Ladies and gentlemen, thank you for standing by, and welcome to the Viavi Solutions Third Quarter 2020 Earnings Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a Question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today Bill Ong, Head of Investor Relations. Please go ahead, sir.

Thank you. Welcome to Viavi Solutions Third Quarter Fiscal Year 2020 Earnings Call. My name is Bill Ong, Head of Investor Relations. Joining me on today's call are Oleg Khaykin, President and CEO and Amar Maletira, CFO. Please note this call will include forward-looking statements about the company's financial performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations and estimations. We encourage you to review our most recent annual report and SEC filings, particularly the risk factors described in those filings. The forward-looking statements, including guidance we provide during this call are valid only as of today. Viavi undertakes no obligation to update these statements. Please also note that unless we state otherwise all results except revenue are non-GAAP. We reconcile these non-GAAP results to our preliminary GAAP financials and discuss their usefulness and limitations in today's earnings release. The release, plus our supplemental earnings slides which includes historical financial tables are available on Viavi's website. Finally, we are recording today's call and we'll make the recording available by 4:30 PM Pacific Time this evening on our website. I would now like to turn the call over to Amar.

Thank you, Bill. Our fiscal Q3 was a challenging quarter for Viavi as the COVID-19 pandemic impacted all businesses around the globe. Fiscal Q3 revenue at $256.2 million declined 3.4% year-on-year and was below the guidance range of $268 million to $288 million. NSE was below the guidance range, while OSP exceeded the range. Viavi's operating margins at 14.8% increased 10 basis points year-on-year and were within the guidance range of 14.5% to 16.5%. EPS at $0.14 reached the guidance midpoint of $0.13 to $0.15 and was up by $0.01 from a year ago. Now moving to our reported Q3 results by business segments, starting with NSE. NSE revenue at $187 million declined 9% year-on-year and was below the guidance range of $204 million to $220 million. Our missed revenue guidance was largely a result of COVID-19 lockdown. Within NSE, any revenue at $163.9 million was down 9.2% from a year ago, primarily due to declines in mature access and cable field instruments. While lab instruments across both wireless and optical combined was roughly flat. SE revenue at $23.1 million declined 7.2% from a year ago, primarily due to weakness in our mature assurance products. While our growth products with NSE were roughly flat. NSE gross margins at 64.2% increased 20 basis points year-on-year. Within NSE, any gross margin at 63.6% declined 60 basis points year-on-year primarily due to lower revenue volumes. SE gross margins at 69.3% expanded by 540 basis points from a year ago due to a favorable mix within our growth assurance as well as data center product lines. NSE's operating margin at 7.4% was below the guided range and decreased 270 basis points from a year ago, reflecting the lower revenue volume due to the impact from COVID-19 partially offset by good expense control. Now to OSP. OSP revenue at $69.2 million exceeded the guidance range of $64 million to $68 million and increased 15.7% year-on-year. This increase in revenue was a result of better-than-expected demand in anti-counterfeiting products. OSP's gross margins at 52.6% increased 110 basis points due to a favorable mix of anti-counterfeiting products. Operating margins at 35% exceeded the 31% to 33% guidance range and expanded 440 basis points year-on-year, primarily due to expansion in gross margin, as well as good operating expense management. Turning to the balance sheet, our total cash and short-term investments ending balance was $537.3 million. Operating cash flow for the quarter was $39.1 million. In Q3, we repurchased approximately $33.1 million of Viavi stock at an average cost basis of $11.49 per share including commissions. Of the $200 million authorized share buyback announced during September 2019 Analyst Day event, we have repurchased approximately $43.8 million of Viavi stock to date. We plan to continue to be opportunistic in our share repurchase. Earlier this week, we closed a secured revolving line of credit of $300 million. We had strong interest from several banks for this credit facility and it was oversubscribed by 70% from our original target. This secured credit facility combined with more than $530 million of cash on our balance sheet further strengthens our liquidity position. Additionally, we do not have any debt coming due for the next three years. We have two convertible notes with our $225 million note at 1.75% coupon due in 2023 and our $460 million note at 1% coupon due in 2024 with conversion prices of $13.94 and $13.22, respectively. Now to our business outlook. Due to the macroeconomic and business uncertainty as a result of COVID-19 global pandemic, we are not providing guidance for fiscal Q4. That said we expect Q4 revenue to be flat to slightly better than our fiscal Q3 driven by seasonal strength in NSE. Looking further ahead, we believe most of the fiscal March quarter's NSE revenue shortfall was pushed out, but it remains unclear when these orders will be placed as our customers continue to be impacted by local shutdown. For OSP, we anticipate our 3D sensing product revenue, which is less than 10% of Viavi's annual revenue to be impacted by weaker end market demand for high-end smartphones. However, we expect anti-counterfeiting product demand to remain stable given that bank note reprints are typically countercyclical in recessionary periods. Before I turn the call over to Oleg, I'm pleased to note that Viavi successfully transitioned to a new ERP system during our fiscal third quarter. We have been working on this initiative for more than a year. This successful transition would drive further efficiency in our G&A and other functions while effectively responding to the changing business needs. With that, I turn the call over to Oleg.

Thank you, Amar. Fiscal Q3 was a challenging quarter for Viavi as the COVID-19 pandemic spread from China to Europe and then to the US, impacting our operations and R&D centers globally. NSE demand experienced increasing headwinds as the quarter progressed and came in below our expectations. OSP, on the other hand, saw a late-quarter recovery due to customer order upsides and expedites and as a result came in above expectations. While the combined revenue came in below our guidance range, through disciplined OpEx management, we delivered the midpoint of our non-GAAP EPS guidance range of $0.14 a share. The NSE business segment was most impacted by COVID-19 headwinds as our customers increasingly went into work-from-home and lockdown modes of operations. Many purchase decisions were either pushed out or placed on hold. That said, at this point, we are not seeing any meaningful order cancellations. We estimate the overall impact of the pandemic on NSE revenue to be around $20 million. Absent that impact in the Q3 NSE revenue would have been near the midpoint of our guidance range of $204 million to $220 million. Nearly half of the NSE revenue shortfall can be attributed to customer and logistics shutdown that resulted in shipments being delayed since no one was available at the customer side to receive products. The other half was the result of demand slowdown with orders pushed out into Q4 and beyond. This mainly impacted our field instruments product lines. We expect these orders to recover when customers return to their normal mode of operations. COVID-19 also impacted SE revenue with assurance products down from a year ago as customers under lockdown were unable to provide on-site verification and acceptance, thereby pushing out revenue recognition into the next quarter. This impact was more modest for enterprise and data center product revenues, which were roughly flat to a year ago. Our lab production products which include 5G wireless and 400 gig fiber delivered as expected. R&D spending generally held up well during Q3 and continued strong into Q4 as customers continued to invest in 5G and 400 gig technology rollouts. Lastly, our NSE operations team has performed admirably, and we did not experience any logistical or supply chain issues that would have impacted our deliveries. The OSP business segment responded well to the challenges of the pandemic lockdown and exceeded our guidance range expectations. When our Chinese operations got impacted by the lockdown, our California operations made up the difference. When California enacted the shelter-in-place order beginning in mid-March, we were able to leverage our Chinese operations. The counterfeiting revenues came in better than expected. We saw increased security pigment demand at the end of the quarter. While the visibility remains limited as to whether or not this positive trend would continue, we expect at a minimum, the core OSP business to maintain its $50 million per quarter run rate for the next several quarters. Additionally, given the broad-based financial stimulus measures announced by various governments, together with a healthy bank and pipeline, we have a positive view on the medium-term outlook for anti-counterfeiting products. Our 3D sensing revenue came in below our expectations during the quarter as customers reacted to pandemic-driven supply chain disruptions and reduced end market demand. We expect these trends to continue into Q4. However, we expect a seasonally stronger second half of calendar year 2020. We expect the end market demand volatility and macroeconomic headwinds to persist in the near future. That said, Viavi is well positioned to persevere. We have a strong balance sheet and liquidity, which combined with our market leadership and disciplined cost management, sets us up well to manage the impact. Our major growth drivers remain intact, as do our core products, some of which provide a counter-cyclical benefit during recessionary times. Historically, in a down market, service providers focus more on maintaining and improving the efficiency of their existing networks versus new construction, which benefits some of our NSE product lines. In OSP, we expect stable demand for banknote reprints during economic downturns, resulting in steady demand for our anti-counterfeiting products. In conclusion, I would like to express a special thanks to my Viavi team for their extraordinary performance during these challenging times. I also wish all our employees, supply chain partners, customers, and our shareholders to stay safe and healthy. I will now turn the call over to Bill.

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

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

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

Sure. A lot of our customers are rolling out 400 gig modules. So when we talk about our 400 gig rollout, that basically means that we are selling production test equipment as well as some of the lab equipment to these customers, both the module manufacturers and the system manufacturers. We continue to see very strong demand for router modules. I think China is clearly one of the big 400 gig rollout destinations. Also, we are seeing this demand continue into Q4 and probably beyond for the rest of the year. So, a very strong demand across all segments.

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

Well, first of all, I don't think I said any revenues that were indefinitely pushed out. I think it's got pushed out to the near-term as customers start coming back to work and make decisions. So it definitely is probably too strong a word. We did not see any 400 gig push out; in fact, both our 400 gig and 5G wireless products shipped as expected. There is strong demand for these products because our customers are seeing very healthy demand in the market even with the downturn. So I don't think we're going to see any additional demand beyond what we are planning that would make up any shortfall. The shortfall that we saw in field instruments, I don't think it's going to be the difference made up by higher demand for 400 gig. I think 400 gig is continuing on its own trajectory.

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

Thanks. Hey, guys. So I was hoping you could talk a little bit more about the OSP counterfeiting business. Obviously, this is a very important product line in this environment and its demand seems to have dynamics that are pretty independent of economic activity, which is nice. I think prior to this commentary, you had thought about this maybe being several quarters out before you would see a pickup in this arena. I'm trying to understand what caused this pull-in? I don't normally think of people expediting orders for pigments and security products, and to what extent do you think you're pulling from the back half potential reprint opportunity?

So, this particular pull-in -- first of all, let me give you a bit more color on this. Most of the printing plants were heavily impacted by shutdowns. In fact, most of the printing facilities have been shut down for the last month and a half to two months. Concerns have also arisen with a significant reduction in the number of flights. People are becoming concerned about the level of inventories they hold on hand, and some of it was driven by the desire for a bit more supply chain security and having product closer to the source. That said, there was initially plenty of inventory available. So, when the notes were being distributed, they came out of inventory, which depletes their inventory of finished notes. Then to the extent these notes need to be replenished, that's when the printing starts and you want to have enough pigment on hand to make the ink. As this progresses, it generates the demand for additional volume. I would say our thesis that there is a lag of several quarters still holds. We are somewhat guilty ourselves; we pulled in some of our critical components for our products to build up inventory internally, fearing some of the supply chain disruptions. That's why we've not experienced any supply chain issues, because we are well prepared and have all the critical components in-house to meet the 400 gig and 5G demand.

So if I could just follow-up on that. Have we seen an increased churn in the currency installed base as a result of COVID, causing them to destroy builds or anything of that sort that facilitates an acceleration of demand? Or is that just not occurring? I mean, how do we reconcile the demand acceleration?

Well, I think, I don't know how much extra currency got destroyed or released. I mean that kind of information you'll get from Central Banks. Generally, in the past, whenever you had any type of fiscal stimulus, some of it comes out in terms of physical notes. One of the things we did see is the paper notes are actually proving to be lower risk than the plastic notes. In some past cases, there has been migration to miler-type money and apparently, that currency is proving to be more risky than the paper notes, which have some antibacterial properties. For us, it's not an issue because we mainly supply inks into the pigments into the ink that goes on the paper notes and as in the past, I believe we will see some of the fresh notes being released, either to stimulate the economy or replace some of the retiring notes.

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

Thanks very much. Oleg, I was hoping you could just take a moment. It sounds like the lab business held up fairly well. I would have thought that in this environment with people working from home, some things like that might have been a little bit weaker because you didn't have people in the labs sort of doing work. I'm just curious if you can talk about that a little bit in contrast to the field, where again, I would have thought as technicians are out there making sure networks are still running, we might have seen that actually be a little bit stronger on the fiber test side or things like that. I'm just curious sort of how you look at those two in this current environment right now?

Sure. Let me give you more color on that. First of all, when we look at the new technology releases, we are in the midst of two big rollouts. One is the optical networking. These things are still being built and being shipped, and from what we see, yes, there may be not all of the engineers are in a lab, but many companies are maintaining essential staffing in the lab and continuing to do the development. What we've seen is that the new technologies being rolled out continue to be aggressively pursued. Even within Viavi, despite a lot of work from home, we maintain some level of engineering lab activities. Someone goes in a lab to do tests while other engineers work remotely. In that respect, we haven't seen the same thing happen as in 2008, 2009; key new products are being accelerated for launches so they can come out stronger and gain market share during the downturn. The advanced products lab and production for 400 gig and 5G continue to be as strong as ever. In terms of field operations, two types of technicians exist in the field. Some do customer turn-ins and go into homes, while most of those are staying at home right now because most vendors have told them to do so. The maintenance of the core of the network is where most operators are working and continuing to send technicians, with the demand for instruments to those operations remaining pretty strong. However, we've seen a big drop-off at the very edge, which is dealing directly with customer premises. For now, if you want to get a new service, you're probably not going to get it. But many operators are trying to increase effective bandwidth within their networks to provide additional capacity to existing customers. This is why, when we talk about field instruments, there are core maintenance instruments and those for client maintenance. The drop-off in demand has occurred in the client maintenance area, while core maintenance demand continues to be good.

So just to add to that, John, in my prepared remarks, I've said cable and access is where we saw most of the decline year-on-year, and we reported in our guidance what we actually recorded.

I don't know how it is where you live, but I know here in the Bay Area, you're informed by your local service providers that they're not sending any technicians to your house. So you are kind of on your own. If you're connected, it's great; if you are not, it’s not so great.

There is some pause, even on the construction site due to the lockdown, and construction is also an area where we sell, in addition to maintenance at the edge of the network. We see a pause in both areas.

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

Hey. Pardon me. Good afternoon. I wanted to follow-on to that a little bit with regard to some of the dynamics at the edge and among service providers. Can you quantify, do you expect a similar impact that you would attribute to lockdowns? It doesn't sound like there's much in the way of supply chain disruption, but for the fourth quarter, I guess the first question. And then, Oleg, more broadly, as you look at dynamics, like for example, cable operators reporting record increases in subscribers in the March quarter and general trends across networks seeing increased network traffic. I wonder for Viavi as a test supplier, what sort of impact that has on your business? You wouldn't feel like it would be as positive as some of the infrastructure guys? But as you look at these dynamics among service providers considering increased traffic and increased subscriber counts, I guess, how long do you expect that to last, and what are you seeing kind of real-time to-date? Do you have any positive exposure to increased network traffic?

So, clearly increased network traffic is good news for us; it's not just increased traffic. It's also the symmetry of traffic. One of the biggest challenges that we are seeing with some of our customers is the significant increase in upstream traffic. Most people are used to just downloading data, but now they are also trying to upload more. One of the major challenges for service providers is creating more bandwidth for upstream usage; this generally requires troubleshooting and opening up some undesirable bands with more noise. I'd say as the amount of bandwidth demand increases and its mix changes, it will create more technical requirements. In the short term, remember it has been a very dynamic environment. Different lockdown stages occurred from the end of February to mid-March, leading to somewhat chaotic events as many were told to go home. Now things are stabilizing, and companies are figuring out must-have necessities versus nice-to-haves and prioritizing accordingly. As the situation stabilizes, there's still quite a bit of uncertainty regarding state reopenings and who will return to work. For now, we are seeing some normalcy and getting our bearings back in terms of operations returning to normal. A large part of the demand for us comes from recalling technicians back to work, which drives demand at the edge. We are also seeing healthy demand for products managing core bandwidth allocation and management. The uncertainty around the edge of the network remains a mystery; we have our biggest reservations there for this quarter until things open up further.

For Q4, although we are not giving any guidance, we provided some color on expected revenue. We expect overall Viavi revenue to be roughly flat or slightly better than Q3, mainly driven by seasonal strength in NSE. This strength comes from the lab side of the business, as well as in the mid-haul and back haul of the network. The access piece is expected to continue to experience some demand push out, because service providers will have to continue with construction and maintenance of the access side, both on fiber and cable, as subscribers demand higher bandwidth and are willing to pay for it. So they will expect higher service levels from service providers. For Q4, we believe it's prudent to assume similar conditions to Q3 with the lab and mid-haul/back haul strength.

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

Just to quantify, the edge of the network constitutes roughly one-third of NSE revenue. This is to put things in perspective.

It's a sizable chunk.

We also have another business in field instrumentation, which is avionic test, but it is less than 5% of the revenue from an overall Viavi perspective.

Okay. If I could follow up quickly with one last question. Regarding 5G, you mentioned NEM development work continuing at pace in 5G and 400 gig optical. Are you seeing any changes pushing out or perhaps even pulling in concerning overall carrier 5G deployment plans?

We have carrier demand, but it is mainly related to trial installations and testing. The bulk of 5G demand today is driven by NEM who are aggressively ramping up product launches in preparation for production. That’s where we see the majority of demand currently coming from. However, we are starting to see more interest from service providers in placing orders related to mid-stream testing and monitoring for 5G. There is also significant interest in ORAN, which is the Open Radio Access Network. Operators are insisting on interoperability across different vendors, leading to increased demand from both NIMs and service providers for independent third-party testing to ensure compliance and interoperability between different network components from different vendors.

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

Thanks very much. First question on the OSP upside at the end of the quarter; were those pull-ins all on the core OSP or were any on the 3D sensing side as well?

No. It was all in the core OSP, Mike. The 3D sensing came in a little below what we had forecasted. If you recall, we adjusted our forecast in our guidance in February for some of the impact to 3D sensing, mainly on the supply chain side as COVID-19 impacted China. We factored that in, but we came in a little below that forecast for 3D sensing. However, it was more than offset by the strength we saw in anti-counterfeiting as well as some expedited orders.

Okay. So I guess can you help us just think about 3D sensing for fiscal '21 in general terms? I think there's going to be some kind of content increase at the customer, but obviously there are macro concerns. I don't know if there are any share concerns or not, but just at a high level, how should we think about the market in 2021?

I think we are pretty comfortable with our market share. The biggest headwinds in 3D sensing are the overall lower expected volumes of higher-end phones. There will be some content increase; there is talk about world-facing cameras. The subject remains around the mix of phones with only one 3D sensing module versus those with both rear-facing and world-facing modules. We are happy with whatever the mix ends up being because we are involved in both areas. The bigger concern for us is the ultimate total market demand. That is the risk we see.

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

Hi, good afternoon. Thanks for taking my question. Oleg, if I can just ask you for what you read, you mentioned the revenue shortfall here was partly logistics and partly lower demand. But as you talk to these customers, what’s your read in terms of which customer groups are more likely to expand their spending plans for the year, particularly against the backdrop of a weaker macro? We've seen some telcos increase their CapEx guidance for the year. I know you're more aligned with expenses, but clearly this shows they will spend a bit more. Do you see this benefiting the core of the network or wireless side more? Thank you.

We are not seeing anybody reevaluating their spending. I think it’s really a question of timing for most of the, I'd say, European, North American and some Asian operators. The issue is primarily at the edge because technicians have been sent home, and we don’t know how quickly they will be brought back to work. That’s where we’ve seen a slowdown in spend. However, there is one area I am more concerned about, which is not a big part of our sales, but still significant in Latin America, South America, and Central America. There has been a significant devaluation of their local currencies. Thus, everything in dollar-denominated spend has become a significant burden for them. I do believe we will see a reduction in spend in those regions as they deal with the significant currency devaluation.

Okay, got it. If I could just follow up with Amar, what's the best level of OpEx to think about in which you will look to run the business before you kind of see the demand recovery come through? Can you shed some light on how to think about fixed costs versus variable? When I look at the gross profit decline quarter-on-quarter, I think there was a 73% margin on the lower revenue. So just trying to think about what the cost actions can do in terms of limiting that?

Sure. Our OpEx was roughly about $10 million below what was implied in our guidance for Q3. One-third of that was mainly due to lower travel and entertainment expenses and marketing expenses as many events were canceled. But we effectively shifted to online media and that has become very effective with more symposiums and events happening online. One-third was because we proactively froze hiring. Although we are still hiring in targeted areas with long-term secular growth opportunities, we made a general freeze on hiring. The remaining third was mainly due to efficiency programs that we had in place, and that will continue within the company. This is how we brought down our OpEx. Half of it was from past actions, and half was proactive. In regard to our overall business at the Viavi level, we have roughly 60% fixed expenses and about 40% variable. When I talk about fixed expenses, it's fixed over a six-month period, but after nine to twelve months, everything is variable. We have efficiency programs that we continue to run that we discussed during the Analyst Day. Overall, we are not assuming a V-shaped recovery. It wouldn’t be prudent to do so. We expect a U-shaped recovery starting from the first half of calendar year 2021. We will manage our OpEx down as revenue decreases while still delivering the required operating profit. For fiscal '21, as we look ahead, we anticipate low single-digit declines for NSE, while we believe OSP will be roughly flat year-on-year compared to fiscal '20.

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

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

For our reported CapEx, it was about $10.3 million for fiscal Q3. We are prudent in how we spend our CapEx, and we allocate about 3% to 5% of CapEx as a percentage of revenue. We expect to focus on maintaining a strong but very targeted investment program aligned with our strategic, operational, and financial discipline over the last few years. We will manage our CapEx range of 3% to 5% going forward, more toward the mid to low end. We seek to remain invested in areas where we expect growth as we emerge from this recessionary period. We want to be much stronger when we come out of the other side. As you saw, we also have a strong cash balance and just put in place a $300 million credit facility, which was oversubscribed by multiple banks who are eager to lend to us.

Okay. I just want to better understand your forecasting. Is the booking or the mix of backlog different between the NSE and OSP? Would either segment require your customers to book that way?

No, I think the NSE business is mainly a book-ship business. Within NSE, we have our SE business and assurance business, which is software and has a good backlog position. Some of the resilient business we have in NSE comes from that. The lab also has larger backlogs compared to the field instrument business. In OSP, Optical Security and Performance business operates similarly, with a lot of orders occurring within the quarter.

A lot of our business is within the quarter, and we typically get a six-month base forecast which can go up or down during the quarter. For 3D sensing, we receive longer-term forecasts, but real forecasts look no more than two to four weeks because we have a short lead time for orders. We see general forecasts, but they can fluctuate throughout the quarter, making a significant portion of our business book-ship within the quarter.

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

Thanks. I wanted to check a couple of things. You are saying that OSP is going to be around the $50 million range excluding 3D sensing; is that correct?

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

Right. But I thought you said that would be around $50 million in the upcoming quarter, or is that not right?

In fiscal Q4, we are not giving specific guidance, but I provided directionally for fiscal '21. So keep in mind that while OSP is expected to be lower sequentially, if revenues are flat and NSE's revenue increases, you could see a mix shift to lower margin products within OSP.

So the operating margin level is definitely lower on NSE than it is on OSP, correct?

That’s true, sequentially if NSE's mix increases, you will see higher absorption and better operating leverage on fixed costs in NSE.

Exactly. All right. The 3D sensing is expected to be down sequentially. Clearly, the guide for light is not a good indicator for you guys. Everyone on this system is speaking about a significant decline in June quarter while you're talking about much flatter sequential declines.

Remember, we have different dynamics than semiconductor products. In the case of semiconductor products, like lasers, the lead times can be much longer. Our demand is much more closely matched to what the customer actually builds and ships.

I see. One last question, if I could. Clearly, your acquisition policy has been tremendous for you. The acquisitions you’ve made have been very successful. Many companies have been reluctant due to pricing conditions. I assume that in this environment, you would take advantage of the depressed conditions and prices to take the opportunity; is it reasonable to think your appetite for acquisitions is higher in this environment or are you conserving cash and therefore choosing not to go that route?

Our appetite for acquisitions always stays the same; it’s just a matter of making sure the deal and price are right. I don’t think we are shying away from doing deals in this environment. We feel comfortable with our fundamental business cash generation and we have a decent balance sheet. With the new credit facility in place, we have more dry powder. If the right opportunity presents itself, we will definitely take a look.

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

I think there is still some denial. It usually takes a few quarters for things to settle down.

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

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

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