Viavi Solutions Inc (VIAV) 2003 Q1 法說會逐字稿

Good afternoon, and welcome to the JDS Uniphase first quarter 2003 conference call At this time, all participants are in a listen only mode. Later we will conduct a question and answer session. I would now like to turn the call over to Dr.Jozef Straus, Co-Chairman and Chief Executive Officer. Dr. Straus, you may begin.

Thank you very much. Good afternoon. Welcome to the call. I'm here with Syrus Madavi, our President and Chief Operating Officer, and Anthony Muller, our Chief Financial Officer. Today we will report on the first quarter of fiscal 2003. I'll provide an overview of our market and business. Syrus will discuss the direction, as well as major changes and [INAUDIBLE] operations. And then we will review the financial results. Afterwards, we'll answer the questions as many as we can in the time available. [INAUDIBLE] Tony will read the safe harbor statement. Tony?

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 statement we make other than those dealing specifically with historical matters. That is, our historical financial results and these statements we make about the conduct of our business operations and finances[INAUDIBLE]. All forward-looking statements include any information and 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 the press releases and security filings with the SEC, particularly the risk factor section of the form 10K filed for the year ended June 30, 2002. 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. I will now review the general status of the market and the company. There has been a lot of discussion on the exact timing of the recovery of the telecommunication industry, and instead of adding further to the debate, we will tell you the steps we are taking to maintain the company's position as leader industry. The company in the current environment, will make technology [INAUDIBLE] and continues to benefit from its close relationship with its customers, and has maintained its financial strength.

In addition, I'll briefly report that we are realizing tangible results from our actions under the global realignment program, such as, we have realized to date the many cost savings rates that I've mentioned that resulted from that. We continue to reduce our operating expenses with 12% improvement from last quarter, and our pro forma gross margin has improved by approximately 30% of sales as compared to last quarter. We believe we are also taking advantage of the current environment to spend time [INAUDIBLE] with an appropriate business model and cost structure. Syrus has already made great progress.

He initiated has and nearly completed reorganization of our operations, [INAUDIBLE] HR, finance, and significantly restructures manufacturing, while driving our business unit to be more responsive to our customers and new product development opportunities. Syrus will discuss this program in more detail. Increasingly, customers want to work with suppliers like JDS Uniphase, that will be there for them in the long term.

We are seeing that our customers in the current environment highly value the stability and reduced costs that we are providing. In fact, this quarter, we have received awards from two longtime major communication customers. We continue to emphasize innovation and product development to bring new products that meet changing customer needs.

For all communications markets, we introduced a new range of products largely targeted for the network edge, enterprise, access, innovation, metro application. We are exploiting to the full extent our base optical technologies. Our leading capabilities in the manufacture, coating, and assembly of optics are highly valued by our customers and have led to a recent contractual projection display applications. Application development for [INAUDIBLE] has led to their use in prescription glass.

Optical pigments also used in decorative applications are now included in two standard -- [ INAUDIBLE ] I need to stress again that I remain positive on the long-term outlook for the telecommunication industry, as I believe communication capabilities have not reached their fullest potential for banded consumption to provide among other things, on-demand and interactive applications requiring high quality audio and full motion video for Internet broadcast, entertainment, education, business, and personal communication.

We are committed to positioning this company with technologies to ensure full participation the ongoing development of this exciting industry. In summary, we continue to position ourself for long-term leadership, while adapting to current economic realities. With Syrus on board, I believe we will execute well. Syrus will now review operations.

Thank you, Jozef. I participated in the last call on July 25. At that time, I mentioned the accident long-term opportunities I believe lay ahead for JDS Uniphase's fiber optics communications, as well as all technology products for other markets.

Since then, we have focused on positioning JDS Uniphase for future growth by quickly reducing costs, increasing operational efficiencies, and continuing to partner with our customers. To this end, I'm pleased now to report on the progress we have made during this quarter to make JDS Uniphase increasingly more competitive. Let me first comment about our customer relationships.

Joseph mentioned that our customers continue to confirm the high value that they place on our ability to provide them with a broad range of innovating cost-effective product solution and industry leading technology. In addition, they understand and appreciate that we have the staying power to be able to support them over the long-term. We fully embrace this vote of confidence by our customers as a great opportunity to establish even stronger partnership with them, and to optimally position JDS Uniphase for future recovery and subsequent growth. To achieve this, we have changed our operational philosophy.

In fact, we have nearly completed a reorganization of the company that we believe will enable us to benefit from the economies of scales available to centralized functions and yet provide the increased focus that is needed on customers and markets in dynamic environments as we experienced today. To increase efficiency, we have centralized information technology, human resources, and finance, to meet our needs company-wide. These functions were previously site oriented and in some cases duplicative.

Due to our actions, we believe we are now better able to reduce operational costs and increase efficiencies in, for example, information technology systems, purchasing, order processing, accounting, payroll, and employee benefits, just to name a few. In manufacturing, we are coordinating across the company to maximize the synergies available for logistics, acquisition of material, supply chain management, and utilization of contract manufacturers. For communication products, multiple independent manufacturing operations have been united in a centralized organization so that we can benefit from economies of scales available in large consolidated production facilities, such as our plant in China. We are also increasing our use of contract manufacturers to augment our capabilities and to benefit from their economies of scales. This helps us minimize our fixed overhead cost, yet leaves us prepared to respond to increased capacity needs in the future. With the additional emphasis on marketing, R&D, and product management, our business units will be even more focused on customers, markets, technologies, and competition.

To facilitate the development of new products in the quickest and most efficient way, pilot facilities have been located near the business units. Also, transition teams will be used to move products and pilot facilities to central manufacturing for high volume production. We believe this new structure provides for reduced cost and greater efficiency for our central organizations, while the business units will be able to focus more on our customers' needs.

Finally, we believe this is the structure -- this structure is built for future growth. Concerning our global realignment program, I would like to emphasize the sense of urgency we have towards reaching financial break even quickly. We have made significant progress during this quarter, which included the following: We have agreed to sell our MEMS business unit, which we expect to complete in early November.

In doing so, we'll lower our cost structure while retaining access to this more than technology and retaining continuity of supply for our MEMS products for commercial supply contract. We closed our Columbus, Ohio, [INAUDIBLE] facility. We have agreed to divest our England facility, and we believe we expect to complete the divestiture shortly. Again, by lowering our cost structure, we will retain our access to diffuse fiber products at this facility for fiberoptics communication, through an agreement designed to maintain continuity of supply for our customers. We have consolidated substantially all our San Jose commercial operation into our Santa Rosa facility.

We have initiated our efforts to close our operations in Edontown,New Jersey, Sydney, Australia, and in consultation with employee representative to close our facility in [INAUDIBLE], the Netherlands, and [INAUDIBLE],Germany. As you may remember, our active components are fabricated into four standard loan sites. To reduce costs, we have decided to consolidate these into two sites. The San Jose, California fabrication facility, will be the center of excellence for Indian phosphate and [INAUDIBLE] processes. The Connecticut facility will be the center of excellence for lithium nitrate process.

In addition, the West Trent, New Jersey site has been selected for packaging development, [INAUDIBLE] and substrate packages. It will also include amplifier operations. Currently, at Edontown, we are now developing specific plans for other fabrication and manufacturing sides to achieve an optimal level of capability, while minimizing associated overhead expenses. Our Ottowa facility has been selected as the center of excellence for passive components and modules.

As a result, several responsibilities are being moved there from other sites, including R&D for optical performance monitors from Toronto, fused fiber component products, and R&D for switching modules, amplifier components and other passive components from San Jose. While Ottawa will continue to have responsibility for manufacturing of some product lines, we are continuing to transfer other products that are mature or ready for manufacturing to [INAUDIBLE].

Ottawa will continue to be the center for our instrumentation and our transmission product lines. We will also continue to strengthen and farther exploit the synergistic opportunities afforded by these product groups to bring forward new and integrated solutions for our customers. While I'm taking these actions to help reach our financial objectives, we are also working closely with our customers to meet our obligations and their needs.

For example, they're also taking actions to ensure continuity of supply during transfers. This includes meeting requirements for requalification of the parts, a process that can take several quarters. We believe we are on track toward our objective of an operating cash break even of about 200 million per quarter by the end of calendar year 2003, and are working to reduce this break even further. The actions I have mentioned along with all others so far in our global realignment program have cost about $978 million, and will result in about 1.1 billion in anticipated costs savings annually.

Looking forward, we estimate an additional 150 million in one-time charges under this program, resulting in an additional $130 million annual cost reduction. At the end of this program, we estimate that the total accounting charges will be 1.1 billion, resulting in an estimated annual cost reduction of 1.2 billion. The total cash costs under this program are expected to be 400 million. Our results with the program appear to be better than the previous estimates. Compared to three months ago, our outlook shows overall program costs when completed at about $85 million less in accounting charges and 90 million less in cash cost than previously estimated.

Overall benefits are about $100 million more than in projected annual cost-saving. With the area of technology and product development, we have also made significant changes in technology and product. We have shifted our fiberoptic particulars communications R&D efforts more towards products for the network edge, including enterprise access aggregation and metro applications in response to customer needs. We launched 29 new products this past quarter, the most ever for the company during the second fiscal quarter.

About half of these are transmission products, a significant shift when compared to our historical product mix. New transmission modules for the network edge include a 10 gigabit, 13-10 in an meter very short range transponder to coincide applications that we developed with Optronics and which led to the acquisition of Optronics Transponder business in August. We also introduced a 10 gigabit long reach multi-range transponder for network side application and [INAUDIBLE] transiever for enterprise application. Other new transmission products introduced during the past quarter included temperature tunable source lasers for telecommunications, and a DWDM source for CA-TV. We also introduced 4 and 6 channel [INAUDIBLE] products using thin film filters that provide lower cost, more integrated solutions, and an 8 channel AWG Mox-D-Mox [PHONETIC] for metro applications.

In addition to several amplifier components that featured low cost and small size, we announced two additional products, which included the low cost Credit Quart Size 0A300, and 15 DBM Ediaphase for C-Pang Metro[PHONETIC], and 0A600 15 DBM Ediaphase for [INAUDIBLE]. We introduced several new test and measurement instruments, including Stress Die Generator and a 10 gigabit optical pattern generator and optical air detecter for testing, as is specified in [INAUDIBLE] 10 gigabit internet standard 802.3AE.

Six new modules were also introduced for multiple application platform, a modular test solution. We also brought a new commercial laser product used for biohazard detection from the prototype stage into manufacturing, and began shipping production units of this product.

In summary, now that I have had a few months here and have had a chance to become more familiar with the company, I'm even more convinced of its long-term potential. There is a lot of hard work ahead of us, but I believe that our current direction will increase our operating efficiency, Reduce our costs and prepare JDS Uniphase to immerge from the downturn stronger and better positioned for growth. I look forward to reporting additional progress to you in the future. Jozef?

Thank you. And now Tony will review the financial results.

Let me first review the key financial numbers for the quarter. Sales of $193 million were down 13% from the 4th quarter and consistent with our revised sales guidance. Pro forma gross margin improved from the 4th quarter over 1300 basis points of improvement, reflecting global realignment program savings and lower inventory writedowns. Declining expenses also reflect the effect of the global realignment program.

Our operating expenses net of restructuring and realignment costs have declined at double digit sequential rates in each of the last two quarters. We continue to make progress with our global realignment program with modest improvements in projected accounting cash costs for the program, and resulting projected cost savings rates. Our financial condition remains strong. Cash and short term investments at the end of September were 1.36 billion, of which over 1.34 million was in cash and short term fixed investments. Let me provide more detail on our operating results.

Sales for North American customers in the 1st quarter represented 70% of total sales, European customers, 18%, and Asian customers, 11%. We had two 10% customers for the quarter. Lucent represented 12% of sales in the quarter, although without cancellation charges we would have been below 10%. The accident instruments, an important customer for our display products represented 10% of quarterly sales. Our sales for the quarter included cancellation charges of almost $20 million. This was contemplated in our guidance for the quarter.

Please note that we wrote off inventory in connection with these cancellations in prior periods, but only recognized such revenue upon receipt of customer payment. Communication products represented 109 million in revenue or 56% of total sales. Revenue in this segment was down 19% sequentially. Our noncommunications sales accounted for 84 million in revenue or 44% of total sales. Revenue in this segment declined 2% from the 4th quarter because of the general flattening of these businesses and lower sales of the small capital goods business in this segment. Each of the businesses in this group is profitable for the quarter. Modules represented about 60% of total communication sales for the quarter. Our book to bill ratio was below 1 for the quarter. Our pro forma gross margin including realignment and other charges was 7% of sales.

Pro forma gross margin includes the benefit of cancellation revenue, inventory write downs, the sale of inventory previously written off, and global realignment program charges. Our results for inventory writedowns were 19 million in previously written off inventory, and no net effect. The favorable change in pro forma gross margin from the 4th quarter over 1300 basis points again reflects global realignment programs savings and lower inventory writedowns.

Excluding global realignment program charges, R&D expenses were $41 million, or 21% of sales for the quarter, down 14% from the 4th quarter. A reflection of the rapid progress we continue to make in increasing our R&D productivity and otherwise reducing expenses. R&D expenses were considerably below the amounts generally forecasted by analysts covering JDS Uniphase, as well as our internal plans, yet we continue to invest in our most promising opportunities and have one of the broadest new product investment programs in our industry. SG&A expenses excluding global realignment charges were 51 million for the quarter or 27% of sales.

SG&A expenses were down 10% sequentially and also below analysts's projections as well as our internal plans. This reflects significant restructuring, including major changes to our IT structure. Operating results for the quarter reflected lower depreciation because of prior fixed asset writedowns. Interest and other income was 13 million for the quarter. Pro forma loss was $98 million or 7 cents per share for the quarter. These results include global realignment program costs and exclude the costs we have historically included for pro forma results.

Primarily, those related to merger and acquisition charges as well as the reduction in the value of long lived assets and gains and losses on investments. This was consistent with our guidance despite our sales being below the original guidance we provided in July. For the 1st quarter we did not record an income tax provision and shares for the quarter were 1.41 million. Let me turn to the global realignment program. The total costs for this program are now estimated to be 1.1 billion of which 978 million was incurred through the end of the 1st quarter. This estimate for total cost was approximately $85 million below our prior estimates. In the 1st quarter we recorded net charges of $35 million.

Under the program of which 4 million was charged to cost of goods sold and 31 million was charged to operating expenses. Included in the cost of the global realignment program are charges for employee severance, lease costs, accelerated depreciation and moving and employee costs related to the phasing out of certain facilities and equipment. To date, actions taken under the global realignment program have reduced our annual cost rate by approximately 1.1 billion. Under the program, we expect to reduce our annual expense rate by an additional 130 million in Q2 periods.

We expect to reduce our operating cash flow break even to 200 million in quarterly sales by the end of calendar 2003. This would imply a pro forma operating break even of approximately 240 million in the quarter of sales at such time. As Syrus indicated, we are working to reduce this break even further. I would remind the call that the above forecasts are based on our anticipated cost structure and do not represent forecast of future sales levels. Regrettably, we will be compelled to reduce our employment further and we will continue to report our employment levels to you in future periods. Our global employment today is approximately 8,000 people. Let me summarize the progress we are making with our global realignment program.

We are seeing its effects on our pro forma gross margins, our R&D and SG&A expenses are declining more rapidly than observers expected and we're below internal plans for the quarter. The total projected accounting and cash costs for the program have declined and anticipated cost-saving rates have increased. Our balance sheet -- I should say our financial strength -- remains considerable. We held 1.36 billion in cash in marketable securities at the end of the quarter of which over 1.34 billion was cash, money market and other highly liquid fixed income securities.

Day sales and accounts receivable declined to 52 days for the quarter as compared to 55 days at the end of the June. This important measure has continued to improve in recent quarters. Our collections experience has been good. The global realignment program used $17 million in cash during the quarter. To date, the program has used approximately 207 million in cash and we expect additional cash outlays of approximately 193 million over future quarters.

Net inventory levels declined 4% during the quarter. We used 56 million in cash from operations during the quarter, including cash used by the global realignment program. We have 11 million in tax refunds received during the first quarter, favorably affecting our cash flows.

Capital spending for the quarter was 18 million, which was less than our depreciation even after considering asset writedowns. Cash on equivalents on short term investments declined 65 million during the quarter. On July 1, 2002, the company adopted statement and financial accounting standards 142, goodwill and other intangible assets. It is no longer amortized, but used [INAUDIBLE]. More frequently, certain events or changes in circumstances indicate that the carrying value may not be recoverable.

In conjunction with the implementation of 142, we performed the transitional required under adoption to the rule related to the carrying value of goodwill as of July 1, 2002 and determined there was no impairment beyond amounts previously recorded as of that date. In addition, we evaluated the carrying value of our goodwill and other assets as of September 30 under 142 and 144. As the procedures required by 142 are complex and time-consuming, the rules permit us to record our best estimate of the charge and adjust this charge by increasing or decreasing it in the following quarter if necessary.

During the 1st quarter, we recorded an estimated charge of $224 million to reduce our goodwill. In addition for the quarter ended September 30, in accordance with 144, the company recorded reductions of $155 million in accounting value of purchased intangibles other than goodwill and other long lived assets. Of the amount written down, 69 million was related to purchase of intangibles and 86 million was related to fixed assets.

The writedowns of goodwill purchased from tangibles and other assets during the quarter reflect lower industry sales forecasted sales, for the company, and further delays in the company's anticipated recovery because of industry conditions. The company Asia-Pacific sales for the 2nd quarter of fiscal 2003 will be 150 to 160 millions. Including anticipated cancellation revenue of approximately $5 million as the downturn of the company's markets conditions. This guidance also reflects inventory reductions by certain customers where our optical products were markets outside communications. At the sales level projected for the 2nd quarter, the company expects pro forma gross margin will be in the range of 4 to 8% of sales with a pro forma net loss of 5 to 7 cents.

We continue to anticipate using approximately 250 to 300 million in cash in fiscal 2003 exclusive of M and A activity based on our expectation for sales, global realignment program, cash costs, capital expenditures of 55 to 60 million dollars, and anticipated tax refunds.

Thanks, Tony. In closing, I wish to express my gratitude to our employees for their dedication and determination throughout these challenging times. Thank you also to our customers, to whom I refer my encouragement and full commitment as we work together to meet the challenges and opportunities ahead. Thank you. We will now open the call for questions.

Thank you. We'll now begin the question-and-answers session. If you have a question, you'll need to press the 1 on your touch-tone phone. You will hear an acknowledgement that you have been placed in queue. If your question has been answered and you wish to be removed from the queue, please press the pound sign. Your questions will be queued in the order they are received.

If you are using your speaker phone, please pick up the handset before pressing the numbers. Once again, if there are any questions, please press the 1 on your touch-tone phone. We have Jim Johan from CIBC World Markets on line with a question. Please state your question.

Hi. Good afternoon. Tony, that was the longest.accounting breakout I got, but I did not hear under the guidance, if you could, between telecom and nontelecom going forward. Can we assume that the nontelecom side is still kind of growing a little bit going forward?

It will probably be, as I indicated in the script, Jim, some of our customers, nontelecom customers, are adjusting their inventories this quarter, so sales in that segment may be down a little bit this quarter, but as far as a percentage of the total sales, we do expect it to go above the 44% level we had in the 1st quarter. It might get close to 50%.

Okay. My last question is, when you look at -- Syrus Madavi went through a bunch of facility movement in terms of restructuring. What does that do to gross margins when you assume you might be running duplicate functions until your OEMs kind of requalify packaging lines, or [INAUDIBLE]. Should we assume that margins will then be kind of artificially depressed for the next few quarters, then maybe hockey stick up once those lines are requalified and the duplicate lines are shut down?

I don't believe so, because as we change as we transfer our manufacturing from one location to another, the costs of the requalification and transfer would be under the global realignment, and, therefore, our margins should continue to be the same with slight improvements as we are building efficiencies, even into existing facilities that will be phasing out.

Okay, thank you.

We have Jim Anderson from Solomon Smith Barney on-line with a question. Please state your question.

Yeah, hi guys. A question, Tony, a little bit here on guidance. Last quarter, your guidance was based on pro forma numbers, as is this quarter. Should we be thinking that this number includes some restructuring impact, costs in your guidance level?

No, you should not. We try -- we maintain -- it's important we maintain consistency as to what we do and do not exclude from pro forma numbers. I'm sorry, the restructuring is included in the pro forma numbers.

It is?

Yes, it is, because the only things we exclude are the M and A and related charges.

So it's fair to say for your September quarter, if we back out the $35 million worth of charges associated with the global realignment program that are in the pro forma numbers, which amounts to about 2 or 3 cents per share, typically how analysts would think about your outlook, you actually reported somewhere around 4 to 5 cent loss, correct?

I haven't done the math that way, but that certainly makes sense.

Okay, one quick question, Tranquence [PHONETIC] has purchased the gear optical component assets. Could you give us color or commentary on how you think those might impact the competitive level of JDSU going forward.

Jim, this is Jozef, I will take this question. [INAUDIBLE] Nothing has changed action September landscape has been redefined. [ INAUDIBLE ] We have respect for each of these companies. They're going to be good. They're going to make the best out of it. We feel strongly with our positioning and product offerings, we'll be talking to our customers and trying to get the business going when there's an up turn. In any case, I think we understand from the positioning -- that they had to do that and we sympathize with that.

Great, thanks.

We have Joseph Wahl from UBS Warburg on-line with a question. Please state your question.

Thanks. Tony, could you -- there has been a lot of fluctuation from the nontelecom operating margins. Could you talk to us about the levels last quarter versus this quarter and what we're seeing in the break outs you are giving on the schedules are indicative of real operating margins or there are some other things we should be looking at in terms of how to think about the profitability of this segment. And in terms of the guidance, if you look in the December quarter, have there been any dramatic shifts or has it been a slow steady drip of declining business?

Let me answer the first question. We did shift around some businesses between our thin product segment and our communication segment. We had small businesses that moved in one direction and others in another direction. This is part of the organization that Syrus Madavi has been affecting. The sequential comparisons probably would be a little bit difficult to interpret, but the profitability that we show in the press release is reflective of the profitability we're receiving now.

The question was the sales decline. Did it happen all at once or in drips and drabs.

It was quite gradual over the quarter, and given the difference between the 1st quarter and 2nd quarter, frankly the total amount was spread out over the quarter.

And, also, Tony mentioned in the noncommunications segment, some of the customers are going through some inventory adjustments, so that also impacted the -- some of the order rates as well, so it was combination of communication, noncommunication, mostly in the communication side, and happening gradually over the quarter.

A quick follow-up on that inventory adjustment. Are there new product introductions that are part of that, or has it been a seasonal adjustment to inventories that they've been taking?

This is the noncommunication side of the house. It's basically one or two customers wanting to take some adjustment on their inventory and they have asked us for such and they're very good customers. We have accommodated them. It's the demand basically getting pushed out by quarter.

Okay. Thank you.

We have Roger Baker from Deutsch Bank on line with a question. Please state your question.

Thank you. Tony, the cash bond, you said it's 250 to 300 million for the year. Can you break down as to what it was in the 1st quarter that you recorded, and what you expect for the following quarters? Thanks.

We have a loss of cash from operations of $56 million and we had capital spending of $18 million, we raised small amounts of cash through our employee stock purchase plan, and the net effect of all this is the cash equivalent and short-term investments declined $65 million during the quarter, but of course we also had a small amount of cash, a little less than 10 million that went out or the electronics acquisition. But that is a pattern that we foresee on improving gradually during the year, but that's indicative of what we expect with the current business conditions.

Thanks.

We have Tom Ansel from Merrill Lynch on-line with a question. Please state your question.

Sorry, you may have already stated this, but did you get a sense of the direction of your enterprise optics business, how it did during the quarter? Pick up from RBM plus new product introductions?

In general, still say that the business remains rather difficult. It's doing okay, but not doing as we would expect.

Better than the overall communications business?

Yes.

We have David Jackson from Morgan Stanley on line with a question. Please state your question.

Great. Thanks very much. Good afternoon. [INAUDIBLE]. Tony, could you give us some sense of proportionately how the revenues break down in the nontelecom products between different kinds of end markets so we can get a better sense of how the economy and different [INAUDIBLE] will impact your sales?

The two biggest product lines are display products and our flex products, which are used for decorative and security applications, and falling behind them is our commercial laser business.

I would say that over recent quarters, the display business has been relatively stronger because of -- because of the consumer television and projection industry: , However, a couple of these businesses are being affected by inventory adjustments by customers that I would characterize really as secular inventory adjustments, they are seasonal and necessarily related to new product introductions. But that's most of the principal product lines in our telecom business.

Okay, great. And one quick follow-up, Jozef. I know that you were asked earlier on the call about the impact of the acquisitions of a gears component business and Nortel's [PHONETIC] business. Could you give us a little more sense of whether you see opportunity for JDS to pick up market share in any particular product areas? I mean, both of the companies said that they were going to reduce capacity, reduce head count and shot down certain product lines, do you see after industry conditions improve, opportunities for any particular product?

David, in my competitive behavior, I will ask my colleagues to go for whatever availability there is for opportunities. In this environment, when customers want to work with suppliers, we'll have the long-term stability that provides us to be there and capabilities. We have been doing this before, we are doing it constantly, and this will give us further opportunities there. Clearly it will take some time to design the product or requalify the product. The impact may have been one or two quarters away.

Okay, great. Thanks to all of you.

We have Kevin Fulcom from [INAUDIBLE] on the line with a question, please state your question

Hello gentlemen. I just have two small ones. The other stuff got covered. One, Tony, is this the last cancellation payment we're likely to see in the coming quarter, the 5 million you mentioned?

Yes. And let me speak to that.

A quarter ago we thought the 1st quarter would be the last one in which we would receive any cancellation payments, and of course these are all very complex situations that are part of long-term relationships with our customers, and as we work with our customers and as we work in a manner where we both value the long-term relationships, customers realized some of the costs we've incurred on their behalf, and, yes, we believe that the 5 million or so we might recognize in the 2nd quarter probably will be the last significant cancellation revenue that we'll have.

Okay, and then I don't know if this would necessarily be -- who this would be for, but it seems as though there's a rise in nontelecom focus for optical companies out there, and you know, you guys have talked about it, there's a lot of different companies out there [INAUDIBLE]. I'm wondering, you know, how fertile those market opportunities are, and if maybe you could describe the ones that you think are the brightest going forward, where we might see you actually making some incremental investments.

[INAUDIBLE] Kevin, when you mentioned telecom, your comment is really exclusive of datacom market, or is it all communication markets, or did you want us to make comment on the datacom?

No, I appreciate the areas that you might focus on in the datacom area. I was focused on noncommunication markets.

Okay. Thanks.

Sure.

We have Jeremy Bunting from Thomas Weisel Partners on line with a question. Please state your question.

[INAUDIBLE]. I had a question for Syrus. Modules have grown 60% revenues, and I was wondering if you could comment on whether or not you believe that that percentage will keep growing over the next couple of quarters, and, also, has the transition of most of your module manufacturing growing over to the facility in China or how is that tracking right now?

Sure. Modules, it depends on what type of modules or what specific product lines. We are transferring the high volume or mature products that we'll be manufacturing, particularly out of Ottawa into that operation. We are also taking some products that you might consider components in transferring them into that operation. So that is ongoing. That has not been completed.

We also have more -- lower level of integration passive components that are being transferred particularly out of Ottawa, again, -- [INAUDIBLE] So we have a lot of initiatives going on right now and they're far from being completed and that's why we are looking forward to realizing the benefit of all these transfers sometime in the next few quarters or so. So there's a lot of movements that are going on, but we are being very selective about which ones we want to transfer and which ones we want to keep behind.

Okay. Thanks. Just really quickly a follow-up, if I could. On your R&D, you said the shift is focusing towards the network edge long term related products and could you quantify the R&D mix as it stands right now to the extent that you can in terms of your different businesses. Thank you.

Yeah, I guess we haven't really made a practice of breaking it out for competitive reasons. The statement you made is accurate, we are shifting more R&D towards transmission, type of products, some of the long haul type of modules and component for the reason the markets are dormant at this point. We want to maintain the capability and so we would be able to respond in the future. We are trying to shift resources, but at the same time maintain the capability so we can respond as the market evolves over the next few quarters. The actual breakout, it hasn't been our practice to give the details.

Fair enough. Thank you.

We have Arnob Shandai, from Lehman Brothers on-line with a question. Please state your question.

Hi Tony, just a quick question maybe you can't answer right away, but this would be helpful for us.

You've had a bunch of charges, you know, inventory write offs, could you give us a sense of if you look at the product business, how that's performed over the last couple of quarters, excluding the cancellation, seems like the declines might not be as strong without the cancellations which were much higher in the past and lower in the future, if you could talk a little about that, what the gross margins, or product gross margins --.

I don't have the calculations here, they're back in my office, but I can tell you how you can determine that. Take the number -- the pro forma number in the press release, we provided in the script the breakout of the global realignment program costs and where they fall on the income statement, and the cancellation charges you know, and those are the numbers I would use to calculate it.

Great, and one other question, can you give a sense of what you expect -- would the best knowledge that you have today where the head count will be when all is said and done?

We'll keep you posted on this each quarter as we make our announcements.

Thanks.

We have Todd Hoffman from Raymond James on-line with a question. Please state your question.

Thank you. Sort of as a follow-up to that last question, after a number of quarters of downsizing, closing facilities, unwinding acquisitions, recognizing cancelled revenue, et cetera, including today's announcements, my question is, how far away are we from being able to see a clean what I'd call unrestructured quarter?

Let me try and answer that, Todd. You'd have to provide me more information. When do you foresee capital spending from carriers improving and our market increasing? When you can help us with that and we don't know the answer, I'm sure others have their estimates of that, we are -- we have been facing for some time sales that have been declining and they have been declining beyond our earlier expectations.

So what we must do is continue to respond to the reality of our marketplace. We have not been unwinding acquisitions except for some very small ones, but we are continually working to make us more cost competitive, and when the market turns, we believe we'll be ready.

Maybe as a follow-up, it seems [INAUDIBLE] but there seems to be a disconnect between the 145 year end, what I call uncancelled revenue guiding, and that 200 million cash break even level. That's why I'm thinking maybe you can foresee that you have some additional global realignment efforts still out in the --.

Let me comment. The important activity is we are taking steps to bring the break even to a certain level. [INAUDIBLE]. Critical science is very important. We believe that the steps we're taking gives us an opportunity to bounce back [INAUDIBLE].

One other thing. You asked how much more in restructure we'd have. We provided very specific numbers in the script in terms of additional accounting costs we expect to incur and additional cash costs we expect to incur to get the 300 million dollar. Those numbers were outlined very clearly in the script.

Thanks.

We have Max Schultz from Credit Suisse First Boston on line with a question. Please state your question.

Hi guys. First just a quick clarification. Could you give us the depreciation in the quarter?

Yes. It was just under 20 million dollars.

Okay thanks. And then I was also wondering, if you look yourself at the 230 million net income break even target, could you give us more color on the business model in terms of, where you would expect gross margin to be, R&D, and SG&A to be at that break even point?

Let me grab a model so I can be more precise. Bear with me one minute.

Let me give you an idea. Gross margin would be pushing 30%, and sorry, wrong column, gross margin would be in the low 30s and the remainder would be operating expenses.

A pretty even split between R&D and SG&A, or leaning one way or the other?

Our SG&A would be a little higher, a little higher because of the costs of maintaining the infrastructure.

The facility count you're going to now, if things got worse, where do you think you could take break even down from that 230 target before you would have to go through another big round of process relocations and component requalifications, incremental cost and time?

We have -- the kind of actions we have and the kind of plans we are executing, we have some latitude in cutting down the cost and taking down the break even lower. We would have to make additional decisions in product lines or areas that we would like to emphasize or de-emphasize. That would ripple through R&D. But also, regardless of the number of sites we have, it would lower the overhead associated with maintaining the product lines and continuing with them. So the kind of infrastructure we got in place is actually -- gives us good amount of flexibility.

I mentioned that -- I believe Jozef mentioned it, it's our objective to make the next few quarters and continue to lower the break even based on the level of expenses we anticipate for the global realignment, so it's our objective to make things better than what we are seeing right now and also the time horizon. We should be able to make additional headways. If what you are saying happens and the revenue level stays at 150 or 160, then we would continue to make things more and more and more efficient.

As Jozef mentioned, it's fundamental tradeoffs in terms of maintaining capabilities versus lowering the costs. We'll make the tradeoffs, but it's our objective as quickly as possible to get into a break even situation.

We have Dale Hope from Griffith McPherty on the line. Please state your question.

Just -- you provided a breakdown of sales. Can you give it to us from a quarterly basis from last year so we can do comparisons?

We have the quarterly sales from last year from the first quarter of last year. We haven't recast the 2nd quarter and 3rd quarter yet because we haven't needed them for publication, but the 1st quarter data is there in the release.

Will you be doing it at any time?

Certainly, we'll do the 2nd quarter when we announce the 2nd quarter to provide the comparison then: if the accounting department has it I'll be happy to send it, I don't know if it's prepared yet.

Okay, just maybe a follow up question, in the [INAUDIBLE] they gave guidance for fiscal 2003, which I believe ended June for them, sales between 64 and 74% year-over-year. Do you see the market that way for your business?

We're not commenting, [ INAUDIBLE] The general state of the business. I'll leave it at that.

How are you seeing your customer inventory? [INAUDIBLE] a considerable overhang there?

There is inventory, but also there is some consumption and some inventories have become obsolete at this time.

Can you hazard a guess when we ought to see some in demand restructure in sales growth [INAUDIBLE]?

That's a good question.

Thanks a lot.

We have Paras [INAUDIBLE] from [INAUDIBLE] on line with a question, please state your question.

Thanks. A quick question, Tony. A while ago I think I heard you say you had 41 facilities at peak and about 25 in the middle of this year. How many facilities do you hope to have after -- at the 230 million break even and how many do you have now?

We would expect to have 8 to 10 when everything is done.

Will any of those facilities be having duplicate or will you be down to one function facility?

I want to make sure I understand your question. When you say function, are you referring to things being available through different source, different sites?

Yes. Are you going to have secondary sources? Or are you going to have one -- 90% of this thing is going to be done in one particular source?

With any particular product or product lines, we are making specific decision as to where is going to be the manufacturing site. So we are being specific to where the products would be manufactured. Now having said that, a lot of sites have similar capabilities, so we are able to manufacture the products or shift the manufacturing to another site. The one that was transferred from, for instance, if we decided to or if we needed in emergency kind of situation, but our intention is to have any particular product manufactured only on one site.

Restructuring subsequent of that would involve -- what kind of things would you be able to do subsequent to that? Say you decide to break even at -- [ Indiscernible ] I think it's tough to say.

As I was saying before, there are strategic choices we would have to make regarding some product lines. We may have to exit and therefore be able to reduce the product offering and portfolio more. This is not very drastic kind a move, but at the same time there are incremental moves that you could make with some products. We very much like to do that in conjunction with our customers and work with them closely to provide visibility before we do it. We don't want to do something disruptive to our customers more than it needs to be. But at the same time, there are some additional choices a that we could make that would [INAUDIBLE] the product.

Thanks.

Thank you.

This concludes the question-and-answers session for the conference. Do you have any concluding remarks?

Yes, I just want to thank you, everybody participating, and we look forward to participating in future conference calls, and thank you very much for your support.