Viavi Solutions Inc (VIAV) 2002 Q4 法說會逐字稿

Welcome to the JDS Uniphase fourth quarter and year-end 2002 conference call.

During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the Q&A session. At that time, if you have a question, please press the one followed by the four on your telephone.

I would now like to turn the conference over to Dr. Jozef Straus, Co-Chairman and Chief Executive Officer of JDS Uniphase. Please go ahead, sir.

Thank you, Christie. Good afternoon. Welcome to the call. I am here with Tony Muller our Chief Financial Officer, and I am pleased to introduce you to Syrus Madavi who has joined JDS Uniphase as President and COO.

Regrettably Greg Dougherty has decided to leave the company to spend time with a seriously ill family member. Greg has been a great leader at JDS Uniphase, and we will miss him and our hearts and best wishes are with him and his family.

Today we would like to discuss with you our fourth quarter results, review some key elements of operations and report the status of our global reallinement program.

I will throwout an overview of the market and business and Tony will review the financial results. First I will ask Tony to review the safe harbor statement.

We would like to advise you that our report and the discussions we will have today include forward-looking statements. Forward-looking statements are all statements we make, other than those dealing specifically with historical matters.

That is our historical financial results and any statements we make about the conduct of our businesses operations and finances up to this moment. Our forward-looking statements include any information or projections we provide on future economic conditions, industry trends, business operations and financial guidance.

All forward-looking statements mentioned are subject to risks and uncertainties that could cause actual results to differ 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 our press releases, and the securities filings of the company with the SEC, particularly the risk factor session of our form 10Q filed for the quarter ended March 30, 2002.

We undertake no obligation to publically update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

Thank you, Tony. I now have the pleasure of introducing our new President and COO, Syrus Madavi. I am delighted he is joining JDS Uniphase. He brings considerable strategy and operational leadership talents that he has applied to global multifaceted businesses. Each business emerged with a relentless focus on customers, markets and applications and achieved exceptional financial results and market presence. These are exactly our objectives as we size the company for current market conditions and prepare for future opportunities. We are getting a leader with the talents required for these challenging times.

As a senior Vice President at Texas Instruments, he managed the business with over 1 billion in sales that consisted of several acquired companies and existing business units. He reorganized the business based on competencies and target markets that included fiber optics and wireless communications.

As Chairman, President and COO of Brown Corporation, he manufactured of analog and mixed signal integrated circus, he increased the value of the company by emphasizing and capitalizing on R&D, holding market focus to among others high speed communications including integrated circuits for DWM applications, wireless base stations and DSL.

He led the company to a more than three-fold increase in sale in its core businesses from operating losses solid profitability. Under his leadership, the company's valuation increased from $100 million in 1994 to over $7 billion in 2000 when it was acquired by Texas Instruments.

Most recently he has been serving as an Executive Chairman of [INAUDIBLE]. A manufacturer of data management, semi-conductor components, and standard semi-conductor components. He will now become the loan Executive Chairman of [INAUDIBLE].

We all come from communication, and semi-conductor industry background. Management experience and leadership that he brings to JDS Uniphase. Now you know why Syrus, the new President, COO to say a few words.

Thank you, Jozef. I'm very pleased to have joined JDS Uniphase as I see many great opportunities for the company. One, we are in a very difficult business downturn, I believe that JDS Uniphase's long-term opportunities in fiberoptics, telecommunications, data communications and the optical technology products for other markets remain bright.

I believe that JDS Uniphase has the resources to remain a leader. With its customer relationships, talented people, advanced technologies, strong manufacturing and financial strength. I look forward to working with Jozef and the many talented leaders throughout the organizations, as we meet the challenges and opportunities of our business.

I have, of course, much to learn about JDS Uniphase, and we must act quickly and decisively in the current market environment, but with the help of the JDS Uniphase team, I am confident we can meet the challenges of today and tomorrow.

As Jozef will describe later in the call, business conditions mandate that we continue with our global realignment program while when invest for the future. And I look forward to reporting to you on our progress in future meetings and calls.

Thank you Syrus. I will now review the general status of the market and the company.

Company sales for the fourth quarter were at 222 million, down 15% from the third quarter. Our 2002 annual fiscal revenue was 1.1 billion. The market downturn has taken a heavy toll and the foreseeable outlook for new orders in telecommunications beyond our first quarter remains flat.

Demand continues to be weak in our long haul and out of long haul telecommunications markets. Consolidation is continuing among carriers, system providers, and component manufacturers. We believe that consolidation is essential for telecommunication industry to return to health and to be able to build an efficiently managed networks needed for continuously increasing traffic.

On the down side, we expect additional attrition of our small customers as the difficult market conditions continue. However, the company's breadth of customers covers the entire optical communications market providing balanced exposure to the various segments. Even with the difficult market conditions in long haul and auto long haul telecommunications, we have various relative strength in other telecommunications segments. Stability in [C.A. TV], and continued growth in data communications. We believe our recent entry into data communication markets with the acquisition from IBM. All increased R&D and transmission products and our strong customer relationships give us upside potential in these generally robust market segments.

Sales have been either stable or growing for our 10 [FIELD] products group. This group has made significant contribution to our business. Growth areas where sales have been increasing for our optics products include projection display, security and medical, environment instrumentation markets.

Sales have been relatively stable for commercial lasers for biotechnology, graphic cards and imaging, semi-conductor processing and other applications. We continue to take significant action to rely on our scale of operations to existing market conditions. This requires cutting some prior clients and similarly cutting R&D and others, so that in aggregate we can maintain or increase our [REALTY] investment in the most promising opportunities and must follow our market.

We have continued to reduce costs through our global realignment program while retaining competencies in what we believe are the enabling optical technologies required to address current and future needs in our key markets. In response to the prolonged downturn, we believe we are taking prudent steps to lower our cash break-even, defined as operating results for depreciation and other non-cash charges to 200 million per quarter through actions that we plan to complete over the next 18 months.

We are reducing costs in every fundamental area of the company. For example, we expect to reduce or I.T. costs dramatically by restructuring our lender relationships while improving the support provided to our users.

A critical aspect of the global realignment program is the [INAUDIBLE] products and knowledge [INAUDIBLE]. Our integration of [SYRUM] and the subsequent consolidation of the Columbus and San Jose locations including the transfer of knowledge have gone so well, that we have advanced the closing date of Columbus by a month from September 30 to August 30 resulting in additional savings. Our employees are to be commended for the professionalism and efficiency. Employee reassignment and training for the transfer of manufacturing to our facility has progressed well.

We expect to be manufacturing all our components in the high percentage of our margins for fiberoptic communications at this facility by the end of fiscal 2003. We believe the decision we are making today will allow us to leverage our cost strength in optical technologies and to invest in the most promising market opportunities for those technologies in the future. These include certain opportunities in fiberoptic communication markets, as well as those in other markets such as display, security and medical environmental instrumentation.

We see ongoing design activities most major customers involved system market [INAUDIBLE] cost platforms [INAUDIBLE] reduced costs, these customers are moving toward our integrated WIDM solutions, multi source agreement design tran receivers and tran responders and simplified but scalable amplified platforms. We expect to invest heave -- leveraging our strength in components and in module design and packaging to produce products such as transreceivers -- in telecommunications markets our sales of 2.5 gigabyte tran responders have been increasing and we are introducing new models.

In data communication markets sale increased over the prior quarter and we have [INAUDIBLE] in January. Our impact 10 gig byte receiver is now in qualification. We have already received others for evaluation units for this product and designs in activities progressing at several accounts. Development programs are creating sins we now data communications telecommunications 2.5 and 10 gigabyte products. Expertise in developing high performance product for telecommunications is helping us to achieve much longer reach for data communication products.

Conversely, our success in producing low cost high reliability hot pluggable package for data communication is being applied to telecommunication products. Our portfolio of transreceivers and transponders are the broadest in the industry includes products for Enterprise, Land, San [INAUDIBLE]. Other areas of relative strength in communications markets include CATV for a fourth quarter bookings increased from the previous quarter.

We have increased design win activity, especially for -- and for defense applications including target links, sensor rays and secular communication between buildings. We believe that [INAUDIBLE] technology has great potential to dramatically decrease the cost of future fiberoptic communication products. With the acquisition with [SYRUM], we have brought together advanced development and manufacturing capabilities. As a result, we have accelerated development of components as the integrated multi function devices.

JDS Uniphase has a leading position in bay one blockers, switchers, optical performance monitors and [INAUDIBLE] models.

We believe these are key products for linkage our networks which rely on all carriers to manage the signals of different wave electronics in the optical domain which will be, in the long term, the more -- makes the network more efficient. We are shipping our standard amply fires overseas and also have several custom design wins. [ INAUDIBLE ]. Built on simplified platforms that are scalable, flexible to performance needs for a white variety of applications.

We are intensifying our investment to utilize our core competency for various markets. With some of the alternatives we are all facing in the world today the company has seen some strengthening in our security and medical environment instrumentation businesses. People are investing in new entertainment systems for their home leading to in. [ INAUDIBLE ]. Governments are seeking ways to keep their valued documents secure. Consequently, our sales have increased for. [ INAUDIBLE].

Our strength in optic technology. [ INAUDIBLE ]. Resulted in the introduction of spec la flare, the first [INAUDIBLE] color shifting pigment. It was awarded the new product of the year by the association of. [INAUDIBLE]. We have already begun shipping to customers in decorative and. [INAUDIBLE]. In response to the need to provide greater brand recognition and differentiations.

Optical technologies using medical and environmental instrumentation have a broader applications. The combination of the [INAUDIBLE] has resulted in small, stable UV laser for -- this is a very promising program, and we have already sold some products and have design wins. a Key ingredient in our strategy for success and ingrained in our culture is our continued focus on our customers.

Our customers are undergoing difficult changes, and have to adapt to a very different set of net he work needs and economics. They need to reduce their cost and design more than ever to absorb design and be able to purchase higher level, more integrated modules. As a result of our close working relationship with our customers, we believe we are able to coordinate our development closely with the future needs and provide the added value that will reduce the cost and speed the time to market.

We are making great use of the -- online program to maintain communications and provide customers while also reducing costs. For example, we recently introduced JDS Uniphase university and on line with over 30 courses in fiberoptic technologies and products. In only 90 days 2600 people have registered and have returned on average 2.5 times. We plan to expand the program to include other areas of business.

Finally, you may ask why I believe telecommunication has potential? Apart from economic woes and the current renormalization of a market, the need and desire -- desire remains for broadband applications with a seemless network -- the industry must refine and further develop its business models and approaches to enable them to provide attractive economic deterrents. In the meantime the Dees to apply our competency in those businesses which have a leadership position as they will be the engines that can drive our customers and us forward.

Again, I am pleased that Syrus has joined us, and I look forward to his contributions to JDS Uniphase.

Thank you.

Now Tony will review the financial results.

Let me first review the key financial numbers for the quarter. Sales of 222 million in the quarter were down 15% from the third quarter and near the mid-point of our sales guidance.

Pro forma gross margin reflected the continued decline in sales of profitable component products, the cost of the global realignment program the impact of considerably smaller purchase volumes. The net effect of inventory charges and the use of inventory previously written down and the overall effect of lower volume.

Our financial condition remains strong. Cash and short-term investments at the end of June were 1.45 billion of which over 1.4 billion was in cash and short-term fixed income investments, essentially flat from last quarter. We generated $14 million in cash from operations.

Looking at the quarter in more detail, let me start with our operating results. Sales to North American customers in the fourth quarter represented 73% of total sales. European customers 16% and Asian customers over 11%. The fiscal year these amounts were 74%, 18% and 8% respectively. We had no 10% customers for the quarter. Lucent represented 15% of sales in the fourth quarter, although without cancellation charges, they would have been well below 10%. Sales included cancellation charges of $21 million or just under 10% of sales.

This was contemplated in our guidance for the quarter. Please note we wrote off inventory in connection with these cancellations in prior periods, but only recognized such revenue upon receipt of customer payment. Transmission and network compensation represented $132 million in revenue or 59% of total sales. Revenue in this segment was down 27% sequentially.

Instrumentation accounted for $89 million in revenue or 40% of total sales. Revenue in this segment increased 10% from the third quarter because of strong demand for display products including projection display components and interference pigments. Sales of our non-telecommunications products represented 38% of total sales for the quarter. Please note that our non-telecommunications businesses as a group are profitable for the quarter.

Modules, in other words collections of components in a single package or on a single board represented about 50% of total communications sales for the quarter. Our book-to-bill ratio was slightly below one for the quarter and up slightly from the prior quarter. Our year end backlog was $179 million.

Our results reflect the use of 17 million in previously written-off inventory, although we reserved other parts in slightly higher amounts agency I'll discuss in a few moments. Our pro forma gross margin, including realignment and other charges was minus 6% of sales.

Pro forma gross margin includes the benefit of cancellation revenue and the sale of inventory previously written off, global reassignment program charges and inventory writedowns. Excluding these items the pro forma gross margin was minus 4%. This is lower than expected because of the lower margin product mix, in particular lower sales of high margin telecommunications components.

Lower purchase volumes, higher mix of data communications transreceivers where we are investing in higher market share and sales of certain non-telecommunications products. Excluding global realignment program charges, R&D expenses were $48 million or 22% of sales from the quarter, down 8% from the third quarter.

SG&A expenses excluding global realignment program charges were $57 million for the quarter or 26% of sales for the quarter. SG&A expenses were down 12% sequentially. Interest and other income was $12 million for the quarter.

Our pro forma loss was 140 million or 10 cents a share for the fourth quarter. These results include the global realignment program costs, charges and benefits related to the writedown of inventory and exclude the costs we have [INAUDIBLE] excluded from pro proforma presentations, primarily those related to merger and acquisition charges, as well as the reduction in the value of long-lived assets.

Please note that analyst estimates for the June quarter typically include the costs associated the pro forma amounts shown above do not exclude such costs. For the fourth quarter outstanding shares were 1.365 billion. Please note that in early July we issued 39 million shares to Phillips Electronics representing the payment of the contingent consideration payable in connection with the acquisition of our [INAUDIBLE] operations in 1998.

Let me provide additional details on the global realignment program. Total cost of the program are estimated to be $1.2 billion of which approximately 943 million was incurred through the end of the fourth quarter.

In the fourth quarter, we recorded net charges of 67 million of which 20 million was charged to cost of goods sold and 47 million was charged to operating expenses. Included in the cost of the global realignment program are charges for accelerated depreciation and moving an employee costs related to the phasing out of certain facilities and equipment and the requalification of parts at their new locations. To date actions taken in the global realignment program have reduced annual expenses by approximately a $955 million annual rate, and our current employment is slightly above 9,000 today. Over the next 18 months, we expect to reduce our annual expense rate by an additional $160 million.

We are completing plans to reduce our operating cash flow break-even to $200 million per quarter over the next 18 months. This would imply a pro forma operating break-even of approximately 260 to $270 million in quarterly sales. Our financial strength remains considerable. We have 1.45 billion in cash and marketable securities at the end of the quarter of which just over 1.4 billion was cash, money market and other highly liquid fixed income securities.

Base sales and accounts receivable were 55 days for the quarter as compared with 57 at the end of March. This important measure has continued to improve in recent quarters. Global realignment program used approximately 22 million in cash during the quarter.

To date, the global realignment program has used approximately 190 million in cash and we expect additional cash outlays of approximately $300 million over future quarters and years. Our net inventory level declined 21% during the quarter. We generated 14 million in cash from operations during the quarter, including the cash used by the global realignment program.

Approximately $45 million in tax refunds we received during the fourth quarter favorably affected our operating cash flows. Capital expenditure for the quarter was 19 million. Year-to-date 133 million. As -- let me turn to long-lived assets.

As we have done for several quarters, we again performed an assessment of our long-lived assets. This resulted in 740 million in reductions of long-lived assets for the quarter. Of this amount, 242 million related to fixed assets. This amount reflects lower industry analyst forecasts for our industry, lower forecasted sales for us, and further delays in our anticipated recovery.

The company anticipates sales for the first quarter of fiscal 2003 will be 200 to 210 million including cancellation revenue as the downturn in the company's markets continues. We do not anticipate recording anymore significant cancellation revenue after the first quarter.

Much of the forecasted revenue decline is in components, typically among the company's highest margin product lines. Therefore the sales levels projected for the first quarter, the company expects pro forma gross margin will be in the range of four to eight percent of sales with a pro forma net loss of 6 to 8 cents a share for the period excluding charges under the global realignment program.

We anticipate using approximately 250 to $300 million in cash in fiscal 2003 based on our expectations for sales, realignment program, cash costs, capital expenditure of 75 to $100 million and anticipated Cap Ex refunds.

Please let me add one final note. Some time ago, I advised Jozef and the board of directors of my plans to retire by the end of the first calendar quarter of 2003 during which I will turn 60. The company has begun considering candidates to become the new CFO at JDS Uniphase and I am assisting Jozef and the board in this effort. Jozef?

Thank you, Tony. Before concluding our prepared remarks, let me give you our thoughts on -- we have always endeavored to maintain the highest standard of busy [INAUDIBLE] in all that we do and all the years have developed policies and practices in support of this.

We have government policies and leadership by example that our colleagues have practiced. And nonexecutive chairman of the board has lead our board of directors and we have had an active and demanding board of directors with audit, compensation and governance committees composed of. [ INDISCERNIBLE ].

Who meet the standards that are now being proposed and mandated. In these times when there have been some serious lapses in et cal and government practices at some companies, we will continue at the it most to continue the high et cal standards practice at JDS Uniphase. JDS Uniphase continues to prove itself as a committed, strong and resilient company that has distinguished itself by its ability to adapt in extreme changes in market conditions for the past few years. This makes me feel proud and I give credit to the leadership team, our organization values and employees who per ser veered for this opportunity. We now open the call for questions. Thank you.

Thank you. Ladies and gentlemen, if you wish to register a question for today's Q&A session, you will need to press the one followed by the four on your telephone. You will hear a three-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 one followed by the three. If you are on a speaker phone, please pick up your hand set before entering your request. Please limit yourself to two questions only. One moment, please for the first question. Our first question is from David Jackson of Morgan Stanley. Please proceed, sir.

Thanks very much. Good afternoon Jozef, Tony and Cyrus. Question for Tony. Is your gross margin and particularly the guidance for next quarter looks weak compared to what we were modeling. Stripping out the 20 million restructuring costs that you mention that's in the gross margin, you still seem to have very weak gross margins. Could you talk to us a little bit about what's going on with the deterioration and why you would expect that to persist into next quarter? And a quick follow-up for Jozef. Jozef in your discussion about corporate governance you didn't talk about stock options. What are your thoughts on the stock option question? Have you considered whether JDS Uniphase will expense stock options?

Let me first speak to gross margin. There have been some very powerful forces that have been affecting our gross volume. First volume decline, although our sales did not end up where we had expected them to be. The biggest single factor has been the tremendous drop-off, the tremendous decline in our components business that have been very profitable. Those are businesses that are highly leveraged, those are high fixed cost businesses with relatively low marginal costs. I would say that is the factor that has most affected us. In addition, our restructuring programs have become somewhat more complex. It's not a matter of just shutting down factories where we have redundant products duct lines. And we are being very, very careful as we assess the next major rounds of our global realignment program to make sure that we can continue to meet our customer commitments, maintain the intellectual property, maintain the -- keep people within the company and make sure we have an orderly transfer. It's a combination of all these factors. The reason we expect the gross margin to begin improving in the first quarter is because we do expect to see some of the early effects of the significant cost reductions we have been implementing. Jozef?

David, hi. I don't want to engage into the debate on the controversy. They are clearly different camps how the stock option should be handled. Clearly we'll do wafer is necessary when regulations or recommendation tells us what needs to be done. Suffice to say that the stock options the costs are associated, disclosed in footnotes, and I would like to leave it at that.

Okay. Thanks a lot to both of you.

Our next question is from James Johan, of CIBC World Markets.

Hi, guys. Just a couple of verifications here. The 21 million additional this quarter in revenues from the take or pay was that all Lucent?

These were not -- this is not take or pay. These were cancellations.

Okay.

And it was not all Lucent.

Okay. But you do expect some more of this to continue into the next fiscal quarter?

Into the first quarter, yes. And thereafter all of the outstanding cancellations situations we expect to be resolved.

Okay. Then the other number I just want to get clear was the new revenue break-even run rate. I think, Tony you said 260 to 270. It sounded more like 200 from Jozef. I'm guessing the 260 to 270 is the correct number. If it is, I guess my next question is over 18 months is that really a level where the company should be if the run rate is still, you know, around 200 million?

The principal guiding factor for us now is to manage the business for cash. $200 million number that Jozef mentioned is operating cash flow break-even. 260 to 270 I mentioned is pro forma operating profit which is the accounting profit. So those two numbers represent the same economic model. As to where we would be if -- over the 18 month period where it takes us to get to 200 million in operating cash flow he break-even, if sales were not to recover over the six-quarter period, I strongly suspect we would be making changes. You may recall that three months ago we had set our objective at operating cash break-even of 250. And now in the space of three months we have advanced that objective further from 250 to 200. So we will continue to modify and adapt as circumstances dictate.

Okay. Okay. One last one. That is kind of the experience with your OEM's currently, and in respect to modular type of sales, you said it was roughly 50% of com sales. Obviously this is hitting the OEM's very hard. Are you seeing more and more of their -- them looking at getting rid of it on captive production and outsourcing more? Especially on like the full tran responder, et cetera? So essentially could you actually see some sales growth as the OEM's continue on outsource?

James, this is Jozef. Clearly this was always our strategy of having our components, we always wanted to come to our customers and offer them modules of high degree complexity as opposed to individual jelly beans. So I think, as the situation continues to remain uncertain, our customers just as well are looking at suppliers who can provide an ability to provide the products with a high degree of complexity and as well as provide an opportunity to provide additional higher value. I think we will continue to engage in this strategy, in fact, very much engaging with customers in terms of partnerships in the design-ins and the optimization of the networks or products for the network so that we have a proper understanding of what to make and design.

So, Jozef, would you say that that outsourcing trend is accelerating above, you know, kind of where you thought? And, you know, are you benefitting? Or are more of these optical layer types of stuff going to contract manufacturers?

At this stage these are small opportunities, but I think on the whole, we will be benefitting, and I think they will, to some degree, accelerate on the coming months <M>

you haven't seen the evidence quiet?

Um -- I wouldn't want to be as specific as that.

I appreciate that.

I'm optimistic, how about that?

Thanks, guys.

Next question is from Joseph Wolf of UBS Warburg.

Thank you. Good afternoon. Two questions.

One is, when you look at the non-telecom portion of the business, it looks like the operating margin, actually was down in the quarter. I was wondering if you could comment on that?

Jozef you did a good job of running through some of the opportunities that exist outside of a traditional telecom and I was hoping you could talk to those opportunities in terms of focused investment and whether you have taken R&D professionals away from telecom and shifted them into the non-telecom business?

And then, you gave a little detail on the data come portion. Can we estimate the sales tracked industry trends or can we be more specific for the growth rate in that business unit?

Thanks.

Let me speak to the operating profit in the non-telecom business. Keep in mind that what you see on the statement showing the segment breakdown is GAAP numbers, and that has impairment charges and M&A charges in it. Included in it clung some earn-out provisions in it in one of the acquisitions. This is really caused by a lot of the information that's required under GAAP reporting. It's not truly operating data.

Joseph, clearly the non-telecom side of business, what we are using our core competitors in the [INAUDIBLE] thing to provide higher value, I think this business has suffered and, in fact has prospered in this environment and we are going to put every effort necessary to support it to grow Andy to make it continue in the leadership position. As to the question where we have shifted. [ INAUDIBLE ] Best people to meet the necessary demands. And are able to meet the R&D and the business demands. Clearly we will continue to evaluate that and staff it appropriately. But again our strategy at this stage is to continue leadership in those aspects wherever you are growing business. And this non-telecom. In data come, I think, just not having numbers at my finger tips, my thought would be that we are moving pretty well along the lines as we Ned Kated in our couple of calls ahead and we are very glad that we made this acquisition.

Just a quick follow-up on Tony. So if we can't look at that operating profit, what should we assume about how that business is doing from a profitability standpoint right now?

The profitability has been consistent over the last couple of quarters.

Thank you.

Next question is from [PING XIAO] of Sanford C. Bernstein and Company.

Hi, how are you? Couple of questions. How much cancellation charge would you expect for the September quarter?

In the range of 10 to 20 million.

10 to 20. Could you give us a sense what the end market segment right now? For example cable T.V., how much percent of revenue that represents versus how small the metro space you still have?

Well we don't break out the individual end markets because, quite frankly, since there are products that we sell to customers who sell into multiple segments, we don't always have the best data. But that data, we also preferred not to give too much specificity on that data to our competitors.

Okay. Next question. How is your order patent in the last few -- last month look like?

In the last month?

Yeah. You do track weekly order pattern?

We track it hourly, PING. [ LAUGHTER ]. But we he only report it quarterly.

Okay.

As I indicated our book-to-bill ratio was below one, but not very far below one. And the book-to-bill ratio as compared to the third quarter was up. Will the -- do we expect the book too bill ratio hit unit in the first quarter? We are not sure.

Okay. Last question. As you mentioned that you would like to increase the module content in your revenue, module alone without the components inside, actually have a very low margin. How do you manage that margin part of the --

This is exactly the strategy we are pursuing. Indeed what we have when we merged with un phase, JDS Uniphase we have. [ INAUDIBLE ]. Serving great base in our component leadership for to maintain fiberoptic amply fire development. We believe that to be a strong player in the data come and manual business, you must have the underlying technological discriminating -- discriminating devices, which provided they have the cost structure to maintain our leadership. I think the greatest debate in our discussion now in the realignment and how to position ourselves together preserving the intellectual property in the company and. [ INAUDIBLE ]. To provide. [ INAUDIBLE ]. While providing the technological leadership, the discriminating technology and the cost factor is what is required.

Thank you.

Next question is from [NATARAJAN SUBRAMIAN].

Hi, [SUBU].

Hi. Couple of quick questions.

Jozef, early in your comments you mentioned something about orders in the first quarter, I understand, being flat from those levels for optical components. Could you clarify what you were talking about? In terms of the non-telecom businesses in the first quarter, September quarter, what would you expect that becomes as a percentage of revenue? Thank you.

Well, perhaps I can help with that question, [SUBU]. If we were to strip out the cancellation revenue, which I indicated was -- we expect to be somewhere between 10 and $20 million in the September quarter, [INAUDIBLE] and we look at the next few quarters, our business for our favorites are that our business is flat. We did not provide guidance, we did not use that language in our guidance because we still don't have a lot of confidence in our forecasting ability because our businesses have changed and continue to change. But we may be seeing the early signs of a bottoming or stability. Certainly no signs of an upturn. But some signs that our business is reaching some level of stability. If we wer to take the advance inhalation revenue out of our forecasts over the next few quarters, we might see reasonably steady level of business and the variability there in any mix changes we might see between telecom and non-telecom would largely be at the noise level.

Thank you very much.

The next question comes from Timothy Anderson of Solomon, Smith, Barney.

Hi, guys. Two questions. Tony, I was wondering if you could spend a minute and talk about the new $160 million in cost savings that are coming out over the next 18 months. Is that going to be fairly linear, or how should we be thinking about the quarterly weighting of those savings?

Then I wanted you to address, maybe Jozef, inventory levels. I was wondering if you could talk a little bit about customer inventory levels and also if you sold anything out of your reserves?

With regard to the savings and exactly when we get there, we can't predict with certainty what the linearity will be. Let me explain why.

The earlier adjustments we made under the global realignment program were made very quickly, and while the decisions were painful, they were, shall we say, a bit more straight forward than the decisions we face now. It meant closing redundant factories and those were all difficult decisions and they had tremendous human costs. But the decisions were relatively straight forward.

Now we are contemplating multiple scenarios for doing very fundamental restructuring. Perhaps significant product line consolidations, and I am sure that the final outcome will really rest on the judgments of Syrus and Jozef as to exactly what is the optimal way to move. So with that in mind, I don't think we can provide very detailed quarter specificity yet as to where -- when we will actually see the savings.

Even after we make a decision, if it is a complex product line consolidation, it can take us a long period of time to transfer and requalify products, transfer people and do many of the other things that are required. I guess that's a long-winded answer for saying we don't know the specific answer to your question today.

Fair enough. On inventories?

Yeah, Tim this is Jozef. Clearly what we are seeing in some of the customers that they still have some inventory. Different customers in different levels of inventory. Different customers do differently. Some indications are that some of our customers still have the inventory, and they are doing it very slowly. The questions have been a couple of times before is. [ INAUDIBLE ]. Some of the inventory, with the lack of deployment to the new network I started to think that the object some [INAUDIBLE] is rather slow. So today's orders are essentially orders we are meeting for customers which have needs for immediate needs. And provide some opportunities for them to establish some networks which decrease maintenance costs and operating expenses.

Did you sell any inventories out of your reserves this quarter?

Under GAAP we don't have reserves in our inventory. We write down the value of the inventory on a part-by-part basis. We sold $17 million in inventory that had been written off. And offsetting that, we had some additional inventory reserves, many of them in the ordinary course of business as every company has, every manufacturer has, we had inventory writedowns of 24 million. So there was a net $7 million cost during the quarter for the inventory ins and outs. But I would emphasize that under GAAP the idea of inventory reserves is no longer applicable.

Great. Thank you.

The next question is from Thomas Affel of Merrill Lynch.

Yes. Do I remember correctly last quarter non-telecom was 25% of revenue?

I think it was 28%, Tom.

Therefore you had pretty good sequential growth in the non-telecom side?

Yes.

What was driving that, primarily?

There were multiple reasons. Display was a very important part of it. Flex, our security products in flex. I guess those are the two bigger products. The two bigger contributors.

Any reasons to not expect that to continue into the next quarter?

I don't know that the display business had a really high rate of growth and that is an OEM business where we sell to projector and display manufacturers and they may have some inventory adjustments. I don't know specifically whether we should expect any, but we may not have that same very high rate of growth this quarter. It was really hi.

And your forward-looking guidance. Do you have an assumption for the non-telecom percentage?

That's included in the guidance we provided, Tom.

Thanks.

Next question is from Max Chutes of CD First Boston.

Hi. In the Cap Ex figure you gave for next year, what's the expectation of the breakdown between non-telecom and telecom related Cap Ex?

We have not disclosed that.

Could we get a sense? Is it roughly even or in line with revenue or more heavily weighted towards one or the other?

I prefer not to disclose that.

And on the restructuring, what's the incremental cash cost of the new initiatives that were announced?

Well, I provided in the script, maximum, some cash numbers. And let me -- perhaps I can go ahead and repeat them. We expect to have about 275 million in additional charges. Under the global realignment program. We expect to have additional cash [INAUDIBLE] of a little over 300 million over the next several years.

Keep in mind a big factor affecting future cash outlays is ongoing lease obligations. We may have vacated a building, left the building, but we still have a lease obligation that may be four or five years, or even longer. So our future cash costs, of course, are defined buy the -- by the future lease payments. Those are the numbers.

I think you were carrying about 90 million in future lease payments so it's about 210 in incremental?

I don't have with me today the breakdown between lease payments, severance payments, cost of future qualifications and other cash costs. I just don't have that with me here.

Okay. And one other question. Are you including cancellation revenues in your billings when you calculate your book-to-bill?

Yes. We record it as a booking at the same time that we record it as revenue.

Okay. All right. Thanks.

Next question comes from [RAJ SHREKANT] of Deutsche Banc.

Thank you, gentlemen. Just one simple question, Tony I think it's for you. On an overall basis in terms of, you said 275 million cash costs for restructure that's in fiscal '03; is that correct?

No, the 275 million was the accounting charge. The cash costs will be a little over 300 million, but that will go beyond 2003 because of the lease dynamics I just described.

Okay. And the next question was, Jozef, you talked about operating cash flow break-even at 200 million?

Yes.

When will you be able to accomplish that?

We would expect to get there in 18 months.

Okay. Thank you.

The next question is from Anthony Carbone of J.P. Morgan

Thanks, and good afternoon.

Good afternoon Tony.

First a clarification question for you, Tony. It seems with your reduced break-even on a revenue EPS basis and cash flow, there seems to be a bigger separation between the two. I was just wondering why, you know, why your cash break-even has come down a little bit more?

For many the same factors that have affected our gross margin this quarter and that is the mix changed. The mix to some module products that currently are considerably less profitable than the optical components whose sales have declined considerably. So it's a reflection of the mix change that affected our fourth quarter.

Okay. And another question for you, Jozef. You previously mentioned that you were gaining traction with some of your newer products, I was wondering if you are starting to see, you know, a pick-up in revenues? Or are sales predominantly your older products? Thank you.

Well, these are really when we are getting some design [INAUDIBLE] really not to the level we used to have when the business was booming. So we are seeing some smaller orders, typically these are, you know, in single four, five digits more or less.

Okay. Thank you.

Thank you.

The next question is Robert Tango from William Blair and Company.

Tony, just one question for you. You mentioned the cash flow from opens was positive to the tune of about 13 or 14 million. Did that -- included in cash flow from OPS, did that reflect the tax again of 45 million?

It wasn't a tax again, it was a tax refund. As I indicated in the script, it was included.

Is it fair to assume that, I mean the net result X that was a loss of about 30 then?

Yeah, what were you going to say Jozef?

We also used cash for the Scion acquisition.

That was outside cash flow from operations. I'm glad Jozef mentioned that.

We announced the Scion acquisition at the call we had three months ago, but of course that was already in the fourth quarter. The answer is yes, if we had not had the $45 million in tax refunds, our operating cash flow would have changed by 4 manufacture million.

Tony, just looking ahead, though, I mean the company, you know with the downturn, they did a great job with the working capital bringing receivables and inventory down, the cash flow has always been positive. In terms of having, you know, a degree of leverage going forward, you know I'm just making the assumption that it's going to be difficult to drive down receivables and inventory to far deeper levels. And is positive cash flow from operations really going to be contingent upon just reducing SG&A and R&D, or is there some other leverage that the company may be able to find, assuming, you know, sort of a flat sales line over the next year?

We do everything we can to maximize our cash flow however, while we are going through a very significant round of restructuring, a new phase of restructuring, we will be operating below break-even and below our cash flow break-even. That's why I indicated in the call, in the script in the prepared remarks, that we anticipate our cash -- exclusive of acquisition activity, or sales of our stock purchase plan, or things like that, exclusive of those items, our cash might come down by 250 to $300 million over the next fiscal year. That's what we indicated in the script.

Okay. Thank you, Tony.

Next question is from [ARNOB CHANDA] of Lehman Brothers.

Thank you. I just wanted to confirm one thing. The gross margin guidance you gave for next quarter is it on the same basis apples-to-apples with the negative four percent you talked about this quarter, which is excluding all the charges and cancellation fees? And I have a follow-up. Thank you.

Yes.

Great. Next question, you know, one of the things, obviously that's been going on with the downturn, units are declining. I was wondering if you could give qualitative or quantitative discussion on how the units versus pricing is fairing?

In other words are units starting to stabilize is it pricing that's affecting you? Is it both or one or the other? Thanks a lot, Tony for all your help and good luck to you in the future.

I'm not -- you still have to deal with me for awhile, [ARNOB].

Let me answer the question. You know, you can't provide global answer, one answer for different segments. Different products have different traction and different profile. But we indicated that components have come down in past much faster than modules. We see some stable stabilization, really in terms of stability in the flat mass. Volumes are the same level in terms of what we have experienced in past couple quarters. [INAUDIBLE]. Inputting into immediate shipment for our customers who want to provide systems right in the quarter. There are very little purchasing for inventory build-ups. For some more complicated products, activity the U.S. [INAUDIBLE ]. And I think in some of the products we have established a higher degree of stability and pricing. But again, you can't global liz it generally, okay?

Thank you.

Next question is from Joseph Bellis of Jefferies and Company.

Thank you. Good afternoon, guys.

Hi, Joe?

Nice hearing your voice. It's a pleasure. You made my day. Let me ask you two questions.

Well, that's easy. Can you buy some product from us, too? [ LAUGHTER ].

Maybe my neighbor can. He has his own company.

My first question is, how many profit centers are there at JDSU today? And how many of those are unprofitable or have unacceptable levels of profitability?

My second question is manufacturing. I'd like to know how many manufacturing facilities you still have currently today, what kind of utilization rate you are running in? What percent of revenues in '03 will be manufactured in China? Thank you very much.

I'm going to answer for first part of the question. Clearly I am not feel comfortable to really state on each of the facilities because they provide the products internally, externally. It will suffice to say as Tony indicated our non-telecom business is reasonably stable, and provided good returns in other sides of the business in the telecommunications side what we are doing is trying to in this discussion of global alignment, trying to. Active components are very, very expensive. So that's what we are trying to get while preserving our relationship with the customers and preserving our intellectual portfolio as well as technical people to move forward. Another part to the question?

Question is number of factories and what percentage of our business will be in China? Depending on how much on the mix between telecommunications business and our non-telecommunications business we expect China to be 30% or above that a year from now.

That's in the June '03 quarter? About 30% of the revenues we make?

That's really in terms of the run rate a year from now.

What is the run rate right now?

It's probably in the range of 20's, low to mid 20's.

20 to 25. Okay thank you.

Next question comes from Steven [CAUFLER] of Wacovia Securities.

Playing around with the break even parameters you talked about. You know there are parameters you talked about. There are expenses that you can control, and other things that are harder to control, but thinking about the gross margin, kind of looks like 20 to 30% is what you have to do in those kind of sales. It's taking more op-ex out of the business. Are we in the ballpark there?

I am going to be you are in the ballpark taking out more op-ex. It is really driven by the product categories, as Tony indicated in all the passive components or the components decline which are high margin products the shift in business more into models. And currently, if you need to get some of the components outside -- we definitely want to get to the level of what you indicate is, if not higher.

Again on the cancellation charges and book to bills, basically you get the cancellation charge, you book it as revenue and a book-in, so it's basically it's inconsequential to book-to-bill, right, Tony?

It's not inconsequence sequential. What happens is when a customer cancels an order, we cancel the booking -- we cancel it in our backlog and it shows up as a negative booking and we write-off the costs, if any we have incurred against the contract. That's good, conservative accounting. So that particular order no longer would then appear in our backlog. And then at a later time, after we settled the cancellation charges and we received the customers' payment, we record the revenue and, of course, we would have to record the booking at that time. So that would be included in the book-to-bill ratio. If you were to take the cancellations out of the bookings, take the cancellations out of the revenue, the book-to-bill ratio couldn't change a lot from where it is now.

Okay. Thanks.

Next question is from [PARAS BARGAVA] of BMO [INAUDIBLE]

By the way, Christie, we will be able to take one more question after [PARAS] because of time constraints.

Tony, just a question going forward. When you get to your -- the break -- cash flow break keen of 200 million, what kind of capacity utilization would you be working with that 200 million in revenues?

That depends on how much capacity we have at that time. As I mentioned in responding to one of the earlier calls, we have some very, very difficult it's not clear to us today how much capacity we will have when those are completed. We want to have enough capacity so we can respond to some foreseeable and unanticipated customer requirements. Until we know the ants to that set of questions, [PARAS], we would not be able to provide you capacity utilization because half of the equation is missing.

I'm just trying to understand if we say revenues level out and they will later. You know what capacity you will be at leaving yourself room to grow, what -- mid-single digits? Would it be low double digits? I'm just trying to understand that calculus, Tony.

We still expect that at the margins, our marginal profitability would be in the range of 50%. Marginal profitability. Particularly to the extent it affected our component businesses.

Okay. That helps. The second question, if I may, is what kind of -- the population was 9300 at the end of the quarter?

Yes.

What kind of population would you expect break-even? And what might -- I know in the K we'll get what the mix between manufacturing and R&D, et cetera is, what would that be today?

Let me just answer the population. We are still debating what facilities and what type of consolidations steps we need to take. What type of technology to take to bring the product lines, rationalize what we are going to do. I think -- have been raised we are not at liberty to disclose. Also government regulations what we need to provide if there are some issues pertaining to some consolidations. In due course, I think we will provide that information.

All right.

Give me a moment to calculate the other percentage. Perhaps we can go to the next caller and I can come back to it. I don't have it at the tip of my tongue but I'm looking it up right now.

Thanks.

The final question is from Gabriel Lowie of Credit [INAUDIBLE].

Good afternoon yes. Couple of short ones. Nonredundant ones. Are you seeing, or to what degree are you seeing communications semi-conductor competitors in the design what do you think the relative cost is to theirs?

Let me comment on it. In earlier prior quarters -- to some degree because of the merchant market. There are some other companies, clearly, who consider our telecommunications a growth opportunity and they are entering the market. But the discriminating opportunity, really is to understand the optical network, provide the degree of optics balance and the marginal differentiation in the optics components some of it IC as well as network interfaced -- those are the really the critical attributes of success on some of these activities.

Okay. Second question I'm sure you have been asked a number of times on and off line, is what your thoughts are on a reverse stock split?

Our board has not approved one. We certainly get many questions from investors, but we have no plans as of today to do one.

Thank you very much.

Thank you.

As to the question [PARAS] asked as to the percentage of total employment that is involved in manufacturing it's in the range of 65 to 70%. Please understand that's a quick calculation and if there is a slightly different number in the 10K it is only because when we do the 10K every number gets examined very, very closely and checked and rechecked. Use the number in the 65 to 70% range.

Thank you very much. We just would like to close. We welcome you again on our future quarters. Thank you for joining us. Welcome Cyrus and we are looking forward to hearing from you in the next quarter.

Thank you very much Jozef.

Thank you.

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