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Viavi Solutions (NASDAQ:VIAV)
Q1 2020 Earnings Call
Oct 30, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Viavi Solutions first-quarter 2020 earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, Mr. Bill Ong, head of investor relations.

Thank you. Please go ahead, sir.

Bill Ong -- Head of Investor Relations

Thank you, Rob. Welcome to Viavi Solutions first-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 current expectations and estimations. We encourage you to review our most recent annual reports 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 the usefulness and limitations in today's earnings release. The release, plus our supplemental earnings slide, which include historical financial tables, are available on Viavi's website.

Finally, we are recording today's call and we'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 posted a record fiscal first-quarter revenue of $299.8 million, which grew 11.7% year on year and exceeded our upwardly revised revenue guidance range of $282 million to $294 million set at our September 12 Analyst Day event. Both NSE and OSP revenue exceeded the guidance range, driven by better performance in wireless and fiber and 3D sensing products, respectively. Viavi's operating margin at 17.6% expanded 130 basis points year on year.

EPS at $0.18 increased $0.03 from a year-ago levels. Both metrics exceeded the revised guidance midpoint of 17% and $0.16, respectively. Now moving to our reported Q1 results by business segment, starting with NSE. NSE revenue at $219.8 million grew 15.3% year on year.

Within NSC, any revenue at $198.9 million increased 20.9% from a year-ago levels, driven by strong performance in wireless lab, cable and access and fiber products across both field and lab. SE revenue at $20.9 million declined 20.2% from a year-ago levels due to the expected run-off in our mature insurance product, as well as weak demand from both growth assurance and data center products. NSE gross margins at 64% increased 40 basis points year on year. Within NSC, any gross margins at 64.4% expanded 180 basis points year on year due to higher revenue volume and a favorable product mix.

SE gross margins at 60.3% was down 950 basis points from a year ago. This was primarily driven by lower revenue in both assurance and data center products. We expect SE revenue and gross margins to improve sequentially in our fiscal second quarter. NSE's operating margins at 10.1% increased 150 basis points from a year-ago levels, reflecting the gross margin improvement and the favorable operating leverage in our opex structure.

Now turning to OSP. OSP revenue at $80 million grew 2.8% year on year, driven by demand for our 3D sensing product. OSP's gross margins at 54.1% increased 350 basis points due to higher absorption of manufacturing overhead from increased 3D sensing product volumes and operational efficiency. Operating margins at 38% expanded 280 basis points, reflecting the improvement in gross margins.

Turning to the balance sheet. Our total cash and short-term investments ending balance was $530.3 million. Operating cash flow for the quarter was $31.3 million. We announced during the September 12 Analyst Day event a 200 million common stock repurchase plan effective until September 30, 2021, which replaces the prior stock repurchase plan.

Under the prior plan, we repurchased 148.6 million in stock. Under the new plan to date, we repurchased approximately 10.1 million of VIAVI stock at an average cost basis of $13.99 per share, including commissions. We'll continue to repurchase Viavi stock opportunistically to offset earnings dilution from stock-based compensation. Now onto our guidance.

We expect fiscal second-quarter 2020 revenue for Viavi to be approximately $302 million, plus or minus $10 million; operating margins at 19%, plus or minus 1%; and EPS to be in the range of $0.18 to $0.20. We expect NSE revenue to be approximately $224 million, plus or minus $8 million; with operating margins at 13%, plus or minus 1%. We expect OSP revenue to be approximately $78 million, plus or minus $2 million; with operating margins at 36.5%, plus or minus 1%. Our tax expense rate is expected to be approximately 18% to 20%.

We expect other income and expenses to reflect a net expense of approximately $2.5 million. Share count is approximately 280 -- 238 million shares. With that, I will turn the call over to Oleg.

Oleg Khaykin -- President and Chief Executive Officer

Thank you, Amar. Fiscal-year 2020 is off to a good start, and I'm pleased with our strong performance in Q1. In NSE, demand was strong in both lab and field instruments. 5G wireless lab demand continues to be robust, up significantly year on year.

Fiber demand has also remained strong in both lab and field, driven by 400-gigabit upgrade cycle. Cable demand was up year on year, helped by a spend recovery in North American cable providers for DOCSIS 3.1, along with some modest demand from Europe. We expect this higher cable demand to continue into Q2. Demand from North American telecom service providers continues to be sporadic with limited visibility.

SE revenue came in at $20.9 million and was weaker than we expected in both our growth assurance and enterprise and data center products. The data center enterprise market has been challenging in calendar-year 2019, with many deals being pushed out as customers reevaluate IT spending. The demand weakness in North American telecom service provider also has impacted the assurance business, resulting in lower revenue. In OSP, 3D sensing revenue increased significantly year on year, driven by a broadening of customer base for optical filters and continued adoption of our engineered diffusers by Android-based smartphone customers.

We expect 3D sensing revenue to continue to grow year on year in Q2. Anti-counterfeiting demand was -- as expected, was down year on year, relying mostly on the banknote reprint volume, and we expect this trend to continue into Q2. This reflects a change from a year ago where OSP benefited from banknote redesign demand in the fiscal first half of 2019. The banknote redesign pipeline remains robust.

However, there is limited visibility from majority currency redesigns demand in the next several quarters. In mid-September, we held our Analyst Day where we updated our strategy and provided the outlook for the next three fiscal years. The next [Inaudible] in Viavi's evolution puts greater focus on growth, both organic and inorganic. We've updated our financial profitability targets based on our growth strategies in 5G wireless, fiber and 3D sensing.

In conclusion, I would like to thank my Viavi team for another outstanding quarter of solid performance and express my appreciation to our customers and our shareholders for their support. I will now turn the call over to Bill.

Bill Ong -- Head of Investor Relations

Thank you, Oleg. Bob, let's begin the question-and-answer session. [Operator instructions]

Questions & Answers:


Operator

[Operator instructions] And your first question comes from the line of Alex Henderson from Needham. Your line is open.

Alex Henderson -- Needham and Company -- Analyst

Great. Thank you very much. So clearly, there is some tension in service provider spending in North America, but broadly, are you seeing macro conditions starting to creep in the conditions in the U.S. and Europe? Or is it more a priority of spending-type issue? How would you characterize the broader macro environment versus the focus of company spends?

Oleg Khaykin -- President and Chief Executive Officer

Hi, Alex. Well, so actually, let me correct it. The North American service provider spend environment is no better or worse than it was all for the last 12 months. What I -- we still get very good revenue from it.

Obviously, it's not as big as it used to be several years back, but we are getting our fair share of whatever is being spent. It's just no longer as good as it used to be, and it's nowhere near as good as what we see in Europe and other parts of the world. The difference, I would say, when I say sporadic, it's just that, sporadic. I mean one day you could get a big whopper of an order and there'll be enough -- and there'll be no forewarning, and there is really nothing leading up to it.

It just seems to me it's more reactionary to demand rather than planning for demand. So that's really, I'd say, will be my commentary. In terms of the macro, I don't think there is really that's -- a presence yet, but we see healthy demand in some of the growth segments. Clearly, everybody is now gearing up for 5G, even though they may not be spending a lot of it now, but they all thinking where they're going to get the money.

And as you can imagine, if in the current environment, my bet would be that a lot of the money will come at the expense of investing in the 2Gs and 3G and 4G infrastructure to keep it up to date. So I think some of the pairing of spending that we've seen, I mean, I don't have much statistical data to make firm conclusion, but I think we are seeing some hesitancy to spend money ahead of the big 5G wave.

Alex Henderson -- Needham and Company -- Analyst

Great quarter. Thanks.

Operator

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

Samik Chatterjee -- J.P. Morgan -- Analyst

So one question for me. Relative to your top-line performance in the quarter, it came in above the high end of your guidance. How should we think about to beat in the context of that momentum continuing as we progressed through the year? And relative to your full-year guidance you provided at the Analyst Day, what's holding you -- what are like some of the factors that are holding you back from raising your full-year guidance again?

Amar Maletira -- Chief Financial Officer

Yeah. So this is Amar here. Thanks for the question. So when you look at the beat, beat to the analyst guidance that we provided just on September 12, it was again driven by -- mainly by those three growth drivers that we have been pointing out as a secular growth trends.

We saw beat in wireless lab, fiber, both in lab, as well as in -- field came in strong. And also, the 3D sensing primarily on the Android side also came in stronger than what we would expect. That doesn't mean that 3DS was -- came in line at least on the iOS side. We also saw some strength in cable and specifically in North America, as well as some in Europe, as well as Latin America.

And then as Oleg mentioned, the North American spend is sporadic. So when you think about looking forward for fiscal ' 20, we want to maintain the guidance we provided. The range is still valid. And again, we are assuming those three growth trends, wireless, fiber and 3D sensing, will continue.

We do expect our base business to be flattish to grow. And our SE business, which we were hoping would be, say, flattish to slight growth, given the enterprise spend being weak and starting off on a weaker note at least in our fiscal Q1, what we are assuming now that that particular enterprise spend weakness will continue, and so SE should be sort of flattish to slight decline. So we will continue to see strength in our any business, and that trend will offset some of the weakness that we are seeing in SE. So overall, we will maintain the guidance that we provided.

Oleg Khaykin -- President and Chief Executive Officer

And I would also add in -- remember, in the second half of fiscal year, especially the March quarter, I mean, it's -- seasonally, you see mobile phone providers are pulling back on their demand, and traditionally, the service providers probably take until the end of February to figure out what their budgets are going to be for next year. As a result, March quarter is traditionally weaker with a lot more uncertainty. So for us to really get more bullish on the fiscal year, we need to see how strong is the momentum exiting Q2 before we have a better picture to revise the guidance for the rest of the fiscal year.

Samik Chatterjee -- J.P. Morgan -- Analyst

Thanks, guys. Appreciate the question.

Operator

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

John Marchetti -- Stifel Financial Corp. -- Analyst

Thanks very much. I was hoping you could just spend a minute on the fairly impressive sequential growth in the APAC business in the quarter. It looks like that grew almost 20% sequentially. Curious if that's primarily on the 3D sensing side just given your comments there, Amar, about some of the Android strengths, but just if you could spend a minute there in terms of that bounce back and maybe where you're seeing growth in that region in this most recent quarter.

Amar Maletira -- Chief Financial Officer

Yeah. So when you look at the sequential growth. John, you're absolutely right. That is mainly driven by 3D sensing.

As you see, we sequentially grow in 3D sensing business from our June quarter to the September quarter. So that's -- a lot of it is reported out of Asia, and so that's the growth you're seeing. But generally speaking, if you look at on a year-on-year basis, I think all regions actually grew this year on a year-on-year basis. And so it was a very broad-based revenue growth story at Viavi for our fiscal Q1, and hence, it was a record revenue quarter for Viavi as a whole.

Bill Ong -- Head of Investor Relations

Clearly, 5G wireless and fiber is a big element on networking side.

Amar Maletira -- Chief Financial Officer

Absolutely.

John Marchetti -- Stifel Financial Corp. -- Analyst

In the APAC region as well, Oleg.

Oleg Khaykin -- President and Chief Executive Officer

Exactly. I mean -- no, I think those secular trends remain same across all the regions.

John Marchetti -- Stifel Financial Corp. -- Analyst

And then maybe just a quick follow-up on that 3D sensing side. Oleg, in to last quarter and also at the Analyst Day, you made some comments about the potential maybe of looking at a licensing model or some different ways to both protect the IP and grow that 3D sensing business, particularly in the Asia-Pac region. Just curious if there's been any movement there or how maybe we should think about the Android ecosystem in particular and its reliance on some of the China mobile handset operators as we're looking out over the remainder of the calendar year. Thank you.

Oleg Khaykin -- President and Chief Executive Officer

So I think at this point, it's too premature to give any update from last four, five weeks ago. As I mentioned, we have a number of legal actions percolating across multiple jurisdictions, and as they develop our strategy between licensing versus enforcement, will modulate depending on the outcomes of various challenges.

John Marchetti -- Stifel Financial Corp. -- Analyst

Thank you.

Operator

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

Tim Savageaux -- Northland Capital Markets -- Analyst

Hi, good afternoon. Congrats on the results. First question is on the 5G or wireless kind of side. I imagine that was the primary driver, pretty impressive, 21% growth rate.

My question is, given what we've seen with Nokia of late, which arguably you need to refresh the whole product line, it seems like that could be a positive thing for you guys. I wonder if you started to see some of that already in terms of contributing to the growth in 5G base station test. And then I'll follow up.

Oleg Khaykin -- President and Chief Executive Officer

Sure. I mean -- clearly, I mean, we are engaged with all the major players in 5G, and it's still very early innings of the 5G deployment. There is a lot of revamping, reengineering and adding of new features to the products that all the various vendors are bringing out, and that obviously drives their need for more features, more test systems, both in, I would say, scope of a test and the quantity of test. And as I said, our view is where they are always at the ready to sell them more when they need it.

So it's not -- I don't think we have any constraints on our ability to deliver new features, the enhancements and what specific customers may demand. And we don't have any limitations on volume of production that we can ship. So I think I would say pretty much, we are riding the 5G wave as it happens.

Tim Savageaux -- Northland Capital Markets -- Analyst

OK, great. And to follow up, we had a little back and forth on this at the Analyst Day where I think if I recall properly, you said we might see another upgrade cycle, cable might recover in, say, two to three years. Maybe I misheard and you meant two to three weeks. But cable seems to have recovered pretty quickly and unexpectedly.

And according to your commentary about Q2 sustainably, I wonder if you could kind of dig into that deeper in terms of what you saw on cable and if you were as surprised as I am. Thanks.

Oleg Khaykin -- President and Chief Executive Officer

Well, I mean, look, I wouldn't say surprised. I mean, I think people may take it too literally when we say DOCSIS 3.1 upgrade. It's not a -- like a spike signal and it goes flat, right? It's like initial wave, everybody buys in North America and does a big upgrade. Then they have to digest it, so you have a drop.

Then as they digest it, they say, oh, we need a bit more here. Then you have a kind of secondary but lower kind of bump-up. And then, of course, the rest of the world started deploying it as well. So you have like a bunch of small little bumps, right? So net-net, reality is when you are deploying DOCSIS 3.1 or any other technology, there is obviously initial spend, and then you do a more fine-tuning, resizing, refiguring out what else more you need.

And remember, we also have a lot of other products that go into cable like fiber monitoring and things like that. So it's not only meters. It's a lot of other test equipment that we sell into cable operators. And then now we obviously see some cable operators starting to look at wireless space.

Well, it opens up opportunity for us to sell them some wireless products. So I would say -- I wouldn't say that we are in for another big uptick, but I just think I was out cautioning everybody not to think that cable goes to zero. It continues to come and go. And the next thing is not that far off, maybe a couple of years, for the fully symmetric DOCSIS 3.1, where you can send and receive data at equal rates.

And then, of course, this whole -- the RemotePhy architecture conversion that's going to be happening in the coming years, which obviously drives a lot of other test requirements. Actually, not that far off from the 5G infrastructure, because, in a way, if you look at RemotePhy architecture and you look at the 5G architecture, they look very similar in many ways. So a lot of the similar-type products would play into that space.

Tim Savageaux -- Northland Capital Markets -- Analyst

OK. Thanks.

Operator

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

Michael Genovese -- MKM Partners -- Analyst

Thanks. Hey, Oleg, it seems like we've seen upside in 5G ever since you've done the acquisitions. So for at least five quarters here, we've seen lab-driven 5G upside. Can you just talk a little bit more about why that's doing so well? And is it somehow -- is there something about 5G that makes it a better opportunity than 4G? Or is it roughly equal to where we were in the 4G cycle?

Oleg Khaykin -- President and Chief Executive Officer

Well, I think the -- I mean, as much as I'd like to take credit for this brilliant insight when we bought that business, it truly is -- has been an upside surprise to us, as well as the management team that's running it. But as we dig into it, I tell you, there is fundamentally something different about 4G and 5G and 3G for that matter. Remember, when -- I was saying it earlier in the earlier calls, when we look at 2G to 3G, 3G to 4G, it was really just marginal improvements, it was kind of the evolutionary, whereas 5G is much more revolutionary, it's completely new technology, a new architecture and a different topology of deployment. As such, it's -- it comes with a very steep learning curve and a lot of uncertainty, and that requires fundamentally a lot more testing and a lot more monitoring to figure out what's going on with the network.

So as a result, I think we do feel the 5G will be more in line with the 1G and 2G in terms of the test and measurement and skills required to deploy these networks than what we've seen with 3G and 4G. And I mean part of what you see is the -- some of the primary early deployers of 5G networks are announced because nobody wants to take the risk of network working as advertised deploying something so different. As a result, I see service providers relying more on NAMs to ensure that they have one to strangle if something goes wrong. So I think in that respect, I do believe we will see more need across the board and not just Viavi but pretty much anybody who is selling into 5G ecosystem.

Amar Maletira -- Chief Financial Officer

Just to -- we did mention during the Analyst Day, Michael, we basically -- given the more test requirement, more use cases and 5G being different than 4G, we also made very targeted investments in R&D to go capture those -- the other use cases that are out there, plus strengthen our market position, which is, as is, very strong.

Oleg Khaykin -- President and Chief Executive Officer

Yeah, it's actually -- Amar bring up very good point. I mean, all that revenue is not coming in for free. I mean, we actually some of these opportunities, and selectively, after funding about three, four quarters ago, and that's obviously what's driving it. So it's a very good -- I mean, I wish all the R&D projects are like this, very tight, very close correlation between this incremental spend and the incremental revenue bump-up.

Amar Maletira -- Chief Financial Officer

And it's a good mix of variable, the fixed costs, so that you guys know that --

Oleg Khaykin -- President and Chief Executive Officer

That's right.

Amar Maletira -- Chief Financial Officer

It's something that we can scale down.

Michael Genovese -- MKM Partners -- Analyst

So when do you expect to see a field test and see the service providers step up more of its spending? When do you think we'll start to see upside in the business or see that driving the business? What's your current view?

Amar Maletira -- Chief Financial Officer

Well, for the last three, four quarters, I've been telling you that everybody is getting a bit ahead of themselves when they think about the deployment. Deployment is still proceeding at a much more cautious pace. And I actually -- as I've been saying all along, I think we're probably going to see field test truly picking up more toward the end of the calendar 2020. And today, it's mostly trials, and it's very much done by NAMs using a lot of very expensive lab equipment as they fine-tune their -- deploying their models.

And we work with all of them in that scenario. And right now, it's all about putting your products as part of the deployment protocols for the network. So when it does go mass rollout, that's when you would see the demand. So I would say second half of next calendar year at the earliest.

Michael Genovese -- MKM Partners -- Analyst

Great. I appreciate the really well thought-out responses and keep up the great work.

Operator

Your next question comes from the line of Richard Shannon from Craig-Hallum. Your line is open.

Richard Shannon -- Craig-Hallum Capital Group -- Analyst

Well, thanks, guys, for taking my questions as well. I want to focus on OSP in the margin structure that you had in the quarter. The gross margin, operating margins were excellent to say at least here. So I guess I wanted to ask a couple of very quick questions here just to make sure I'm understanding things here.

Is the non-3D sensing part of that business, is that -- was that revenue kind of flat? And was there any change in margin structure there? Or is it all due to 3D sensing?

Amar Maletira -- Chief Financial Officer

So it's all due to 3D sensing. And as we had indicated, Richard, as the 3D sensing volumes go up, it leads to higher absorption of our manufacturing costs, and also the team up the learning curve here, and we've been doing this for the last one and a half years. The team is also driving a lot of operational efficiency in manufacturing. So it's a combination of higher absorption of manufacturing audits with higher volumes, as well as the increased operational efficiency.

Oleg Khaykin -- President and Chief Executive Officer

And we also obviously have been working on the anti-counterfeiting side. We took out some of the older redundant cost capacity out, and we continue to improve productivity of those assets. So -- but I think as Amar said, the biggest impact here is our 3D sensing volume production of filters, and diffusers is now running at a much bigger industrial scale. So there's elements of economies of scales kicking in.

And this quarter have been particularly very highly loaded factory with very good absorption. Now, obviously, when it comes to things like June quarter, you have the opposite effect. I mean, you have a lot of under-absorption, unless you're building inventory. And we prefer to build just in time and take the dips and lumps when they come, still avoid building up inventories.

But what we've developed is a very flexible variable cost that we can ratchet up and ratchet down as volume comes in.

Richard Shannon -- Craig-Hallum Capital Group -- Analyst

OK. So I think historically, you talked about 3D sensing being a poor -- adding to a poor mix within OSP. It sounds like it was actually maybe in line or maybe even better in the quarter. Is that fair to guess or not?

Amar Maletira -- Chief Financial Officer

So I will not comment on that piece because for obvious reasons, but obviously, it is better than what it was last year as the volumes were lower and we were scaling up the manufacturing. So --

Oleg Khaykin -- President and Chief Executive Officer

Well, I mean, listen, a poorer mix is the -- I guess I prefer -- I like money. So let's out it this way, I mean, yes, I would love to have 40%, 50% operating profits on some products, but remember, even the 3D sensing, although it's lower margin than a traditional military -- Mil/Aero products or anti-counterfeiting products from the business units, it's still significantly better operating margin than a lot of our other product lines. So, overall, it's very positively accretive to Viavi overall.

Amar Maletira -- Chief Financial Officer

Yeahh. So I think you bring up a good point, Richard, if I can just expand it a little bit. So as Oleg mentioned, we have seasonality in our margin structure in OSP. So the first two quarters of the fiscal year, the September quarter and December quarter, you typically see higher margins, and then we purposefully avoid prebuilding inventory, etc.

And those margins typically go down in the March and the June quarter, right? So overall, we should be still where we guided, about mid-30% for the fiscal year, but again, we don't want to go -- this is a consumer business with very fast cycle times, and we have a very -- three- to four-week lead times. So there's no reason for us to go prebuild a lot of inventory and get stuck with that inventory in the consumer business. So we are very, very -- we have worked this in the last two years, and it's worked very well for us, and that's how we will also operate going forward.

Oleg Khaykin -- President and Chief Executive Officer

Well, and as 3D sensing penetrates more and more products and vertical markets, you're going to see more of a smoothing out between the first and second half of the calendar year. And it's very similar. I mean, I remember back from my early days in this industry, if you look at the gallium arsenide power amplifier in CDMA phones, when it all started, it was a two-week -- two-quarter-a-year business with strong demand in the first half and an almost nothing in the second half. As the CDMA, WCDMA and 3G penetrated, it became more and more linearized than today.

Nobody talks about strong second half and weak first half in the power amplifier space. So I expect the 3D sensing to be marching in that general direction.

Richard Shannon -- Craig-Hallum Capital Group -- Analyst

OK. Great. Thanks for all the detail and keep up the good work. That's all for me.

Operator

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

Meta Marshall -- Morgan Stanley -- Analyst

Great. Thanks. First question for me just on wireless coming in stronger than expected, and it maybe not be as seasonal as you maybe talked before. Just how do we think about the seasonality of that wireless business or how you are thinking about it now? And then maybe just kind of more definitionally, like, I know short lead times on the 3D sensing business can be short kind of for the [Inaudible] ecosystem.

But I just want to like understand, are they the same kind of short lead times on the Android ecosystem or just timing the volumes and how we should of that?

Oleg Khaykin -- President and Chief Executive Officer

OK. So, I mean, wireless, I think the -- when -- there is a difference between when you sell into the field versus when you sell in a lab. Lab is driven by engineering budgets and they are fairly SaaS and they are more or less linearized. And clearly, when you're going into a hot new area like 5G, it is the most strategic spending thing that a company can do.

Fundamentally, if the company wants to get more aggressive, you see more budgets come up, and in the end, you purely just have to line up with the customers' engineering road map and you write that spend cycle, OK? So I think at this point in time, if there is a seasonality, it's not a seasonality. There is -- that is, I would call, calendar-based. It's really driven more by the individual NAM, a rollout and product launch cycle, right? And you just got to be agile and roll with the punches. In case of the 3D sensing, it's very much a Viavi and Amar and my philosophy, that we do not get ahead of ourselves, and you could always try to make your gross margins look a little better in the down quarters by running more production.

But all you're doing is taking good cash from your bank and putting it into an inventory, and as often happens in the -- especially consumer electronic space, that inventory often turns into nothing. If a customer doesn't have as much demand as they predicted or they make a design change, and all of a sudden, the inventory is useless. So what we chose to do consciously from the very beginning is to run this business on a very short product lead-time basis. And we have a phenomenal manufacturing team that can execute and turn on a diamond within two to four weeks, at the worst case, turn around the order.

And we plan and build our whole supply chain to be able to respond to that lead time, which gives us tremendous flexibility not to prebuild inventory or respond to the very early forecast from our customers but rather wait until the customer has a much better visibility of their true demand and we'd build just to that. So that's very much more of Amar and my philosophy on how we prefer to run production for consumer electronics business.

Meta Marshall -- Morgan Stanley -- Analyst

Got it. Thank you so much.

Operator

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

Unknown speaker

Hi, guys. This is Nick filling in for Mehdi. Just wanted to shift a little bit to talking about 400G. Do you still see like second half of '20 to be the catalyst for that? Where do we stand with 400G? And what should we think about it in terms of how it impacts each business unit?

Oleg Khaykin -- President and Chief Executive Officer

Well, I think I would say the 400-gig rollout is now in full swing. I mean, and it's got quite a ways to go. So I expect that business to be good for us and our customers. I mean, you've seen probably -- there has been some reports like Inphi just had a very strong quarter.

That is a -- it's going to be a long deployment cycle, and everybody playing in that thing will benefit. And where we benefit in it primarily today is in the production because that's where the volume of shipments that drives the production test. And that said, R&D is now following with a 600- and 800-gig. So you sell to them that equipment for the lab space.

But I'd say for production testing, that's where we see a lot of 400-gig. But it also means as it starts getting deployed in the next several quarters, we will see probably demand for that kind of thing happening in the field instruments. So it's kind of like a three cycles, R&D cycle, followed by production cycle, followed by the deployment cycle. And that's pretty much we hope the same model will repeat itself in the wireless space.

Amar Maletira -- Chief Financial Officer

And the field is quite early, and we did launch a 400-gig product for the field.

Oleg Khaykin -- President and Chief Executive Officer

Yeah. Today, a lot of 400-gig goes mostly in the data centers and -- which is a whole new market for us. And of course, once the data centers are running it, then people start upgrading the -- or to interconnect them more for high speed.

Unknown speaker

And just a quick follow-up on that. Do you have a kind of a sense of in terms of when that shift from data centers to kind of broad usage? Like when should we expect that? Is that second half? Is that next quarter? Is it 2021? What should we think?

Oleg Khaykin -- President and Chief Executive Officer

Well, it varies. I mean, it depends on operators and how much capacity they have in their metro networks. But we're also seeing the hyperscale data center operators actually building out their own interconnect networks and spending a lot of money there. But I would say probably too premature to make a sweeping statement as to when the operators are going to go to 400-gig upgrade.

Most likely, it's going to be more focused specific to individual operators, and they will do it probably, initially in the markets where they have the biggest constraint of capacity and probably delay deployment of 400-gig in areas where they have a lot of dark fiber.

Amar Maletira -- Chief Financial Officer

And some correlation with 5G deployment, too.

Oleg Khaykin -- President and Chief Executive Officer

5G is another one. Yeah, exactly.

Unknown speaker

OK. Perfect. Thank you.

Operator

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

Bill Ong -- Head of Investor Relations

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

Operator

[Operator signoff]

Duration: 40 minutes

Call participants:

Bill Ong -- Head of Investor Relations

Amar Maletira -- Chief Financial Officer

Oleg Khaykin -- President and Chief Executive Officer

Alex Henderson -- Needham and Company -- Analyst

Samik Chatterjee -- J.P. Morgan -- Analyst

John Marchetti -- Stifel Financial Corp. -- Analyst

Tim Savageaux -- Northland Capital Markets -- Analyst

Michael Genovese -- MKM Partners -- Analyst

Richard Shannon -- Craig-Hallum Capital Group -- Analyst

Meta Marshall -- Morgan Stanley -- Analyst

Unknown speaker

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