Viavi Solutions Inc (VIAV) 2001 Q4 法說會逐字稿

JDS UNIPHASE FOURTH QUARTER CONFERENCE CALL

Ladies and gentleman thank you for standing by. Welcome to the JDS Uniphase fiscal year 2001 fourth quarter and year-end conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question and answer session. At that time, if you have a question you will need to press the '1' followed by the '4' on your telephone. I would now like to turn the conference over to Dr. Jozef Straus, Co-Chairman and Chief Executive Officer. Please go ahead sir.

Thank you very much. Welcome to all of you on this call. I am joined by Greg Dougherty, our Chief Operating Officer, and Tony Muller, our Chief Financial Officer. This afternoon we would like to discuss with you our fourth quarter and year-end results and offer our perspective on our markets and the actions we are going to take to deal with the present downturn and prepare for future growth. Before we get into the details of the quarter, I would like to emphasize that we remain positive about the optical telecommunication market. While the downturn is exceptionally severe, it does not affect my conviction that telecommunication market will return for healthy growth industry in the future, and that conviction guides us on strategic vision as you create an even stronger company. Now let me ask Tony to review the safe harbor statement, and then Greg and I will provide market and business reports, before Tony covers the financials.

We would like to advise you that our report in the discussions we will have today will include forward-looking statements, as that term is defined under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are all statements we make other than those dealing specifically with historical matters, i.e., our historical financial results and any statements we make about the conduct of our business operations and finances up to this moment. Our forward-looking statements include any information we provide on future business operations and guidance regarding the future financial performance of the company and any information regarding the likelihood timing, cost, and any benefits of the business restructuring activities we discuss today. All forward-looking statements mentioned are subject to risks and uncertainties that could cause the actual results to differ possibly materially from those projected in the forward-looking statements. Some, but not all of these risks and uncertainties are discussed from time to time in the press releases and securities filings of the company with the SEC, particularly the risk factor section of our Form 10-Q filed for the quarter ended March 31, 2001. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. Now, please let me explain the trading hold up in our stock today. A hacker gained access to a draft of our release as it was being prepared for our website, and as soon as we learned of this, I asked NASDAQ and the Toronto Stock Exchange to halt trading in our stock. We apologize for this unplanned perturbation. Jozef?

Thank you Tony. It certainly has been an exciting and challenging 12 months. Our revenue for the fiscal year ended June 30th was 3.2 billion, 83% above the pro forma revenue of 1.8 billion fiscal 2000. Yet our fourth quarter revenue was 601 million, down 35% sequentially. This indicates just how strong our markets were only a few months ago. The ensuing downturn started very quickly, and our reaction was immediate and decisive. The Global Realignment Program is necessary to restructure our company and to integrate our operation more efficiently without sacrificing customer service, research and development activities. The scope of this program has been expanded given the severity of the downturn, but I think it is important to know that the most important aspect of this program is the strength of the core company that is being recreated. Our goal is to emerge from this industry downturn as the industry leader in technology, in products, in cost structure, and in financial strength. Given our research and development capabilities, our customer relationships, and our sound financial position, we believe that we are in position to achieve this goal with the strong management team we have in place. Before Greg and Tony give you detailed operational and financial overview, I would like to talk about the market environment, offer a broad review of our Global Realignment Program, and provide an product technology update that encompasses the customer activity that we are pursuing to remain a leader in our industry. Turning to the market, let me comment on some of the topics that are on everyone's minds. First, the much discussed topic of carrier level capital expenditures. As you have heard, carriers have adjusted their spending levels for a number of reasons including excess capacity in the market, constrained capital markets, decrease in competition, the rationalization of industry structure, and the need to show a return on investment. The immediate impact has been a slowing of equipment purchases as the carriers improve their utilization of existing capacity. Clearly, we are seeing the effect of this on our order flow, and we have yet to see positive signs of this trend reversing. In addition, to reduce carrier level capital expenditure, inventory levels remain high at our customers. Both of these factors impact the level of our customer purchases from us. It is hard to predict when the inventory situation will correct itself, but we believe that our strong design win activity will continue the future sales growth as the technology moves forward, even in this environment. Geographically, European markets have followed the North American market trends, and we are seeing our European customers lower purchases as well. Metro and switches continue to be the bright spots in the market, and while they are growing from a small base, we believe we are well positioned with strong product presence in both markets. In fact, we have dedicated 25% of our R&D dollars to the metro market. Finally, we get lot of questions about the pricing environment. While our customers are always asking for lower prices and the competition is indeed fierce, we do see increased emphasis being placed on providing higher value for the same dollar. Our philosophy always has been to maintain a low cost structure so we can continue to meet our customers' pricing needs and build our position in the next generation system at the same time. For customers pricing is only aspect of component supply. Ideally, customers also want to limit the number of vendors to consolidate qualification efforts, and they want assurance that their suppliers are going to be around in years to come. By offering contracts covering a portfolio product and superior price performance, we believe that JDS Uniphase has an enviable position in the telephone component's industry. Our response to this market environment is our Global Realignment Program. In the execution of this program, we are taking measures to build for the future. Last quarter, we outlined for you the scope of this program. However, the severity of this downturn has forced us to expand this scope. We believe that the additional steps we have announced today will generate now an aggregate of $700 million in annual cost savings and research and development budget greater than 12% of sales and reduction in our employee base from approximately 29,000 at the beginning of the calendar year to 20,000 approximately currently and then to 13,000 employees. We will also decrease our square footage by almost 2 million sq/ft from 6.3 million to 4.4 million sq/ft. Combined that with 1.6 billion in cash, money market instruments, and other highly liquid fixed income securities and essentially no debt, we feel that we have indeed a strong financial position. While this realignment has been very difficult for everyone at JDS Uniphase, we are energized by the strength of the company, and we believe we will emerge from this downturn. Now, let me turn to how we are capturing opportunities through customer activities and new products to position ourselves for the upturn in the market. First, we are engaging with our customers at every level of the organization. We have a global direct sales force that provides very individualized attention for all our customers. In the near term, we are working with them to meet their current needs, while continuing to define requirements for the next generation systems. Our product development activities continue to move ahead based on the positive reception of our newly introduced products. Let me quickly remind some of the products we have introduced in the last 6 months. Number one, the industry highest-powered uncooled 980 pump lasers and uncooled micro amplifier. The industry's highest-powered Raman pumps, the OC-48 and OC-192 transponders to create the industry's most complete family of transponder products. A family of products for 40-gigabit systems included 40 gigabit modulators, dynamic gain equalizers, and tune up of dispersion compensators. We believe that the new products will propel us out of this downturn and our design win activity continues to be strong. In fact, it has not experienced any slowing down in this environment. I would also like to comment briefly on our new management team. In addition to Greg, I have working very closely with me Don Scifres, Scott Parker, Tony Muller, Yves Dzialowski, Mike Phillips, and Fred Leonberger. This talented group of individuals has melded into executive team that is decisive, result oriented in helping JDS Uniphase to become a better partner for its customers and a stronger corporate entity. This team has made many difficult choices as we realign our business to be profitable at lower revenue level, without sacrificing customer service and future growth, and I am proud to work with them. Personally, I remain positive about the future. Our market will eventually recover and grow again as the demand for bandwidth continues to grow. In the near term however, this environment is opportunistic and is giving JDS Uniphase a chance to prove that we are a strong leader in optical components for years to come. Our customers need a worldwide partner that can offer a broad range of components and subsystems, collaborate on research and development, ensure manufacturing volumes, and provide long-term staying power and financial strength. We believe that JDS Uniphase is just such a partner, and we expect to turn adversity into opportunity to come out of this downturn with key positions in the next generation systems that will be introduced over the next 12-18 months. Thanks. Greg?

Thank you Jozef. Through our Global Realignment Program, we have greatly accelerated our integration efforts at JDS Uniphase by restructuring the company to be aligned with the current market environment. We have four guiding principles behind our restructuring. The first is to ensure that our employees are treated with dignity and respect; the second, to better integrate JDS Uniphase so that we are able to present a single company, which offers value-added solutions to our customers; the third, to align our cost structure with market realities; and the fourth, to ensure that JDS Uniphase remains positioned as the industry leader when we exit this industry downturn in terms of technology, product lines, cost structure, and financial position. We are convinced that JDS Uniphase has the people, technology, and the financial resources to make this happen. I would like to provide you with additional details on the Global Realignment Program, as well as an update of what we have accomplished to date. First, we are reorganizing how we manage the company to be more market driven and integrated to leverage synergies. Modules and subsystems have become our customer's top priority, and we are adjusting our management structure to further prioritize these areas, as well as increase our focus on the high-growth areas of metro and switching. We believe that by aligning our product development activities and the efforts of our considerable sales force we can a present clear, more integrated stories to our customers and provide even more solutions to them in the future. Turning to research and development. We are increasingly taking a corporate wide strategic view of our priorities, as we allocate dollars and engineering talent to projects. As we evaluate these projects, we will be leveraging the breadth and strength of our technology bases to provide more integrated solutions to our customers. A resulting corollary is that we must decide on what not to do, and our lower priority overlapping projects are being cancelled. Our projected research and development budget will remain greater than 12% of sales, which in dollars is still greater than the revenue of any of our competitors. In manufacturing, we are consolidating our sites into global centers of excellence. Clearly, this will improve our capacity utilization, but it has additional benefits. Consolidation will also facilitate our ability to standardize our business processes and simplify our supply chain management and qualification procedures. These steps will considerably improve the cost structure of our manufacturing groups. Importantly, we are building on our strength in China, and we are accelerating the transfer of manufacturing to our Shenzhen facilities. Additionally, we continue to move forward with our automation initiatives by prioritizing projects based on the strategic decisions being made in relation to research and development. We will also continue to utilize manufacturing partners where it makes sense. By leveraging our extensive Oracle ERP system, we are implementing a shared service initiative to better serve our customers and to reduce cost. We will create a centralized customer service organization to allow our customers to place a single purchase order with a single person for any JDS Uniphase product manufactured anywhere in the world. We will also be centralizing our general accounting functions. In addition, we will use our Oracle tools as a means to leverage our purchasing clout by negotiating more blanket purchase agreements with our key suppliers. Finally, we have established an operation strategy group that now consolidates supply chain management, automation, quality, and facilities into one corporate team lead by one of our most capable and experienced operations executives. We expect that unified leadership and common business processes implemented across the company will allow us to realize gains in effectiveness and efficiency while completing our transformation into a an integrated company that relentlessly focuses on continuous improvement in quality, speed, and customer satisfaction. Now, let me update you on what we have already accomplished with the Global Realignment Program. The program is being executed in multiple phases, both because some of our earlier decisions were obvious steps towards integration and because our anticipated sales levels were higher that we can now forecast. This first phase, now complete, will result in almost $300 million in annual savings. This process reduced our employee count by approximately 9,000 people, and we have identified, and are in the process of closing, 9 operations and 25 buildings, totaling approximately 1.2 million sq/ft. The operations being closed are in the following locations: Asheville, North Carolina; Bracknell, England; Freehold, New Jersey; Hillend, Scotland; Oxford, England; Richardson, Texas; Rochester, New York; Shunde, China; and Taipei, Taiwan. We exceeded the original targets of the program that we previously announced because of the leadership and teamwork of managers throughout JDS Uniphase. With the change in the level of our business and the insights and opportunities we found throughout the company, we have expanded the scope of the Global Realignment Program. We now expect to generate an additional $400 million in annual savings, bringing the total expected to the $700 million annual savings that Jozef mentioned earlier. The second phase of the Global Realignment Program, which is partially completed, will result in a further reduction of approximately 7,000 employees and 800,000 sq/ft of facilities. JDS Uniphase assembled an incredible technology base and grew rapidly by expanding capacity as customer demand grew explosively. We are now building what we believe will be an even stronger, more integrated company. I continue to be impressed and energized by the talent, energy, enthusiasm, and professionalism of the JDS Uniphase team and its unceasing dedication to customers. We are all sadden by having to ask so many people to leave our company during these difficult times, and we are doing the most we can to treat all of them in the best way possible. The people of JDS Uniphase represent one of the strongest forces in the optical component and subsystem industry. These painful and difficult but necessary steps will ensure that JDS Uniphase remains a market leader. Thank you. Jozef?

Thanks Greg. Now, Tony will take you through the fourth quarter and the fiscal year, as well as current guidance for future periods.

Thank you Jozef. First let me speak to the numbers for the quarter. Our fourth quarter results were consistent with our guidance as we reported sales of 601 million for the quarter and 3.2 billion in sales for the fiscal year ended June 30th. The 601 million in sales for the quarter was down 35% sequentially from the third quarter and down 6% from pro forma combined sales of 641 million in the fourth quarter of fiscal 2000. The pro forma sales for the prior year include the separately recorded results of E-TEK. The 3.2 billion in annual sales compares to 1.8 billion in pro forma sales last year also including E-TEK. It was a year of growth, although in recent quarters our sales are declined because of the severe downturn in our industry. Alcatel was our only 10% customer for the quarter. For the year, the customers that were over 10% were Alcatel at 12.3%, Lucent at 10% even, and Nortel at 14.1%. For the quarter, our book-to-bill ratio was well below unity. Please let me report on our two segments, amplification and transmission on the one hand, and WDM, switching, and thin film. Please note that our organization structure is being changed, as Greg mentioned, as we complete our Global Realignment Program, and this will in all likelihood cause our segment reporting to change to remain in compliance with SEC rules. Amplification and transmission represented 42% of total sales and declined 41% in the third quarter. WDM, switching, and thin film products represented 58% of total sales and declined 28% from the prior quarter. Please note that this segment includes our non-telecommunications businesses. Let me speak now to the Global Realignment Program. We have been vigorously implementing this program, and we can give you a clear picture of the extent of changes we are making. The total cost of this program is now estimated to be 900-950 million of which 500 million was incurred through the end of the fourth quarter, and the majority of the remaining amounts were expected to be charged in the first quarter of fiscal 2002. The charges recorded in the fourth quarter include 264 million in restructuring charges, 220 million in charges to cost of goods sold, and 16 million in charges to operating expenses. Included in the total cost of the Global Realignment Program, in addition to severance, employ retention bonuses, and the like, our charges were obsolete inventory write-downs and accelerated depreciation, moving costs, and employee costs related to the phasing out of certain facilities and equipment. This program, as Greg mentioned, is expected to reduce annual expenses by 700 million from the levels experienced at the commencement of the Global Realignment Program through reductions in manufacturing capacity, employment reductions, product rationalization, and decreased discretionary spending. We are selling virtually our entire air force. We are in the process of vacating approximately 2 million sq/ft of space or about 30% of the total space we occupied before the downturn. We anticipate a total global employment reduction of 16,000, of which approximately 9,000 was completed by June 30th. Most of the remaining reductions are expected to take place in the first half of 2002. In addition to charges associated with the Global Realignment Program, we incurred charges of approximately 270 million for the write-down of excess inventory in the fourth quarter related to our lower sales forecasts. All of the foregoing amounts are greater than estimates previously announced because of further reductions in sales forecasts. In addition, we have found additional opportunities to make JDS Uniphase more efficient, and we have expanded the program in response to lowered sales forecasts. Will this be the end, in particular the end of our layoffs, when this program is completed? We have endeavored to act decisively throughout the program and to restructure our operations to remain profitability at low sales levels to avoid having to do another round of cuts. We cannot be sure of course. We hope this is as far as we will have to go so that all of our people can devote their full efforts to building for the future. Finally, it is important to know that the full impact of our Global Realignment Program will phase into our income statement over the next 3 quarters. The goal of this program is to create a cost structure that results in breakeven financial performance at $350 million in quarterly sales. Let me speak now to gross margin. In operating expenses, we incurred $220 million in charges against cost of goods sold under our Global Realignment Program, in the quarter, and an additional approximately 270 million in write-offs of excess inventory also were charged against cost of goods sold in the quarter. Actually, these charges, fourth quarter pro forma gross margin, would have been consistent with our guidance despite lower sales because of the speed and effectiveness of our cost cutting. Excluding a small amount of charges under the Global Realignment Program, our R&D expenses were just under $85 million or 14.1% of sales for the quarter, and the high expense ratio was a reflection of a sharply lower sales level. SG&A expenses, excluding Global Realignment Program charges, were 135 million or 22.4% of sales for the quarter, again, a reflection of lower sales. Interest and other income was $11 million for the quarter. Fourth quarter shares were 1.32 billion on a primary basis, and diluted shares were 1.34 billion. Let me speak now to our balance sheet and financial condition. I am very pleased to report that our considerable financial strength improved even further in the fourth quarter. We generated $65 million in cash operations during the quarter and 354 million for the year. Capital spending for the fourth quarter was 155 million as we completed several projects already underway, and we invested 716 million in projects for the year. We project that capital spending in the first quarter will be substantially under $100 million. The Global Realignment Program consumed approximately 31 million in cash during the fourth quarter, and this amount was included in cash generated during the quarter. Day sales and accounts receivable were 72 days for the quarter because of our lower sales level, as lower payments by some large customers. Inventory turns for the quarter are not meaningful because of the large inventory provisions taken. During the quarter, we sold a considerable portion of the Nortel stock we received in the sale of our Zurich operations. The results of the above is that we held $1.8 billion in cash in marketable securities at June 30th, of which 1.6 billion was held as cash, money market instruments, and another highly liquid fixed income securities. This gives us the financial strength to invest in our business, weather the industry downturn, and continue to make acquisitions to expand our technology base. Our debt was minimal. Let met turn now to a discussion of goodwill and certain other charges. As we announced in April and reported in our 10-Q, the company has evaluated the carrying value of certain long-lived assets and acquired equity investments consisting primarily of goodwill and our investment in ADVA shares. There is too much of accounting rules, the majority of the goodwill on our books was recorded based on stock prices at the time merger agreements were executed and announced. The company's policy is to assess enterprise level goodwill if the market capitalization of a company is less than our net assets with goodwill being reduced to the extent net assets are greater than market capitalization. Downturns in telecommunications equipments and financial markets have created unique circumstances with regard to the assessment of long-lived assets, and we sought the counsel of the staff of the Securities and Exchange Commission on the interpretation of generally expected accounting principles with regard to this matter. We have had communications with the staff of the SEC, and we will amend our quarterly report on Form 10-Q for the quarter ended March 31st to reduce the carrying value of goodwill by $38.7 billion for that quarter. In addition, we recorded $6.1 billion reduction for goodwill in the quarter ended June 30th following further declines in our market capitalization. Finally, approximately $300 million in certain amounts paid to SDL executives, these are payments that were disclosed in our S4 registration statement, these amounts were paid in connection with the acquisition. These were previously recorded as acquisition costs in the quarter ended March 31st, and we are reclassifying these as a one-time charge for that period, and we have also recorded a $715 million charge for the third quarter to write-down the value of our equity investment in ADVA. Because of the significant industry downturn, we are in the process of performing a review of our long-lived assets in accordance with GAAP, and this may result in further charges being recorded for the fourth quarter of fiscal 2001 based on the value of such assets. This is a very time consuming enterprise. It is underway now, but we were not able to get this final bit of analysis done prior to this announcement. The largest portion of the company's goodwill arose from the merger of JDS Fitel and Uniphase and the subsequent acquisition of SDL, E-TEK, and OCLI. The businesses associated with these business combinations remain significant operations within JDS Uniphase notwithstanding the current business downturn and change in market valuations. This significant reduction in our goodwill and other assets no doubt will result in press reports or articles about a sizable loss. So let me explain what it really means. This goodwill resulted from our acquiring good companies when valuations were high, but keep in mind that while we purchased highly valued shares, we were also in effect selling highly valued shares at the same time. As none of the transactions with the resulting in large goodwill amounts, were done for cash. Had these transactions been done at different times when valuations were lower with exactly the same share exchange ratios, the goodwill amounts would have been considerably smaller. Of course, these good companies likely would have become parts of other companies, and we would not have had the opportunity to acquire them. So by avoiding goodwill, we would have foregone many opportunities to strengthen JDS Uniphase. And when you assess these charges, please keep in mind that they were recorded at a time when our cash increased sharply. So these charges in no way impaired our financial health or strength. We are reporting a pro forma loss of 477 million or ¢36 a share for the fourth quarter, and net income of $67 million or ¢6 a share for the year ended June 30th, 2001. These results reflect the costs of the Global Realignment Program in charges for the write-down of excess inventory and exclude the costs we have historically excluded, primarily those related to merger and acquisition charges. Let me speak to guidance now. On June 14th, we projected that revenue for the first quarter fiscal 2002, or the September quarter, would be $450 million. Our practice is to provide guidance based on our forecasts. These forecasts, however, have been declining during the severe industry downturn, and we have had to, from time to time, revise guidance accordingly. We do not yet see any positive signs of a reversal in the downward trend of the industry. We now expect first quarter sales to be below our earlier guidance, and we are not currently providing guidance for the first quarter or for future periods. Jozef?

Thanks Tony. In closing, let me say that I've been deeply involved in the technical progress of fiberoptics for over 20 years, and the pace of change has never slowed down despite the ups and downs of the economy and the financial markets. The innovation we are working today will come to market and the financial growth will return to the industry. I firmly believe that the future vitality of our industry hinges on our customer design activity. In the near term, we believe that aggressive implementation of the Global Realignment Program has positioned us to remain the price performance leader in the component industry, and our ability to partner with customers is resulting in numerous design wins. Our customers want product breadth, development collaboration, and a supplier that will be there to develop products in the years to come as this market reverses course. We believe the next generation of optical systems will have more JDS Uniphase content than the last phase. This is a very bittersweet time for me because while we are remaking JDS Uniphase to be stronger as ever, we are very sad that we cannot continue to employ everyone that has become a part of JDS Uniphase family during our growth phase. I would like to thank all our employees for their continued hard work during this difficult time. Your efforts are appreciated more now than ever. We can now open for questions. Thank you.

Jen.

Thank you. Ladies and gentlemen if you wish to register a question, you will need to press the '1' followed by the '4' on your telephone. You will hear a 3-tone prompt to acknowledge your request. If your question has been answered and you wish to withdraw your polling request, you may do so by pressing the '1' followed by the '3'. If you are on a speakerphone, please pick up your handset before entering your request. One moment please for the first question. Joseph Wolf with UBS Warburg please go ahead with your question.

Thank you. I have two questions. One is with all the charges I was hoping that you could perhaps give us an indication when you, in the segment breakdown what the normalized operating margins would have been for the 2 business units, if that would be possible? And then my second question has to do with a lot of companies in this sector have been spending time focused on China as an emerging opportunity. I know that a lot of your customers are not, you don't sell directly to China in many situations, but I was wondering if you could comment on the extent to which you see China as an emerging market or when you see that developing?

Joseph with regard to segment profitability, we are not providing profitability breakdowns.

Let me comment on China. Clearly, China is an emerging opportunity, especially with [_______________]. We have had a strong customer base prior to merging with SDL, and SDL has a strong customer base of their own. So we are actually increasing JDS Uniphase as it is, but today, from system companies you can imagine that more system companies and carriers will be working very hard to increase their penetration, as the infrastructure needs to be prepared at much higher level. To that extent, we are working with our system companies those who are already there and who are participating there, we will deliver the products. Indirectly, we'll penetrate. Not only that, but we already have also a strong manufacturing operation in China, and I think we can leverage this that not only in manufacturing but in technology to develop new products and working with existing system companies who have the base to develop products for particular application.

Thank you.

Our next question comes from David Jackson with Morgan Stanley please go ahead sir.

Thanks very much, couple of questions for Tony. Tony, is there any way that you could give a breakout of your non-telecom revenue during the quarter? And also, is it possible to give us some kind of indication of the level of business that you've got from the metro end market? And what your thoughts are, Jozef, maybe about the growth rate of your metro business?

Our telecom revenue is included in the WDM, thin films, and switching segment. Parts of our non-telecom business did go down, but of course, not to the level that our telecom business declined. Some segments did decline in response to overall economic conditions. But beyond that, we don't provide sales breakdown within our segments.

Your second question was the growth in metro business, and clearly, we are participating in that level of activity. There's an absolute base is not to the level as we had in the long haul, but I think, as we're seeing many system companies increasing the level of activities and moving beyond, we're putting more and more focus on it. That's all I could say.

Many thanks.

Thank you.

I think in terms of total amount of sales, let me try and add to Jozef's response. With regard to total sales, the metro business is certainly very promising for us. It is, of course, one of our healthier segments but is still small, and it's certainly under 15 and possibly under 10% of our total sales at this point.

Thanks a lot.

Max Schuetz with Credit Suisse First Boston please go ahead with your question.

Thanks a lot. Two questions, one, I was wondering if you could comment, it seems like from what we have heard from TyCom that Submarine's holding up a little bit better, wondered what you guys were seeing in that area. And also if you could comment on what the outlook was in Europe right now.

Well, we don't want to comment on particular customer really, but they are segmenting really in submarine business where the segments are much longer and the cycles are longer. So in there, some strong aspects indeed, as you indicated that that business is holding up and are also segmenting some parts of business where the business is going down. We have indicated that in the last quarter. What was the second part of your question?

Europe.

Europe. Europe really has little bit of lag. I wish it didn't have, I can continue but we did say that it started to lag similarly in terms of a decrease. The last quarter we still were a lot better but now I think we're starting to see a same effect.

And the drop off in Europe has been sort of last couple of weeks of this quarter you would say?

But it is not as, I can't say that the drop off has been as dramatic as you see it in North America. Slower, but I couldn't say that.

It happened earlier than that.

Right.

Okay, great. Thanks a lot.

Charles Willhoit with JP Morgan please go ahead with your question.

Thanks. Actually two questions, first, on the manufacturing capacities. Obviously, you're consolidating a lot of plants and enclosing a lot of facilities, few million square feet I think you guys said. If longer term positioning for the company, assuming demand comes back at some point in the near future, relatively near future, how well are you positioned to be able to handle increase in demand and do you have out sourcing plans or partners that you're going to work with as opposed to opening your own facilities? And then the second question is on the modules and subsystems space. I think Greg mentioned that you guys are going to have much more of a focus on modules and subsystems. Are customers coming to you guys and asking for more designs of modules and subsystems as opposed to discrete, and could this render some of the discrete component stuff sitting inside of their inventory as obsolete within a quarter or two? Thanks.

Okay. The manufacturing capacity question. There are a couple of things that we're doing. We feel we're well positioned if the industry were to pick up in an unforecasted way and that would make us very happy. But we basically are running at a one-shift operation across the company. So in terms of our ability to ramp without adding floor space, adding capital, or anything like that, is something we could readily do. The second thing we've done as part of this global realignment has been to really emphasize these centers of excellence, which is more of a platform based manufacturing approach, which allows us to build up capacity much quicker because of the commonality of the processes. Second question on modules and subsystems, we're definitely seeing this from our customer pool, and they are very interested in us adding functionality both as a means of reducing size and also to improve the thermal performance of their modules which then makes their value proposition to the carriers much better. The size and the heat of our customer's equipment is becoming a key differentiator for them in their market space.

And about the obsolescence part, I mean is there a chance that the discrete components out there are going to be obsoleted in a few quarters?

I think that there is always a chance of that, and it depends how quickly the new architectures and new systems are embraced by their customers, and they'll really know for certain how much and what the impact would be.

Okay, thanks so much.

Tim Anderson with Salomon Smith barney please go ahead with your question.

Yeah. Thank you very much. Tony, I was wondering if you could give us a little bit better characterization of the timing of the restructuring benefits that you have coming in. You mentioned, if I heard it correctly, that of $400 million to go on an annualized basis, sounds like around 100 million a quarter. Initially, you said that most of this would be completed, if I heard it right, by the end of September. Yet it will take three quarters for the benefits to flow through. Could you try and give us a little better sense of that?

Tim, the full Global Realignment Program requires a lot of operational execution, and in many cases, we can take accounting reserves, in many cases we cannot, and I think what we're describing here is a tail. It takes time to shutdown operation because of compliance with local laws and because of the time to economically and effectively transfer products to other sites, achieve qualifications, and so forth, so while the biggest numbers will occur, the biggest of the remaining savings will occur in the first quarter, it will take approximately 3 quarters for the full effect to be realized simply because there is a lot of work to do, and a lot of these operations can only be closed down. We can't close them down any faster than nature will allow.

When you say the biggest savings will occur in the first quarter, is that off of the total 700 million savings base or the 400 base that you were talking about?

Yeah, we have already achieved the 300. So it's most of the 400 or the biggest, I'm sure, more than half of the 400 will be realized in the first quarter, and then the remainder would come in the 2 quarters after that.

Okay. One quick question if I may about customer mix. You did note that Alcatel was the only 10% customer in the quarter. I know in past quarters Lucent and Nortel have been amongst those but I don't think have been for the past two, if memory serves correctly. Could you characterize for us a little bit below that 10% line for who were your large customers? Did continue to slide, while some others have filled the gap? Are you seeing a uniform depression with the percentages essentially remaining the same?

Now, Tim, you know we don't provide any customer detail.

That was a good try.

Now, all of the names that we customarily expect to see are there below the 10% level, and I'm sure if you mention 10 or 12 customers you would have at least 9 or 10 of them right. But we don't really provide any detail. There were several customers who were just below 10% and quite a few customers who were still representing significant percentages, but we don't provide any detail beyond that.

Okay, one last quick question, any spending left in the Oracle system or rework?

Absolutely. It's not a matter or rework. The Oracle system is moving into its next phase. We still have a couple of sites, a couple of operations where we need to complete the initial installations. But now that the installations are largely done, they're up and running. The big emphasis on our Oracle system is doing the integration among the sites in the interest of speed, particularly, during the upturn, during strong times, we implemented it on a site by site basis, and now we're going back and achieving very high levels of integration, particularly through our shared services programs in supply chain management, customer service, and a variety of general accounting and administrative functions.

Great. Thank you.

Robert Tango with William Blair & Company please go ahead with your question. ROBERT TANGO, JR.: Thank you, and a question for Greg Dougherty. The entire JDS Uniphase team has been working diligently really since last winter to try and restructure the entire organization, attempting to take advantage of this downturn in the market, and in some respects it may be a blessing 6 or 9 months from now, but Greg, you've been with other, prior to coming to SDL, you've been with other major organizations, and I know you've been a key part of this restructuring. Can you just give us some perspective on how much work is left to be done? How much progress you've been making, because I know there've been a number of issues, and how this restructuring compares to some of the situations that you have been in prior to coming to SDL? Thanks.

Okay, thanks Rob. I guess I'd start by saying it's different than the previous experience, in the sense that before it was in one or two sites, and of course, we've got numerous sites which adds a level of complexity and challenge, and we all recognize that, and I'm sure you do as well. In terms of progress, the company really recognized that with all the growth it was very difficult to integrate things and behaviors and priorities, but all of the employees definitely recognize the need to do so, and our customers were telling us we needed to do so. So in terms of the support and how people have embraced it, it's gone quite well, and I believe, we've made a tremendous amount of progress because people have really rallied around the principle of becoming a more integrated, easier to do business with company, and so I think the progress is going quite well. The other thing I'd say in terms of why the progress is going well is that because of the number of acquisitions, we had a lot more overlap than I had the last time I did such a restructuring, and therefore, it made some of the integration decisions maybe a bit more straightforward in terms of having the same activity going on in multiple places, and the idea of consolidating for critical mass becomes a driver in the decision making process, and people can embrace that. ROBERT TANGO, JR.: Greg, do you think that some of the more significant hurdles last winter and early spring, do you think we're sort of through those? And would you say, I mean I know it's tough to put a time on it, but would you say by the October timeframe, would 90% of the major moves that have to be a made, will be completed?

I guess I won't go with 90%. I think that a key piece will be as we continue to go through this second phase of global realignment. So I would say that we'll probably be past the 90% point in about another 4-8 weeks. ROBERT TANGO, JR.: Super.

And maybe, I just wanted to add for clarification, when we announced our restructuring number one, I think we indicated that sales level, we sanctioned about $700 million, and today we are looking at lower quarter end of 600, so we need to kind of position ourselves, as Tony indicated, with a break in level to about 350 to come up and position our company for the worse and just move out as we come out. ROBERT TANGO, JR.: Sure. Thank you. I appreciate it.

Jeremy Bunting with Thomas Weisel Partners please go ahead with your question.

Thanks very much. Jozef I wondering if you could comment on with the strength in design wins, is that targeted more towards long haul than for metro? And I was wondering as well if you could give us a discussion on what the chances are from a competitive standpoint in the metro market and perhaps what the opportunities are, and how different they are from the long haul products and technologies which you are obviously selling?

Let me continue on this one. Clearly, the most important aspect is continuing with our customers, and while I don't want to indicate the precise number of design wins which were there, but we have several tenths of those in quarter 3. Our sales force is keeping tabs on all opportunities that may result. Really the breakdown in the head to toe connectivity is what's very important, especially for new products moving forward, that we provide integrated solutions. So we're forcing very much provide the customer a high degree of solution, and that encompasses boxes, it may encompass not only actives, but encompass both active and passive, as well as some logic and functionality. The last majority in long haul we're looking from 10 gigabit and 40 gigabit, as well as if you look where we are working on metro applications, essentially what we need to provide is (a) volume, as well as new architectures, and as well as new technologies which allow these architectures to pay in. We have a team actually in New Jersey, which is very strongly working with review of those designs and architectural positioning with our customers so they can optimize their structural and architectural connectivity, as I call our transportation cost per bit per mile per second and bring our customer components in. I would think that the most important aspects are application, as we indicated before in high-growth multiplexing and configuration of switching, etc., etc.

Thank you very much.

Thank you.

Mr. Subrahmanyan with Goldman Sachs please go ahead with your question.

Thanks. A couple of questions. First, Tony, you mentioned that the level at which the company will be profitable once you get through all the plans, will be 350 million. I was just wondering if you could give us a couple of more benchmarks, maybe the level of gross margin, the level of operating expenses that would be implied in it. And my second question was, in the last 5 weeks since you provided guidance on the June 14th, if you look at the delta obviously, are there any particular geographies, any product areas, any customers that changed more dramatically than the others?

Let me first try and respond to your question with regard to our margin structure. We believe, because of the negative effect of operating leverage, our gross margins would be somewhere in the mid to high 30s. Operating expenses would make up the difference. With regard to any products that have particular strength or have behaved outside the norm, perhaps I can refer that to Greg. Anything to add, any products that have been noteworthy, although this has really been a pretty much across-the-board decline.

It's been pretty much across-the-board decline yes. I would say that, one thing I would add is that those products that are related to infrastructure, particularly to the laying of new fiber products such as amplifiers or multiplexors, that segment of the market has been particularly weak.

Great, and actually, the number I was trying to get to is at the level of profitability, at $350 million revenue, what would the gross margin and operating expense implications be?

Well, I mentioned that gross margin would be somewhere between the mid to high 30s. We are still fine-tuning our estimates. Keep in mind that we mentioned that 350 is our objective and we know on macro terms exactly, approximately how effective the Global Realignment Program will be, but we still have a lot of fine-tuning, and I think it is too early for us to start providing estimates of margin structure for model building.

Fair enough. Thank you very much.

Operator, maybe we will be able to take 3 more questions if there are any.

Our next question is from Sanjiv Wadhwani with RBC Dain Rauscher Wessels. Please go ahead.

Thank you. Two questions. Number one is I am curious to see if, Tony, you could provide the $700 million that you are expecting in cost savings. What is the ballpark that will come out of manufacturing and ballpark that comes out of opex? And the second question I am just curious to see if you can provide what is going on with the Raman amplification and the outlook over the next say 6 months or so?

With regard to the savings, I think I would have to provide you the same response that I did to Subu's question. We don't have that level of precision ready for publication. As to Raman, I will defer to one of my colleagues.

Okay.

On Raman, we are seeing quite a bit of designing activity on the Raman front. There are a lot of interesting architectures that people are looking at right now to change the value proposition that systems houses are providing to the carriers. And we feel we are pretty well positioned. Our Raman pump that we have introduced is the highest power in the industry that we are aware of, and it is also 25% more efficient, and as I mentioned earlier, heat is becoming a very big discriminator in these network applications.

Thank you.

Thomas Astle with Merrill Lynch in Canada. Please go ahead with your question.

Hello. Just, first of all, two clarifications. Are you announcing new head cuts today of 7,000, if I got that right? And secondly, Tony is your excess inventory rule still a 6-month rule?

We are announcing that we expect employment reductions of 7,000 from the level we had at June 30th. There have been so many press stories that I don't want to try and address that moving target. I'd rather just give you the real numbers. With regard to excess inventory, yes, we continue to use a 6-month planning horizon. Under the accounting rules, we can go out as far as 1-year, but we continue to believe that the right thing to do is to state our financial statements very conservatively, particularly as the technology changes as quickly as it does.

And that 6 months is applied to all products? There is no differentiation in passive or active?

That's correct.

Okay. And just a gross margin question, on the Agere call, they indicated their gross margin may go negative next quarter given by the low volumes. I assume that's kind of related to their more active business. Do you have any issues like that given that part of your business is active and at high fixed costs?

Jeez. I don't know. I don't think Agere made many comments about the JDS Uniphase gross margins. I think what you can, if you take some of the numbers that are in the press release where we did break out the charges in the quarter for gross margin, that affected gross margin, and compare that to our pro forma results, because of course the 2 numbers that are in the press release, for cost of goods sold, are charges against our pro forma gross margin. You can get a pretty good idea that our gross margin is still pretty healthy in the fourth quarter.

And it is previously undertaken going forward. Does volume become an issue for gross margins for you?

Of course it does. We are cutting our fixed overheads dramatically and quickly, but sales on the other hand have been declining. So we do experience the negative aspects of operating leverage, and that has had a depressing effect on our gross margin, and we expect it will have a further depressing effect on gross margin. But when all this is over, we are going to have an unbelievably neat cost structure, which will give us confidence in very good operating leverage as business recovers.

Okay. Thanks.

And our last question today will come from Arun Veerappan with Robertson Stephens. Please go ahead with your question sir.

Yes. Good afternoon. I am wondering if you could share with us what the backlog number is given that you'll have to disclose it on your 10-K?

Arun, we don't have it completed. We are making a lot of changes in our customer service organization, and that of course relates directly to our backlog records, and we are making so many changes, not to our policies, but doing a lot of clean up, a lot of consolidation. We don't have that number ready today.

Okay. If I could do a followup then Tony, as you looked at the 3 months of the quarter and thus far into July, was there any month where net bookings actually turned positive?

I'm sorry. In terms of...

I'm basically asking for the linearity of the order patterns. If you look at orders incoming minus cancellations and look at net bookings on a monthly basis, did net bookings turn positive either in May-June or so far in July?

I don't believe, I know we have had positive bookings in every quarter, and I don't believe we have had a negative month, a negative net month. Greg is assuring me that, Greg's confirming that we have had sizeable cancellations certainly in the third quarter and certainly in the fourth quarter, but we have not had any negative booking months.

Fair enough. I am just trying to read one level deeper into that Tony. So if you've actually had positive bookings months and you have obviously eaten into some of the backlog that you had as you entered the June quarter, is it reasonable to believe that the backlog that you have is probably close to that 350 million breakeven number that you were talking about?

On that, I can't comment on that Arun.

Okay. Good. Thank you.

I think operator I would like to stop right here. I am sure there will be many other questions, other calls. We may need to attend to some other activities. Tony may have some receiving calls. I may show my ugly face on the TV very soon...

Yeah. We have had a couple of TV trucks that have decided...

So I am putting my tie on, my official beret. I hope you see my ugly face on the TV. Thank you very much and better look forward, charge ahead. These are very challenging times, but thanks for your support. Thank you very much.

Thank you. Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please...