Viavi Solutions Inc (VIAV) 2002 Q1 法說會逐字稿

JDS UNIPHASE FIRST QUARTER CONFERENCE CALL

Ladies and gentlemen, thank you for standing by. Welcome to the JDS Uniphase first quarter fiscal year 2002 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, President, and Chief Executive Officer of JDS Uniphase. Please go ahead.

Thank you very much Kelly. Welcome to you all 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 first quarter results, report to you on the progress of our Global Realignment Program, and offer our perspective on our markets. We have made considerable progress in reengineering our company to be a better partner for our customers now and in the future as the market returns to growth. I believe that you will share my enthusiasm on how this positions us for going forward. I believe the long-term opportunities in fiber optics are very much intact, and they are excited about JDS Uniphase's prospects. Now let me ask Tony to review the safe harbor statement, and then Greg and I will provide the market and business reports, before Tony covers the financials. Tony.

We would like to advise the call 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, costs, 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-K filed for the fiscal year ended June 30, 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.

Thank you Tony. Our revenue in the first quarter was $329 million, down 45% sequentially. While we believe that sequential declines of this magnitude are behind us, we have not yet returned to growth. To ensure our profitability at lower revenue levels, we are completing our Global Realignment Program as scheduled. We have already reduced annual costs by over $600 million with the closure of 17 sites and the reduction in employment to just under 13,000. We now believe that we will meet the cost goals of our Global Realignment Program by the end of our March quarter. What is most compelling, however, is the story behind these numbers. Importantly, we believe that we have demonstrated the agility to respond quickly in a dramatically changing environment. In the 8 months from May, when we undertook the Global Realignment Program to December, at the end of our second quarter, we will have significantly reengineered JDS Uniphase. We believe that these efforts, combined with our ongoing strategic initiatives, position our company to offer unsurpassed product breath, technological innovation, competitive costs, and the responsive affective manufacturing capability. Our customer breath a test to our leadership as major and the emerging system manufacturer throughout the world look to JDS Uniphase as a partner. We are staying very close to our customers in the current environment, and I would like to share with you how we are working with them today. Our customers are predominantly focused on developing new systems to dramatically lower network costs for the carriers. Overall, this is in several fold. First, we are enhancing our system knowledge to increase our collaborative engineering with our customers. They are asking us to play a larger role in the new system development by getting involved in the early stages and defining how system performance can be optimized using our component and multilevel products and resources. This work helps to lower our customer engineering costs and improve system performance. Second, we are designing products with the lower cost of ownership. Specifically, multilevel products that consume less power, have a smaller footprint, and offer more intelligence. Third, we are taking significant costs out of our operations to offer lower pricing on components and modules. Current business conditions reflect our customers desire to carry less inventory. Most orders today require quick delivery to meet our customer's time line for system deployment. The other type of product order we are receiving is for new designs. We are not seeing yet regular production orders that indicate customer interest in replenishing inventory. To meet shorter lead times and rapidly changing volume requirements, we have reduced a number of manufacturing plants, transferred labor-intensive product to lower labor cost markets and improved efficiencies at our facilities. Overall planning is not being done without assuming any forward time giving our customers a comfort level that we can have search capacity with minimum advance notice when business requirements increase. Additionally, we have recently announced an automation development alliance with Adept Technology to develop best-in-class solution for component and module manufacturing processes. Our long-term goal is to improve the manufacturability of components and modules using automated solutions whenever possible. Importantly, automated manufacturability is a critical component of all new product development process. By working with the leading major automation companies such as Adept, we believe we are enhancing our ability to optimize the manufacture of the new products in our pipeline. We do expect component prices to continue declining as they have always in the past and we have taken aggressive steps to reduce our costs. In addition, to lowering our own costs, we are also structuring customer contracts for one-stop solutions to reflect customer preference in these needs. We believe we can provide the highest share of customer volume needs, a broader range of their component requirements such of the systems, the benefits of a single source over broad range of products and the value added functionality in advanced modules. Our design win activity remains strong, and we continue to make appropriate investment in R&D, as we expand our product portfolio and modules and sub systems. Research and development is one of JDS Uniphase's strongest attributes, and we recently conducted an intensive company-wide R&D review to sharpen our focus and strengthen our investment in the development of next generation products with more value and intelligence for our customers. We are making considerable investment in more integrated modules and platforms with higher performance, greater complexity, smaller footprints, and lower costs. Greg will provide more details on the progress of our R&D activities. Finally, we are left with a question. Where is the bottom? We still cannot trace the bottom with utmost confidence, although cancellations of customer orders have declined significantly. We do not believe that September was the bottom, but December or March maybe. We recognize that carrier capital spending is forecasted to decline, but given our discussion with customers regarding the plans for new product launches and continued inventory reductions, we believe that December and March can represent the low point of the industry downturn. Of course as our lawyers remind us, we cannot assure that this will be the case. What is strongly believed is that fiberoptic is still a nascent industry with considerable growth potential as optical systems penetrate further into the telecommunications network. Everyday, I hear about application, consumers can look forward to advance once the bandwidth is available. From Internet games to home movies, to network appliances, there are abundant opportunities requiring high bandwidth delivery the future. Not to mention, the business world that has become conservatively more Internet intensive. JDS Uniphase adopts as the industry travels through its various phases and we intend to differentiate those all by offering customers technological innovation, flexibility, longevity of supply, and partnership. We have not lost the focus of the promising future fiberoptics, and we are looking today to provide the bandwidth solutions for tomorrow. Greg?

Thank you Jozef. I would like to take the next few moments to provide you with the status report on our Global Realignment Program and also give you an update on other activities that we are now embarking on. We have made a tremendous amount of progress on our Global Realignment Program over the past 3 months. I am pleased to say that the majority of the necessary actions have been taken and that we have detailed plans for all future steps. Our people have worked very hard to complete our Realignment plans ahead of schedule and Jozef and I are both very appreciative. Let me summarize what we have accomplished to date. We have completed our plans for the Global Realignment Program and are well on track to meeting them. Excluding one-time charges in reserve additions, we met our margin and expense targets in the first quarter. As we mentioned on last quarter's call, we believe the Global Realignment Program will result in a cost structure that will result in a breakeven pro forma operating income at a quarterly revenue level of $350 million or less. We expect to be at this cost structure by the end of March, and we expect to realize its full financial benefits in the fourth quarter. Regarding our facilities, the program was designed to retain our global presence with a much more manageable number of locations. We have reduced our number of sites from 41 to 24, resulting in a reduction of 2 million square feet. Our sites will now be distributed as follows - 2 in Canada, 2 in California, 12 in the Eastern United States, 4 in Europe, 1 in Australia, and 3 in China. We have reduced our employment from 29,000 to fewer than 13,000 and we will not stop looking for additional opportunities to improve efficiency and lower costs. The employment reductions have been very difficult for all of us at JDS Uniphase, and we are quite saddened by seeing so many people leave JDS Uniphase. We have also completed a reorganization of the company's operating units. We have organized our business groups around platforms and applications. We believe that this alignment will allow us to be quicker and more agile in developing new modules with higher levels of integration and functionality. This structure is also providing greater focus and assisting in our cost savings. We now have two major divisions; transmission and network components, and thin film products and instrumentation. These divisions are made up of 6 business groups. Our transmission and network component division is made up of the following groups, wavelength routing, which includes our DWDM multiplexor/demultiplexor, our MEMS products, switches, wave guides, circulators, and tunable components and modules, such as tunable filters, game equalizers, and dispersion compensators. Amplification, which includes erbium-doped and Raman amplifiers, passive amplifier components, optical performance monitors, and polarization-mode compensators. The transmission subsystems group, which includes our alliance with transceivers and transponders, high speed circuits and our CATV product lines, and then active components group, which includes all products based on our semiconductor device platforms such as high-speed modulators, 980 and 14XX pump lasers, photo detectors and source lasers. Our thin film products and instrumentation division includes our optical coding, instrumentation, and non-telecom business. We are pleased that we can soon begin to put the restructuring behind us and move forward with renewed energy to drive JDS Uniphase to the next level. We believe that we are taking meaningful steps to improve our manufacturing execution, our technology, and our customer satisfaction, while continuing to ensure that JDS Uniphase is a great company to work for. As we mentioned in our last conference call, we are working towards a one company model for JDS Uniphase. In fact, we are ahead of several of our plans. Our centralized [________________] organization is largely in place. We believe this organization is providing our customers with much higher level of service and responsiveness. We continue to make significant progress on the centralization of our general accounting functions as well. We are able to do this in part because of the investments we have made in the past in our IT infrastructure. We have launched several new operations initiatives led by our recently created operations strategy group with participation from each of our business groups. The purpose of these initiatives is to establish a set of standard best practices to be used across the company. Key initiatives include the establishment of a balanced scorecard, the establishment of an outsourcing team, and development of an automation strategy. Our balanced scorecard is a total foster continuous improvement by identifying, measuring, and developing improvement plans for 20 key matrix to capture all facets of the business. The matrix spent, financial performance, customer satisfaction including delivery performance and cycle time; quality, in particularly yield improvements, new product introduction, and people satisfaction. We are currently standardizing on a common language and determining how we measure the performance in developing target performance levels.

Excuse me. Greg, I have to interrupt the call for a minute. We have an indication that there may have been an interruption in the webcast and I would like to hold the call until we can confirm that the webcast is in fact being transmitted properly.

Are we on.

It is working. Please continue.

Well we apologize for the interruption.

Continue.

The balance scorecard is instrumental in establishing corporate-wide improvements and standardization. On outsourcing, as you know we have been moving significant passive components manufacturing to our China operations. Our transfers have been going very well and for the most part are ahead of schedule. In addition to our China operations, we already used numerous contract manufacturers. We have chartered a team to develop a more integrated, one-company outsourcing strategy which will extend our product leadership and cost leadership and provide search capacity for our customers by focusing on establishing strategic partnerships for our further outsourcing expansions and extensions. Regarding our automation strategy. As you know, we have a centralized automation team led by our optical process automation team or OPA. As a part of the strategic development in supply agreement with Adept Technology, we will invest $25 million in a Adept convertible preferred stock and move forward with joint development of best-in-class solutions for component and module manufacturing processes based on the complimentary skills found at OPA and Adept. Independently, we are in the process of prioritizing our automation activities and aligning them with the front-end of our design process. In the product design phase, we are emphasizing a focus on the use of platforms as building blocks and the reuse of existing automation platforms. Finally, let me discuss research and development. Our systems customers are telling us that they need to provide more cost-effective solutions to their carrier customers and our R&D programming is targeted to help them do just that. We are placing a tremendous amount of energy to better understand our customer's network architecture needs. We have already engaged with several key customers to assist in developing the lowest cost architectures for both metro and long haul networks. To facilitate this growing engagement with our customers of the network architecture level, we are continuing to invest heavily in our network test bed group. Some of the specific products that we are working on in our research and development organizations are as follows - For transmission products, modulators, receivers, transceivers, and transponder products at 10 and 40 gigabits. Smaller footprints and lower-powered transponder modules for intermediate and short-reach applications. Mini lithium niobate modulators for smaller and lower cost applications, power efficient high-speed drivers, higher sensitivity receivers. For erbium-doped amplifiers, fast transient response times, standard specification lower cost amplifiers, digital interfaces and integrated Raman erbium-doped amplifiers. For amplifier components, higher power and uncooled 980 pump lasers, 14XX high-powered pump lasers for Raman amplification. Laser-welded platforms for pass of components for higher-powered amplifiers and pump combiners. Multifunction integrated hybrid passive devices for smaller sized amplifiers. And for our network flexibility modules, tunable dispersion compensation modules, tunable gain equalization modules, polarization node dispersion compensators, wavelength-switching modules, integrated MEMS, variable optical attenuators with tunable filter modules, tunable lasers, and Add/Drop multiplexor technologies for 115 and 125 gigahertz channel spacing. Innovation in close collaboration with our customers to meet their current and future needs have been the key ingredients in the success of JDS Uniphase. We intend to continue investing aggressively in our R&D programs to maintain our technology and market leadership positions. To demonstrate that commitment to our customers, over the next few quarter, we expect R&D expenditures to be slightly above 15% of sales. In summary, we are proud of what we have accomplished over the past 3 months. I am particularly impressed by the level of cooperation that I have seen across the company, as we have pulled together this new organization. We are confident that we are emerging as a stronger, more focused company with a very broad product portfolio and an all-star team. Jozef?

Thanks Greg. Now Tony will take you through the first quarter and additional guidance for future periods. Tony?

Thank you Jozef. Let me first give the call, the financial highlights for the quarter. Our sales of $329 million in the quarter were down 45% from the fourth quarter. As Jozef mentioned, we believe this steep slope of declining revenue is largely behind us, and we are beginning to see signs of stabilization. Global Realignment Program charges were $278 million for the quarter. Pro forma gross margin reflected the costs of the global realignment program as well as a write down of $62 million in inventory largely for products becoming obsolete with our new product introductions as well as some higher warranty reserves. Our financial condition remains extremely strong. Cash remained unchanged at $1.6 billion. Although cash plus short-term investments which includes equity securities declined slightly because of lower equity market prices for some of its shares that we hold. We generated $66 million in cash flow from operations. These results demonstrate how quickly JDS Uniphase was able to react to the changing environment and cut cost as necessary. We have remained cash flow positive despite a significant sales decline. More importantly, our operating leverage has improved significantly through the elimination of redundancies, tighter integration across the company, continued improvement in manufacturing efficiencies in the ongoing transfer of products to lower cost, labor cost markets. We expect to have most of the Global Realignment Program cost behind us by the end of December. Now, let me look at the quarter in more detail and let me start with the Global Realignment Program. The total cost of this program is still estimated to be $900 to $950 million of which approximately $800 million was incurred through the end of the first quarter. In the first quarter, we incurred global realignment program charges of $278 million of which $243 million was reported as restructuring, $26 million was charged to cost of goods sold and $9 million was charged to operating expenses. Included in the cost of the Global Realignment Program our charges for obsolete inventory write-downs related to product platform consolidation, accelerated appreciation, and moving in employee cost related to phasing out of certain facilities and equipment. To date, the program has reduced our annual expenses by over $600 million from the levels experienced at the commencement of the Global Realignment Program. By the end of our fourth quarter, the program is expected to reduce annual expenses by $800 million through reductions in manufacturing capacity, employment reductions, product rationalization, and decreased discretionary spending. This is higher than our original plan that estimated annual savings of $700 million. The global realignment program has largely proceeded ahead of plan. Our current employment level with fewer than 13,000 was originally targeted for December, and we are in the final stages of shutting down the facilities identified for closure. Thanks to the dedication and hard of our team, we are putting the restructuring behind us and focusing all of our energy on building a better partner for our customers. What we now provide, additional details on our operating results. Alcatel was our only 10% customer for the quarter. We have revised our segment reporting to reflect our changed organization, as Greg indicated, to one, transmission in network components to a second segment thin film products and instrumentation. Transmission and network components represented $243 million in revenue or 74% of our sales. Thin film products and instrumentation accounted for $84 million in revenue or 26% of sales. Our book-to-bill ratio was below 1 for the quarter because of the continuing downturn, and as we reported in our annual report on Form 10-K, we did experience additional cancellations in September in the September quarter. We incurred charges of approximately $62 million for write-down of excess and obsolete inventory, largely charges for inventory being rendered obsolete by our new product programs. We also incurred higher warranty costs during the quarter. Excluding a small amount of charges reported under the Global Realignment Program, R&D were approximately $64 million or 19.4% of sales for the quarter, down 25% from the fourth quarter. We expect to spend over 15% of sales with the remainder fiscal 2002 on R&D. SG&A expenses excluding the global realignment program charges were $87 million or 26.4% of sales for the quarter. On a comparable basis, they were down 39% sequentially. Interest and other income were $15 million for the quarter. Our pro forma loss was $260 million or 20 cents of share for the first quarter. These results reflect the costs of the Global Realignment Program and charges for the write-down of excess inventory and exclude the cost we have historically excluded primarily those related to merger and acquisition charges. Please note that analysts' estimates for the September quarter technically exclude the cost associated with the JDS Uniphase Global Realignment Program. The pro forma amounts shown above do not exclude such costs. So, please remember this information if you are comparing results for the quarter with first call or I-biz estimates of a loss of 3 cents a share for the quarter. First quarter shares were 1.32 billion. I am pleased to report that our financial strength continues to remain strong in the first quarter. We generated $66 million in cash from operation during the quarter despite the sales decline. Capital spending for the first quarter was $56 million which was below depreciation. We expect capital spending for the entire year to be just over 200 million. The Global Realignment Program used approximately $50 million in cash during the quarter, and this amount was reflected in net cash generated during the quarter. To date, the Global Realignment Program has used 81 million in cash and we expect an additional cash outlay of approximately 200 million over future quarters. Day sales and accounts receivable were 72 days which was as the same as last quarter. Inventory turns for the quarter were 5.7, but really are non-meaningful because of the large inventory provisions we have taken in the fourth quarter and the first quarter. We held $1.8 billion in cash in marketable securities at the end of the quarter, of which 1.6 billion was cash, money market, and other highly liquid fixed income securities. We are shedding under utilized assets, reducing our capital spending, and have even follow the tools necessary to drive improved asset turnover. We are working hard to remain an industry leader in financial strength as well as other elements of our business. As listeners on this call are aware JDS Uniphase has been evaluating the carrying value of certain long-lived assets consisting primarily of goodwill, pursuing with the generally accepted accounting principles or GAAP. Based on this assessment, we did not record a reduction in the carrying value of the company's assets of September 29th, which was the last day of the quarter. The company did record a $42 million reduction in purchasing intangibles, pursuing with actions taken under the Global Realignment Program in addition to amortization for the period. We are still on the downturn; however, the rate of descent is moderated and we believe we can see the early signs of stabilization. The company anticipates that sales for the second quarter will be approximately 10% to 15% for the first quarter as a downturn in the company's market continues. We are not providing guidance for subsequent periods. But the sales level projected for the second quarter, we expect pro forma gross margins will be in the range of 32% to 44%, of sales because of low capacity utilization and the effect of operating leverage and we expect to report a pro forma loss of 1 to 2 cents for the period excluding charges under the Global Realignment Program. Jozef?

Thanks Tony. I would like to thank all of our employees that have performed so admirably during these difficult time. We all look forward to renewed focus to building our company, which is a difficult task or having to ask some of our colleagues to leave. In closing, let me say that I am energized by the level of collaborative engineering occurring between ourselves, our customers, our next generation systems. We believe the value of these next generation systems can provide to service providers in terms of cost savings and new service offerings is compelling and we believe that the carriers will recognize this. The penetration of broadband to the end consumer remains a very low absolute number and that translates into considerable opportunity for the entire telecommunication industry. We are optimistic about the long-term prospects of our company and in our industry. With our dramatic restructuring new product pipeline and a strong balance sheet, I am confident that the team and the structure that we have in place today is well suited to keep JDS Uniphase at the forefront of optical component and module technology. We can now open the call for questions. Kelly?

Thank you. Ladies and gentlemen, if you wish to register a question for today's question and answer session, 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 the handset before entering your request. One moment please for the first question. James Jungjohann with CIBC World Markets, please go ahead.

Well, I didn't think I would get up this high, thank you. Tony, how did you manage to maintain the 1.6 billion in cash? Where did the cash flow from operations come from? Where there any asset sales involved? And then number two, the gross margin guidance of 32% to 34%, is there a capacity utilization that you'd be wanting to share with us, I mean now or, are you below 50% any numbers there?

Let me first explain the cash. We are very prudent in our capital spending. We did not have any significant asset sales. We collected a lot of money from customers and of course we are continually reducing our inventories, and it was just through this blocking and tackling that we were able to generate cash from operations during the quarter. No magic, just a lot of hard work and good business. Greg, would you like to respond to the capacity question?

Hi Jim, on the capacity utilization we are certainly under 50% and for the most part running one shift throughout the company so giving us a lot of leverage when the industry turns back on.

Greg, when the reorganization is done by March, what percentage of manufacturing will be done in China or if you could break up kind of what your goals are using contract manufacturers.

We do not have any specific goal from a contract manufacturing percentages continue to look at that from a strategic prospective in terms of how we want to utilize factories. On China we are running 10% to 15% today, and we would expect that to maybe double at the time of the fourth quarter.

Okay, great, thanks guys.

Thank you.

Joseph Wolf with UBS Warburg, please go ahead.

Thank you. Can you hear me?

I think so.

Okay, I have a question about new segment sales and the way that has been distributed in there. My question is, if any one of you could tell us the sequential declines in the new product categories in the September quarter? It seems like, and go though some of your margins assumptions that we should be thinking about in the new segments going forward?

First, we are not prepared to provide margin assumptions by segment but with regard to product declines the sales for the entire company declined by 45% so I would clear declines. Kelly?

Yes, Mr. Wolf does that answer your question?

There is a lot of static on mu line, but you may want to go on.

Joseph, could you please put your phone on mute.

Okay that's solved the problem. Kelly?

Yes?

Please go ahead.

All right, Robert Tango with William Blair & Company, please go ahead.

Thank you. You have made a number of changes in the last, it has been almost 12 months now, lot of internal restructuring, reducing cost, supply chain management, etc., and it sounds like we are getting to the end of the cycle here. What is management's level of confidence in the reorganize to now handle the new and future demands of their customers, meaning the system vendors, and also if you could give us a sense as what is your current view of the system vendors and their ability to predict their future is a little bit better, and how will their ordering habits possibly change in the future? Thank you.

Let me try to answer the first part of the question. What is very, very important that we engage in [________________] with our customers in the collaborative design. This has been our standard [________________] for the last 12 months, and we are increasing this effort because in fact our customers need to provide products of lower cost, high complexity and only through collaborative designs we can couple to enable them to deliver the products in the new designs in the future. Now, when we look at our customer base, and really our design wins are within the customers in many different levels, and of course as we indicated, we think that the bottom next quarter or in March, we think that some of the pickup from the customers side may occur in next half year or 2002.

There was a question [________________] first question was management's confidence in the reorganization.

I am very, very comfortable and actually gratified with the new organization. Greg is taking great charge in the Global Realignment Program; we are defining our products from the application point of view. The groups are operating in an extremely cooperative manner and across the entire company, and I think we are positioned very well with respect to focusing our R&D and manufacturing to provide the customers what is necessary.

Okay, thank you. You have made a lot of progress, I appreciate it.

Thank you Rob.

Max Schuetz with Credit Suisse First Boston, please go ahead.

Hi guys. Two questions. One, I was wondering if you could comment on what the sales looked like in terms of the geographic breakdown in any particular areas of strength or weakness? And second, if you could give us a little bit of color on the new design wins? You said design win momentums stayed strong? What types of platforms do the OEM seem to be focusing on right now? Is there a particular strength or weakness in different areas of the network metro or long haul [________________] there? Thanks.

I don't have a precise geographic breakdown, although we can confirm that Europe and other parts of the world were keeping up with the United States in terms of the sales decline.

Okay.

I guess Max on the second part of your question with regards to the design wins, I would say that it is going across our application and product portfolio, if we look at amplifiers design wins in some higher levels of intelligence with the erbium-doped amplifiers, we have had some success recently on Raman Amplifiers. On transmission products we continue to work on the 10-40 gigabit transponder so that has been a key area of emphasis. The active component level or the amplifier component level pump lasers continue to do well, particularly if you look at uncooled which reduces the total cost of ownership and then in the network flexibility modules, doing a lot of work with wavelength switching and then tunable components such as dispersion compensators gain equalization. So things that basically give our customers a greater flexibility and allow them to improve the value proposition for their customers.

Thanks.

Joseph Bellace with Jefferies & Company, please go ahead.

Yes. Thank you very much, I had two questions for Joseph and Tony, and I like that name. Who were the top 5 customers in the September quarter if you could identify those? And secondly in the metro market could you give us an update on what percent of revenues in June were less than 10% and how many customers did you ship metro product to in the quarter? And any names would be appreciated. Thank you.

Well Joe, the one customer that we do describe is Alcatel because they are above 10% and the remaining large customers are the same important customers we have had and I apologize if I don't include some customers name, but Nortel, Lucent, CIENA, Scientific Atlanta, Cisco, and Juniper. These were all important customers of ours.

Okay, thank you, Tony, and who were the metro space?

In the metro space we are dealing with all the major metro players I think the, it is safe to say that if you look at the top 5, you are dealing with all the top 5 players that were reported in the metro and playing with a broad range of products within metro.

Can you indicate how many customers you ship products to in metro or whether it is below 10% or above 10% of revenue?

I would probably venture to say above 10% of revenue, and it was in the 5 to 10 customer range which basically covers I think most of the players in the space.

One other thing Joe, let me add that in the metro core, the products technically are often very similar or indeed even identical to the comparable products that are used in the long haul. So sometimes when we are selling to a customer who has a broad product portfolio, a specific product can be used either for the metro core or long haul products but that information is not always available to us.

Thank you Tony.

The next question is from Stephen Koffler with Wachovia Securities, please go ahead.

Thank you. Hi! there. First, I have always tried to figure out the normalized number that is getting harder and harder with the way the industry is going, but Tony, if we took out charges from Global Realignment that effected gross margin, if there were some, I think there were, and inventory charges, what would the gross margin have been for the quarter? And EPS along the same way?

If we take the pro forma results, and I would like to emphasize that we have maintained a consistent definition of pro forma results and we haven't just thrown Global Realignment Programs into the exclusion category, but if we start with the pro forma results, and adjust for the Global Realignment Program costs and the [_______________] inventory charges we would, in tax effect then, we would have had a loss of about 3 cents and the gross margin would have been about 25%, and keep in mind that the gross margin number reflects the additional warranty charges that I referred to earlier.

Okay, so would the guidance for next quarter, is it principally warranty charges that help you get up there?

Well it is not so. We are also saving now at a $600 million annual rate because of the Global Realignment Program that is we will start to see some significant impact from that. Hope so.

Okay. My other question, when last we spoke, the basic idea was that 350 million or something under that was the breakeven, just looking into the commentary it seems like we would have to have some really big improvement sometime in the spring in business conditions to hit that. Could you talk a little bit about what you are thinking is for the potential need for further action as we get into like the late winter, early spring.

Well I would address that question, I mean our Global Realignment Program was formulated on advantage 50 million breakeven program, we have anticipated some level of opportunity with respect to that. We are ahead of the program, and of course as the business oscillate and we have also anticipating the next quarter to be we have some degree of granularity to just consider that we feel comfortable that our program is right on track, and we are going to be within the range what we indicated.

Let me add, let me give this call a little bit of inside information. Originally, the Global Realignment Program was intended to get to $350 million breakeven at a $700 million annual savings rate. As we indicated today, our savings rate is now projected to be $800 million, our annual savings rate. So maybe you could fill in the blanks.

Okay. Thanks.

Jeremy Bunting with Thomas Weisel Partner, please go ahead.

Thanks very much. I was wondering if you could comment even though all of the new products and older products are obviously down. Could you give us a perspective on how much of the revenue in the last quarter was from products introduced say over the last year would it be sort of half, or more than half? Some flavor there?

The product range is really changing very rapidly because as we are cleaving continuous improvement with respect to the product categories and the announcing of new products, we are shipping improved versions of product continuously. Maybe the families have remained the same, but the product specification [________________] better than bringing higher value complex product with respect to all transmitter products and amplifier products. I would say it definitely represents 30% to 50% range.

Okay, thank you. One last question to Tony with the amounts of, what was the level of turns business during the quarter? And do you expect that same level to continue going forward?

Could you define for the call what you mean by the turns business?

Yes, thank you. I would describe it as orders placed during the quarter per shipment during the quarter.

Jozef you want to.....

I indicated in the call that in the current business environment many orders require quick delivery to meet our customers lifetime for systems deployment, and then there are a type of products we have which are design wins more captive offices, qualifications, small pilot line testing. We don't have or we are not seeing regular production orders of higher volume that we used to have indicated by customer interest in replenishing the inventory.

Another thing to keep in mind Jeremy is that when a customer orders parts because the customer does not have the parts in inventory and they want reasonably quick delivery, very often it takes a long time for us to manufacture the parts because they are very often customized as to an individual customer. Now, it may take a month or two months for us to deliver, following receipt of an order, simply because of the technical demands of production and that may cost a quarter boundary. So soon there is some change in the nature of the business, but it would skew any calculations that we might do on businesses booked and shipped during the quarter.

Also, I may add, it really depends on the nature. Active components, the cycle time is longer, and the passive component, cycle time for the new product is shorter. So I think, it may have the same time line of getting the order, but some will get the next while some will remain in the existing quarter.

But I can tell you that we have backlog going into this quarter, and we still had to, as of the 30th of September, we have backlog for the quarter, and we also needed to have some business that we still needed to book for the quarter.

Thank you very much.

Arun Veerappan with Robertson Stephens. Please go ahead.

Yes, good afternoon. A couple of question, but first of all, could you just followup on the previous one. Tony, perhaps a different way to look at is if you could just look at the three-month shippable backlog that you had entering this quarter. What percentage coverage do you have for your guidance of 10% to 15% decline?

We do not disclose that.

Could you share with us how that three-month shippable backlog performed at least on a sequential basis entering the September quarter and entering the December quarter.

Arun, Arun. What is your next question Arun?

Okay. Well let me ask then, if you guys, based on your conversation that you have had with your customers with the intermediary the CEMs, etc. Have you been able to gauge or do you have an idea as to what the end demand level is for your product, obviously, on the shipping to end demand? So another way of putting it is how much of inventory of your products is there based on current shipment rates. Do you have an idea or some color that you could share with us?

Well, we will share with you what we know which is, unfortunately, not very much. Customers are, in the aggregate customers we believe, are using the parts that are in their inventory, meaning they are using more than they are buying from us. We have speculated, as had other companies, both suppliers of optical components and suppliers of IC components to optical manufacturers, have speculated on how much higher their sales would be in the absence of any inventory investment or disinvestment. And we have seen numbers ranging from 25% higher to a 100% higher. Unfortunately, we do not have very good data, although we do have to be very frank in saying that there is still a lot of inventory in our customers stock rooms and that has been depressing our sales, as well as the sales of every one else in our industry, and its going to still have a depressing effect on sales certainly in the December quarter and probably beyond that, although we expect that depressing effect to mitigate over time.

Okay, good. And a final question if I could. Once all of this settles down and you are able to implement the Global Realignment Program fully, where do you think gross margins end up for your company. What are model gross margins, given your mix of actives, passives, modules, etc?

In what sales level.

At 350 to 400.

Well at 350 to 400, it depends of when it takes place. If it is by the fourth quarter, we have had...

Once the alignment program is done.

We would expect the sales to be 40% or something better than that.

Okay, good, thank you.

That would be the gross margins.

That is right. Thank you.

Timothy Anderson with Salomon Smith Barney. Please go ahead.

Yes, thank you. A couple of questions. Tony, I was wondering if you could comment a little bit, kind of, following on the inventory question about component obsolescence. You have been through essentially three quarters of a downturn and wanted to get your read on when components are likely to be become obsolete and no longer a factor in the inventory. Then I will come back with one more.

Yeah, Tim. Hi, it is Jozef here. I think the component obsolescence is very closely correlated with our design wins. So we think that within 12 months, we have a very similar obsolescence rate. Some of the products, of course, may even have a shorter timeframe.

Okay. One thing you did mention on the call is you talked a little bit about future price decline Jozef, and I was wondering if you could address that; give us a little bit more color. When volume starts to return, what is your sense on what types and magnitude of price declines you would expect to see from your customers?

Well, Tim, we have had ongoing productivity improvements over the last five years and ongoing demands for our corresponding price decline. And I believe, the same pressure will continue from both sides of the equation. Clearly, in the process as we are now, some of our customers as they are positioning themselves to come out from the gate with new designs and may be asking higher levels of their overall mode of considerable pricing to be able to come forward through [________________] and they are very sensitive for both sides of their operation to make sure that our market share remains where we need to be, and provide the customers benefit of higher degree complex with their new products. We think that with the new designs and new higher-level modules, we maintain our margins as Tony indicated.

Okay, thank you.

Natarajan Subrahmanyan, please go ahead.

Thank you. A couple of questions, one is a quick housekeeping question. Could you just, Tony, tell us what non-telecom revenues versus percentage of overall revenues? And the second question is, one of the factors, obviously was influence is when the bottom comes is just how your customers business does and in terms of the transport market, it does not feel like we found a bottom for this systems level business. So I am just wondering what you are taking into account on that side when you think about where your business would bottom? Thanks.

First our non-telecom revenue is included in our thin film filteration instrumentation segment, although that includes also the thin film filter activity we have for includes OCLI as well as other products of the company and that includes the thin film filters that are made for use by other parts of our company. In addition, it includes our instrumentation business which is all based on telecom.

The second part of that question was irrespective of the confidence or the compliments that the carrier decline.

Yeah, we believe, that our industry can turn before other related industries. For example, if the optical components in comparison to fiber are expected to turn earlier as additional channels on existing fiber are related. And if you look at our bookings in three segments, two of those segments can start to improve before the third does. The first is filling holes in inventory. Eventually, customer inventories will be depleted or at least will be reduced. Even if their sales remain the same, eventually they will work through their inventories and that depressing effect of inventory disinvestment will dissipate over time. Second, there will be the effect on new products, and we think the combination of these two factors can cause our industry to bottom, and start to increase in the absence of a strong recovery in capital spending. Of course, for us to show strong robust sequential growth rates, capital spending will have to recover. But because of the factors I just mentioned, we believe, that our business can hit bottom and start to come up, maybe not a lot yet, but can start to improve before related industries do.

Thank you.

James Kedersha with Adams, Harkness & Hill. Please go ahead.

Hi, thank you. Jozef, could give us any sense if you look at, you know not even orders, but just coding activity of how that varies by the different segments out there, and what I am getting at it is as most of us might guess is coding activity better than things like metro and switching as long haul. That's like good color.

Well, let me comment on it. I think, we [________________] everywhere. Okay, what we are positioning ourselves looking at satisfying our customers to some sales levels who can provide us an opportunity for an uptake and it refers to combination of all, some of the wavelength monitoring, battery switching fiber amplifiers and it goes across the board, I would say.

Maybe, just to add to that, it goes across several of these questions, but one of the key struggles, I think, our customers are having is whether or not you laid up more wavelengths on a fiber or you come up with a new value proposition with a different architecture and light up the dark fiber, and there is a lot of coding going on to look at that ladder scenario, so different architectures, whether it be higher speeds or more transparency or better wavelength provisioning, and so we have got a lot of designing activity to enable new architectures in this game.

There is a new architecture, you know, what does that imply for components either in amounts or in timing?

It potentially implies several things. One is, more functionality where we can add a lot more value, it implies opportunities for coding, whether be in the longer haul transport as well as the metro because again it's a value proposition that people are bringing to the carriers. The timing, I don't think we have a good answer on just for the fact that I still believe our customers and the carriers are struggling with this question right now also. It does mean there is a lot of coding and a lot of designing activity and we are positioning ourselves to cover that base.

Right, thank you.

Thomas Astle with Merrill Lynch, please go ahead.

Good afternoon. Just for Greg, you know, I am quite interested in your comments on customer inventory and obsolescence question, and a lot of them have written off large amounts in inventory, but have you seen any, sort of, concrete evidence of them actually designing out old designs, designing in new ones, and that's how eventually finding its way into the dumpster? Anything along those lines and any difference between actives and passives in the rate of obsolescence and do modules have a role to play here in that?

I guess, I'll go back to answering the last question that we do see customers that we know are carrying inventory also looking at a new architecture which would obsolete quite a bit of that inventory, and if someone were to leave from 10-14 gigabits or if someone were to go to a higher level of functionality to have a better value proposition, then that would happen quicker.

Okay, and between passives and actives, would you differentiate there between operative obsolescence?

My comment would be that with passive components, and if you can provide higher degree of intelligence, you could come up with new functionalities and this has been much easier than with active components, of course. So, I think you tend to have combination when you look at the network architecture to offer some combination, which allows lower costs or more architectural opportunities with some of the combination of passive and perhaps even some transponders activities.

Okay, thank you.

Susan Streeter with Sprott Securities, please go ahead.

Thanks, good afternoon. Tony, I am just wondering if you can provide me with a little bit of detail. Previously, on the last conference call you suggested you could get back, sort of, a gross margin at 35% to 40% on a revenue run rate of approximately 350 million, the guidance for next quarter suggests that you are approaching that level at a much lower revenue run rate, and I am just trying to understand what the dynamic has been, is that just another function of the restructuring costs permitting greater annualized savings?

Yes.

Okay, thank you.

Kevin Slocum with SoundView Technologies, please go ahead.

I think this may be Jozef that I am addressing this to, but Greg if it's yours, grab it. With this restructuring and this new customer approach, I am just wondering if you can help us a little bit with how your customer phasing is changing or impacted?

Well, look Kevin, I mean, you have to look at the situation where there was a whole plethora of VC funded startup system company, and while I am a great believer that a customer is a king and we must support everybody, but you know in this new environment, we also need to take into effect who is going to survive and who is going to have an opportunity to benefit from all design and R&D activities. At the end, what is very important is our ability to get some revenues and our ability to all startup companies to get some revenue. So, when you look at that when we are designing new products, we are spending R&D money with a hope that we would get some sales and so by partnering with our customers and those who we have had [_______________] believing we have a plenty of opportunity [_______________], we are leveraging at this downturn intellectual ability to address the opportunity which we may have at hand.

I guess, Kevin, and to add to what Jozef said, the other thing that we have done with this organization is by aligning more along the applications as opposed to product lines that are basically acquisitions like we have in the past. We are bringing more of an application cell to the customer and having people talk across our capability as opposed to a person peddling photo detectors and a person peddling source lasers and not having a coordinated story and so, Scott Parker, our Vice-President of Sales did a great job of integrating the sales force and he has got a very good single phase to the customer structure in place now, and these new business groups that we've established are putting together stronger marketing organizations to look at application selling as opposed to everyone selling a widget.

So if you took a big account like Nortel as an example, you've taken your headcount and it's less than half. The sales, contact with that account has it been cut by larger than half, I am just, sort of, curious how.........?

No, I think our sales force in the restructuring has, well, it has been downsized a bit, it has not been downsized anywhere near the level of the rest of the company, and a lot of the sales force cuts in SG&A resulted from this centralization of the customer service operation so as an efficiency improvement in the shared service model.

All right, I just wanted to, I am not very good with compliments typically, I thought you guys did a great job of going through the structural change and helping us through what you've been up to. Thanks.

Thanks Kevin. Kelly, I think we have time for 2 more callers.

All right. [________________] with BMO/Nesbitt Burns, please go ahead.

Thank you very much. A couple of questions. First I wonder, and then I would probably come straight forward to come up with this, if you could tell us from the beginning of the year to now the dollar volume decline, how much of it would have been due to unit volume, and how much would have been due to pricing? And secondly, if you could tell us if your sales to pre IPO startup companies, venture back companies had been increasing or decreasing at the year has gone along?

As far as with regard to our decline, walk through any of our factories and you can see that it a unit decline. Our prices have come down, they have come down every year and every quarter, in good times and bad, but this downturn is driven overwhelmingly by unit sales declines.

So 80?

Oh no, no, no, no. No more than that. More than that is based on unit declines.

Okay, so pricing has been a very small portion of your decline?

Oh, absolutely. Walk through any of our factories. If a customer has too much inventory, he measures the inventory in physical units.

But, you know, we went from 29,000 people to 28,000.

Yeah, and I don't recall your second question Paras?

What percentage has your sales to pre IPO venture back, startup whatever you to call them, have they increased as the years come along or like what's happened to that?

I think that we have gone up a little bit because the percentage of sales as represented by our top 10 customers has declined, it's still more than well over 50%, but it's declined somewhat from what it was in prior periods. We have not analyzed it preciously the way you have asked the question, but I think our sales to the emerging new systems companies has gone up somewhat. Clearly, there has been a big increase over the last few quarters in the number of such companies, and I am sure that we've had some additional volume in sales to them, but I don't have the data, we just look at it preciously the way you asked the question Paras.

Thanks very much.

Raj Srikanth with Deutsche Bank Alex Brown, please go ahead.

Thank you. I have a very short question. The arrangement and investment in Adept technology, is that an exclusive deal with JDSU or are they are allowed to make equivalent for others as well?

There are certain elements of exclusivity and certain elements of non-exclusivity. Any thing that has developed through our cooperative relationship is available only to JDS Uniphase were applications and fiberoptics. Adept is free to sell those products or non-fiberoptic applications outside our industry. Otherwise, both Adept and JDS Uniphase are free to conduct their business however they choose.

Thanks. On another note, hey, congratulations on watching that cash.

Thank you very much.

Thank you, I am getting a lot of help.

Let's take 2 more questions....

You only got 2 more? Okay, you are having fun.

I am having fun, but I got to catch my plane very soon okay.

All right. Kelly, let's continue then.

All right. Arnab Chanda with Lehman Brothers, please go ahead.

Thank you. Just one question to clarify the gross margin that you reported this quarter. The fact that if looked to your guidance I assume that the gross margins will actually go up by almost 10 percentage points, what does that assume, is it basically closures of factories that's occurring there or is there something else I am missing? And then margins were almost half from June to September, is that basically the same issue there? Thank you.

Well, our guidance would assume that the normalized gross margin would go up between 700 and 900 basis points, so by 7% to 9%, based on a couple of factors. First, dramatic reduction in costs, it's not just shutting sites, it's reducing other kinds of costs, greater purchasing efficiencies, and many other elements of our manufacturing cost structure, and also there were some other costs, particularly some warranty costs that were higher than we normally expect this past quarter then we would not expect those to be here next quarter. One more last question. I am sorry Arnab; did we answer your questions?

Yes, thank you.

Thank you. Kelly, last person.

Jane Dragone with CE Unterberg Towbin, please go ahead.

Thank you. Tony, any guess on where you think the level of quarterly revenue run rate gets to once growth resumes? And don't say you don't know. You can't say that.

Well, I'll just ask you, when? After how many quarters of growth?

Well, I mean, is it closer to 450 million or 650 million?

Well, depends on how long we grow. We certainly do not expect to turn around immediately and go back to $600 million or anything above that, but we still think this is a business with a lot of long-term growth and the sales levels we are seeing now are depressed because of inventory liquidation by our customers, but we think that our sales ultimately will recover to a number substantially higher, but we have to figure out what the time horizon is as is associated with your question.

This is a good opportunity for me to express my enthusiasm that I think we are positioning the company very properly resized when there is a leverage, we are applying the leverage when the rebound occurs, and I think this has been very difficult for us, but I think what we are doing now is positioning for our future as this happens.

Okay, when do you think you see a match between system-vendor shipments and shipments from yourself or other OC vendors?

When do we think inventory liquidation will be? Sometime in the future...........

Any more specific than that Tony?

No, I can't. I think that our sales can begin to grow again before the inventory liquidation is completed at all of our customers because our customers went into their inventory liquidation at different times over a period of about 2 or 3 quarters. So, we just don't know enough to be able to predict that today Jane.

Okay, and one last question, did you generate cash last quarter as well?

We have generated cash from operations for many, many quarters in a row.

Okay, great. Thanks a lot.

I think, I am afraid, Kelly we may need to finish up this. I want to thank everybody for participating on this conference call and this was a very fine quarter. I look forward to seeing you on December 11 in our Investor get together.............

Yeah, we will be webcasting a full day of presentations by all the managers JDS Uniphase and it will be webcast on our site on Tuesday, December 11, 2001, and we hope you can all join us. Thank you very much.

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