber and the optical transport side, those two businesses come in with higher margins compared to our field-instrument business. So there has to be a favorable impact to our margins from that perspective. No.

2, we continue to reduce our operating expenses. As you can see, our operating expenses has gone down sequentially and also versus our prior guidance. And so there is a lot of operating leverage in the model. In case North American service providers come back and start spending, it should create a very good operating leverage in the model.

Having said that, I believe that we should be within the 7% to 9% operating margins for NSE for the full year, at least from what we have seen as of now.

Vijay Bhagavath — Deutsche Bank — Analyst

OK, thank you.

Operator

Your next question comes from Michael Genovese with MKM Partners. Your line is open. Michael Genovese with MKM Partners, your line is open.

Michael Genovese — MKM Partners — Analyst

Apologies for that. I was on mute, obviously. Hi.  So you guys beat my estimate for OSP by about $5 million. I had $18 million for 3D sensing and I guess I’m just wondering the $5 million upside, did that come more on the 3D sensing side or more on the core OSP? Or was it spread between the two?

Amar Maletira — Chief Financial Officer

Yes, actually — thanks, Michael. Good question.  It was spread between the two. So we saw both our expectation on 3D sensing as well as on anti-counterfeiting products, the demand came in higher than our expectations in both those areas. So roughly, I would say, it’s split evenly between those two product lines.

Michael Genovese — MKM Partners — Analyst

Right. And was some of that an upside from…

Amar Maletira — Chief Financial Officer

And let me just add to that, Michael. So the upside is mainly coming from, as I mentioned in my prepared remarks, as well as Oleg mentioned too, it’s coming from the Android ecosystem. We have started seeing some traction in the Android ecosystem and that’s something that showed up in Q1. We expect that in Q2.

And hence, we increased our guidance from $50 million to $60 million and with the same ratio of having about 75% of that revenue show up in first half versus second half.

Michael Genovese — MKM Partners — Analyst

OK, perfect. Thanks for that. I can save my follow-up for another question, which is the acquisition. Does the acquisition just improve your filter technology or does it actually grow the addressable market that you can sell into, smartphones, other consumer electronics? And is there a play into the auto and other markets as well?

Oleg Khaykin — President and Chief Executive Officer

So that’s an excellent question. It actually increases our addressable market. Where RPC plays on the projector side of the module, it sits right above the VCSEL. That’s what diffuses the laser light to avoid — to provide eye safety and the distribution of laser light onto the object.

And our filter sits on the camera side, which is the receiving end of the module. So by going in, we now have light going through Viavi both on the transmit as well as the receive part of the module. And RPC, we were attracted to that company for the same reason that where we are playing today on the filter side. It’s got unique technology that is ranked to be the best in the world by our customers and they have a significant design win traction in the Android ecosystem.

And in time of flight is where you absolutely need to have the engineered diffuser.

Michael Genovese — MKM Partners — Analyst

Great. Well, thanks for that, guys. Congratulations on the results.

Oleg Khaykin — President and Chief Executive Officer

Thank you.

Operator

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

Dan Park — Needham & Co. — Analyst

Guys, good afternoon. This is Dan Park on for Alex.  Thanks for taking my question. So I just wanted to-so with Verizon guiding their full-year — FY18 CAPEX down, I just wanted to see if you guys are seeing any impact from this?

Oleg Khaykin — President and Chief Executive Officer

So yeah. I mean, we clearly saw it in Q1 and it’s also really comes down to where they are guiding.  In some areas, they are probably going to spend some money mainly on 5G wireless for the field trials.  So in that area, we’ll probably see some upside to our opportunities. But for the kind of major bread and butter, the base network maintenance, that’s one area, where we are obviously more concerned about as to what the spend is going to be in the coming quarters.

Dan Park — Needham & Co. — Analyst

OK, great. Thanks for taking my question.

Operator

Your next question is from Richard Shannon with Craig-Hallum. Your line is open.

Richard Shannon — Craig-Hallum Capital Group LLC — Analyst

Hi, guys. Thank you for taking my question, as well. I may have missed the first few minutes of comments, so if I’m repeating things, I apologize. With the RPC acquisition, Amar, can you give us any quantification or characterization of how much that’s adding to your December quarter revenues so we can get a sense of apples-to-apples comparison?

Amar Maletira — Chief Financial Officer

So — thanks for the question, Richard. So for our December quarter, it’s not much. Actually, this is — the company, from a revenue perspective, is less than 1% of our total Viavi revenue. So it’s not material.

This is mainly a technology acquisition that puts us strategically into the 3D-sensing ecosystem. So for December quarter, it’s immaterial, because we just closed the deal and it is two months’ worth of revenue, which is not material enough. Having said that, as we close this deal, integrate it, we will come back when we announce earnings for the December quarter and give you more color on the opportunity in this space.

Richard Shannon — Craig-Hallum Capital Group LLC — Analyst

OK, perfect. Thanks for that. My follow-on question.  You talked about this in your prepared remarks and I believe last quarter as well regarding the opportunity for military and public safety, communications upgrades. If you can just give us a sense of timing and scale of how we should think about that, it would be a useful perspective, please.

Oleg Khaykin — President and Chief Executive Officer

Sure. When we talk about the government, as you can imagine, things move at a snail’s pace. What we monitor is the budgets approval. So the most important thing, the budgets got approved and they got assigned to particular projects.

The next step is the RFQs for these projects and awards that come from it. So I think, for me, while we talk about the wireless 5G as kind of more of a near-term opportunity, I’d say, the government, military type of opportunities that we see on the AvComm side are more into the second half of next calendar year. So for us, the business that we are targeting from that increased spend is really more starting in the second half of next calendar year. That’s the earliest that we see visibility on.

Richard Shannon — Craig-Hallum Capital Group LLC — Analyst

OK, perfect. Thanks for that perspective, guys. Thank you.

Amar Maletira — Chief Financial Officer

Sure.

Oleg Khaykin — President and Chief Executive Officer

Thank you.

Operator

Your next question is from Jun Zhang with Rosenblatt Securities. Your line is open.

Kevin Garrigan — Rosenblatt Securities — Analyst

Hey. Good afternoon, guys. This is Kevin Garrigan on for Jun. Thanks for taking my question.

I was just wondering if you could provide any color on how sustainable, you think, demand is for 5G and 400G testing in the next one to three years? And then are you seeing kind of any increase in competition in these markets?

Oleg Khaykin — President and Chief Executive Officer

So on the 5G testing, I think, we need to just basically segment the market. So where we play is on the system side. So that’s NAMs when they build base stations, they test them for protocol testing, capacity testing, security testing, so on and so forth. That’s where we play and then when it goes into the field, we provide similar type tester to operators to evaluate various vendors, as well as providing them also with some of the field instruments to kind of monitor network from the field point of view.

So that’s where we see ourselves playing. We’re not playing in the lab that designs chips or the actual boards for the equipment. That’s where some of the other players are seeing demand as well. In the space, where we play, we are, to the best of my knowledge, the majority market-share leader worldwide.

And in this particular case, success breeds success, I mean, because it requires significant investment in software and infrastructure by major NAMs and operators. And once they are invested in our solution, it becomes not only an integral part of their testing protocol, but also integral part of their network planning. So in that respect, I feel pretty good about our long-term prospects, given that we won the early stages of the technology deployment.

Kevin Garrigan — Rosenblatt Securities — Analyst

OK, great. Thanks for that. And then just a quick follow-up. I know you kind of mentioned some of the 3D-sensing trends heading into 2019.

Have you seen any impact on your business from a slowdown in the industrial and automotive segment for 3D sensing?

Oleg Khaykin — President and Chief Executive Officer

Well, I mean, the industrial — we are — we have virtually zero revenue in industrial automotive.  So that’s really not even an issue for us. So in fact, I think 3D sensing in automotive is probably a couple years away, because whatever sensing they’re using today is not a 3D. It’s more of a conventional sensing. So I’m not really sure what you mean by slowdown in that space.

But our view on automotive, it’s really a longer-term opportunity. We are currently involved in all the major Tier 1 and Tier 2 OEM or subsystem providers to automotive manufacturers. And our view on the 3D sensing being more present in the car is probably about two to three years away. We are going to see in some high-end cars, some of the in-cabin monitoring that’s already happening today, but it’s relatively small volumes by comparison.

Kevin Garrigan — Rosenblatt Securities — Analyst

OK, great. Thank you.

Oleg Khaykin — President and Chief Executive Officer

Sure.

Operator

Your next question is from James Kisner with Loop Capital Markets. Your line is open.

James Kisner — Loop Capital Markets — Analyst

Thank you. So I guess, first, you didn’t mention this at all. I just noticed in your filings that you guys talk about having some production in China.  I’m just wondering are any of your products in the current products targeted for tariffs, or they may be on the new list if they’re not? And is any impact, at all, from tariffs at this point?

Amar Maletira — Chief Financial Officer

So I think, yes, we do have some products in China but the impact is minimal at this point in time, James. We are continuously monitoring it and I know there are three lists out there now. And we’re also working on mitigation plans. At this time point in time, we don’t see material impact to our P&L, because of tariffs so — and we’ll continue to monitor the situation.

James Kisner — Loop Capital Markets — Analyst

OK. And can you talk a little bit and give more about the North American slowdown? In the past, you guys have talked about just being pretty diversified and being able to kind of weather kind of a slowdown in North America. Yet, you’re talking about it now and so I’m just — it sounds to me like it was a pretty stark or pretty sharp slowdown in spend in North America. And I assume it’s kind of merger-related or maybe you can comment more on what you think the motivation might be and sort of how lasting that — how sharp that slowdown is.

Oleg Khaykin — President and Chief Executive Officer

Well, I mean, the slowdown is indeed very sharp, especially with the biggest operators. They tried to triage the trade-off between M&A, network maintenance and network expansion and their dividend policies.  So unfortunately, what our — the purchases of our equipment in their P&L fall under the OPEX, not the CAPEX. So as such, if you’re under the gun to improve your quarterly P&L, the operating profit, to the extent you tighten up on spending, that’s really where we normally get impacted. So I think, clearly, everybody is kind of watching each other.

They’re all making bold acquisitions and they’re all looking for money to pay for them. But that’s largely happening at the expense of delaying maintenance or delaying upgrade of the network monitoring and management. Eventually, it’s just like with a house.  You can delay fixing your roof for a long time, but eventually the bill comes through and the longer you delay, the more you have to do spending later on. So for us, at this point in time, I’d like to say, we’ve mitigated a lot of that risk.

But obviously, you only mitigate it when it’s truly zero. Until it gets down to zero, there is always some downside of it. But given the drop in the last 12 months that we have seen, it’s largely — I would say, it’s kind of hard to imagine this thing to go further down. But then again, zero is the ultimate floor.

James Kisner — Loop Capital Markets — Analyst

OK. And so just one quick follow-up. You guys, I think, talked about being in the higher end of your prior-guided range for wireless test assets for the year. Is that still kind of unchanged, still in the high end of the range? Or you got to change the outlook for the year for the wireless test assets?

Oleg Khaykin — President and Chief Executive Officer

Very positive for wireless. I mean, it’s really 5G is driving a lot of the upside now and we expect further down the road the government and military spend starting to contribute. And initially, what we’re doing today is we are winning big in the lab with 5G testing as well as the early deployments, where the service providers are using our equipment to evaluate various vendors. And what we are working on is to parlay our leadership in the lab testing into longer-term field instrumentation testing, because once the networks start getting deployed, the real money and the big volume will be in field instruments.

James Kisner — Loop Capital Markets — Analyst

OK, thank you very much.

Oleg Khaykin — President and Chief Executive Officer

Sure.

Operator

Your next question is from Dave Kang with B. Riley FBR. Your line is open.

Lee Krowl — B. Riley FBR — Analyst

Hey, guys. This is actually Lee Krowl on for B. Riley. Thanks for taking my question.

Real quick just on the acquisition. I just wanted to kind of parse the slide deck. You guys mentioned they’re levered to the Android ecosystem. The Android ecosystem is obviously very diverse and there’s many, many OEMS, some very high volume, some very low volume.

So just when you refer to design wins, are these high-volume design wins? Or is it more that you do have design wins and you’re kind of sampling for future opportunities?

Oleg Khaykin — President and Chief Executive Officer

Well, the design wins, they have a combination of both. They have the design wins with the biggest Android OEMs, which is not saying much at this point in time, right? But it’s a — they got all the, basically, the top 4 or 5 players in the Android ecosystem and they are in all the kind of early volume applications. So that’s — and they won it pretty much purely on the merits of their technology. Now that said, it’s Android ecosystem.  It’s not iOS, because, as you know, Apple does their own and it’s primarily driven by time of flight applications.

So as that said, as time of flight proliferates and gets adopted into various other applications, we feel it presents us with a good opportunity to go further.

Lee Krowl — B. Riley FBR — Analyst

Got it, got it. That makes sense. And then switching over to the North American market weakness, I’ll ask my question on that space, as well. You kind of — you hinted at the procurement cycles for certain adoption demand reaching kind of the conclusion of those cycles.

If I had to dig in and guess I would say that the DOCSIS 3.0 but maybe just kind of curious, because it seems like in the past you guys described DOCSIS as ramping and getting good traction, but G.fast on the horizon. So just kind of curious if that G.fast opportunity kind of passed you guys or if it did indeed get concluded as well?

Oleg Khaykin — President and Chief Executive Officer

So — yes. First of all, on DOCSIS 3.1. The big deployment took place in North America or at least big procurement took place in North America over the past 12 months. And I believe, we’ve taken the lion’s share of all the opportunities.

And now, I would say, our customers are kind of approaching the end or the lower end of their procurement cycle. That said, the cable, the next wave, although smaller wave, will be in Europe. Now the G.fast has been perennially delayed and postponed in North America. It’s not that it has passed us by.

I don’t think anybody got any spend and the expectations that telcos would match the cable guys with the spend on DSL side with a gigabit to the home thus far have largely not materialized, with a few exceptions of smaller operators. The biggest players are still kind of kicking the can down the road.  Where we are seeing G.fast picking up and happening, it’s really in Europe. But as I said, Europe is a much smaller market for both cable as well as G.fast than North America would be. So I think it still may happen but it will probably be at much smaller volumes than many of our customers were initially anticipating.

And I think some of the telco companies are now thinking perhaps using 5G to do the kind of final couple hundred yards into the home versus the copper. So it still hasn’t fully shaken out yet. That’s the status of G.fast. It’s pretty much dormant and delayed.

Amar Maletira — Chief Financial Officer

If I could just add some color on North America versus the rest of the world performance in NSE, just so that you all appreciate the diversification that we have driven in the last couple of years. In fact, outside of North America, actually grew double-digits, just to give you guys some color.  And so to Oleg’s earlier point, we continue to see spend, good demand, and good execution across the board, both in North America as well as outside of North America, but the demand is particularly good outside of North America.

Oleg Khaykin — President and Chief Executive Officer

Yeah, and I said, in fact, I’m very pleased with our team’s efforts in Europe, Latin America and Asia, where we’ve taken a significant share from our competition in the last two years and we have a very strong momentum going into the next calendar year.

Lee Krowl — B. Riley FBR — Analyst

Got it. That was very helpful. Thanks, guys.

Operator

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

John Marchetti — Stifel Financial Corp — Analyst

Thanks very much. Maybe just following up a little bit on the G.fast comment. Oleg, you’ve mentioned before, obviously, fiber to the home and those fiber deployments as being sort of one of the four key pillars going forward. Just trying to sort of reconcile that as a real leg of growth.

If you think maybe at least in North America you might see some of this bypassed if you will for 5G deployments and some things like that. Is the rest of world enough with fiber to the home type of deployments to make up for that? I’m just trying to reconcile the fiber deployments as one of the key trends with some of the comments you just made on G.fast.

Oleg Khaykin — President and Chief Executive Officer

Sure. So I mean, let’s talk about fiber growth. I call it fiber everywhere and we consciously change the fiber to the home to fiber everywhere, because fiber to the home is a big deal indeed everywhere else in the world, right? And North America, it’s really more of a function of dense urban areas, like say, New York, Boston, where you run fiber into the building. What really was in kind of most of North America is you run the fiber to the optical nodes within the last couple hundred yards of a home and then you run G.fast or sometimes fiber all the way to the building, right? Maybe the new construction.

So where we are seeing is indeed, fiber is being pushed, regardless whether the customers are deploying or not deploying G.fast. They’re pushing fiber ever closer to the home, because it reduces their maintenance of the copper plant, right? In everywhere else in Europe, I mean, in Europe and Asia, I mean, fiber is indeed running all the way to the home. But we are also more excited about other things.  We are seeing now people are making fun of cable guys, right? I wouldn’t call them cable anymore. They’re fiber guys now.

They’re no longer cable.  I mean, if you really look at cable as service providers, they’re pretty much a fiber network operators — becoming more and more fiber network operators there then coax cable. Coax is really now the last couple hundred yards that they run into the home and they are pushing fiber all the way into the neighborhood. And that’s where we are seeing a lot of fiber opportunities in the near term is really selling to cable service providers. And now, when we talk also about the wireless, we’re now talking about fiber being pushed all the way down to the antenna, all the way to the antenna tower, to the base station.

So I mean, this is now a really — that’s where we see a lot of fiber interest from both telcos as well as cable companies.

John Marchetti — Stifel Financial Corp — Analyst

Right. So more pushing fiber deeper into the networks, not so much fiber to the home as you used to sort of comment about it?

Oleg Khaykin — President and Chief Executive Officer

Well, yeah. In Europe, it’s truly fiber to the home.  In America, I would say, it’s more to the building in the big urban areas. But it’s still, in the suburbs, it’s just economically not feasible for most of them to push fiber all the way to the building, to the house.

John Marchetti — Stifel Financial Corp — Analyst

OK. And then if I can just ask on OSP for a minute.  You had obviously a little bit more strength than you expected in the bank note side and in the anti-counterfeiting side. Just trying to think about that as we move forward here. Were those — did you get a couple of programs that you weren’t sure were coming in relative to your expectations? Were the ones you got a little bit larger than you expected?  And how do we think about that potentially then dropping off in the second half of the fiscal year?

Oleg Khaykin — President and Chief Executive Officer

Well, clearly, we get forecasts from our customers, but our customers. But our modus operandi is always to take a more conservative judgment to it, right? We don’t take the number the customer gives us and run with it. We always know that having enough scars on your back from a lot of these customer forecasts that it’s always — usually never as good as they predict and you’ve got to be smart about planning your capacity and linearizing the demand. So in our case, we’ve taken a prudent, I’d say, conservative look at the forecast, and said, hey, if it materializes as what customers want, we will be able to, with some overtime and up side to meet the up side.

But when we plan our capacity, we plan our costs, we plan for a — some judged forecast. So what happened in this case, some more — I mean, probably more of a customer forecast materialized rather than failed to materialize. And we got some up side. It’s not a big up side but it’s still nevertheless an up side and we could easily absorb it all within our current operating budget.

And that obviously provided bigger operating leverage to the bottom line.

John Marchetti — Stifel Financial Corp — Analyst

Right, OK.

Oleg Khaykin — President and Chief Executive Officer

So those all the — we never plan for the peak.  We always plan for the kind of the RMS value of the customer forecast.

Amar Maletira — Chief Financial Officer

Plan conservatively, execute aggressively.

Oleg Khaykin — President and Chief Executive Officer

That’s exactly right. The worst thing you can do is you plan for the peak and then end up holding the bag.

John Marchetti — Stifel Financial Corp — Analyst

Thanks very much.

Oleg Khaykin — President and Chief Executive Officer

Sure, thanks.

Operator

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

Meta Marshall — Morgan Stanley — Analyst

Great. Thanks. I just wanted to ask on the NSE operating margins, just to the extent of which kind of some of that is just better operations versus some of the Cobham synergies being realized. And then maybe as a second point, I know, you talked about 5G strength.

Is there any particular geography in which you’re kind of seeing more surprising early interest than you would have expected? Or is it kind of widespread? Thanks.

Amar Maletira — Chief Financial Officer

Yep. So I’ll take the first question here, Meta.  Thanks for the question. So in terms of operating margins, there are two things here. One is definitely the leverage that we have by adding just the AvComm and the Wireless business in the model.  We have not added a lot of corporate overhead here.  We are leveraging the corporate OPEX to go deliver the additional revenue.

So there is a natural leverage there. No. 2, is we continue to expense — manage our expenses in our core NSE business. We knew that at the end of the day, we have a cyclical business and we have to manage our expenses very tight and that’s what we continue to do.

So for example, if North American service providers start spending, it should be a very good operating leverage for the model and good amount of operating profit should drop through. In terms of synergies for AvComm and Wireless, we are still in the early stages. We did see some cost synergies as we continue to execute on the integration and that was also baked into this model. But again, that’s in fact ahead of us.

Oleg Khaykin — President and Chief Executive Officer

And I’ll take your question on our 5G. So I would kind of characterize it maybe as three buckets. The first one is the NAMs. That’s by far the biggest.  That’s the equipment manufacturers, that’s your major European and Asian base station or 5G equipment providers.

They are the biggest group — spending group at this time as they ramp production and testing of their products prior to their delivery to the service providers. The second bucket is the service providers and I would say the second biggest one, it’s really about Asia and it’s really about Japan. I would say Japan is by far the most aggressive. In fact, if you want to know what’s going to happen and not happen, and what works and doesn’t work in 5G, I would very closely watch Japan, because they truly are the early adopter and the most aggressive customer in terms of testing all the potential values of 5G.

And I would say the third bucket would be the kind of European and North American operators who are just kind of putting their foot in the water, testing 5G and kind of playing with it. And it’s really more of a science experiment and just kind of getting the initial learnings. So I would say in that order, it’s by far the NAMs are first, followed by Japanese service providers, followed by the service providers everywhere else in the world.

Meta Marshall — Morgan Stanley — Analyst

Great. Thanks so much, guys.

Oleg Khaykin — President and Chief Executive Officer

Sure.

Operator

And our last question comes from Samik Chatterjee with JPMorgan. Your line is open.

Bharat Daryani — JPMorgan Chase & Co. — Analyst

Yeah. Hi, guys. Good evening. This is actually Bharat Daryani on for Samik.

So my question is on 3D sensing. One of the players in the 3D sensing market recently highlighted being close to a design win for world-facing 3D-sensing application. So what is your take on the adoption of 3D sensing on the world-facing side? How would you size that opportunity? And also in terms of time line in the second half of next calendar year of realistic time line to look at. Thanks.

Oleg Khaykin — President and Chief Executive Officer

When people say world-facing, that usually means time of flight technology, right? And there’s a lot of different players playing. We are — I mean, there’s a number of Android players doing it.  There’s rumors that iOS is also doing it. So I mean, we’re involved in pretty much every design that’s out there. I mean, I don’t know, I think, we, probably in our world facing, we have all of the business, but we have a big chunk of the opportunities are in the bag for us with our filter technology.

But now with the acquisition of RPC, one of the key elements in the technology chain on the world-facing camera is the diffuser. And RPC is the leader in the technology in the diffuser that provides the lowest loss and highest eye safety available in the market. And through them, we are also now extremely well-positioned in the world-facing cameras on the laser side of the equation, not only on the camera side of the equation.

Bharat Daryani — JPMorgan Chase & Co. — Analyst

Right. Thanks for that. And just a quick follow-up on the datacenter products. So in 4Q fiscal ’18 and in the first quarter, as well, you highlighted datacenter products grew by double-digit percentage.

So how should we think about that going through 2019? And we’ve also been hearing some comments around moderation in spending by the hyperscalers.  So I would like to know your thoughts on any possible impact from that.  Thanks.

Amar Maletira — Chief Financial Officer

So I’m not going to provide a guidance for the full year on datacenter products but just directionally, that business should continue to grow. Again, depending on the market condition, whether it’s a single-digit growth or double-digit growth, we had good growth in the last three or four quarters. And that’s a result of two things. One is we started off at a lower base and so it was easier compare.

And secondly, I think, we have a team in place and product strategy, etc., that’s all starting to work and come together. Having said that, going into fiscal-year ’19, the business unit, as such, should continue to grow and depending on the market demand.

Oleg Khaykin — President and Chief Executive Officer

And we’re pretty happy with our performance. I mean, your question specifically regarding hyper scale datacenters, frankly, for us they’re a non-event.  They do, for the most part, their own technology development so they’re not really the customer base we are addressing. Most of our customer base in the datacenter are the enterprise customers and customers managing their own networks. Now we do provide for also customers who do use hyperscale datacenters, we provide them solution to monitor the performance of the data, the hyperscale datacenter operator.

So it’s just kind of the idea of keeping them honest to make sure that they are fulfilling their obligations or their service agreements — service level agreements.

Bharat Daryani — JPMorgan Chase & Co. — Analyst

Great. Thank you so much for taking my questions. Thanks.

Oleg Khaykin — President and Chief Executive Officer

Sure.

Operator

This concludes the Q&A portion of the call. I’d now like to turn it back over to Bill Ong.

Bill Ong — Senior Director of Investor Relations

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

Operator

[Operator sign-off]

Duration: 51 minutes

Call Participants:

Bill Ong — Senior Director of Investor Relations

Amar Maletira — Chief Financial Officer

Oleg Khaykin — President and Chief Executive Officer

Vijay Bhagavath — Deutsche Bank — Analyst

Michael Genovese — MKM Partners — Analyst

Dan Park — Needham & Co. — Analyst

Richard Shannon — Craig-Hallum Capital Group LLC — Analyst

Kevin Garrigan — Rosenblatt Securities — Analyst

James Kisner — Loop Capital Markets — Analyst

Lee Krowl — B. Riley FBR — Analyst

John Marchetti — Stifel Financial Corp — Analyst

Meta Marshall — Morgan Stanley — Analyst

Bharat Daryani — JPMorgan Chase & Co. — Analyst

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