Viavi Solutions Inc (VIAV) 2003 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the fourth quarter fiscal year 2003 earnings 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 Mr. Ronald Foster. Mr. Foster, you may begin.

Thank you, and welcome to the call. I'm Ron Foster, CFO of JDS Uniphase, and I'm here with Jozef Strauss, our CEO, and Syrus Madavi, our President and COO, to report our fourth quarter and year-end results and to provide guidance for the first quarter of our fiscal year 2004. Josef will provide a general status on the market on the company, Syrus will report on our business status, and then I will review the financials and provide guidance.

But first, 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. 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 the press releases and security filings of the company with the SEC, particularly the Risk Factor section of our Form 10-Q, filed for the quarter ended March 31st, 2003. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

I would like to also indicate that this call is being recorded, and will be available for replay from the investor portion of our website, www.jdsu.com. Our discussion today will include non-GAAP measures, a detailed reconciliation of these non-GAAP measures to our GAAP results, as well as a discussion of the usefulness and limitations of these non-GAAP measures is included in the news release announcing our fourth quarter results issued earlier today. This news release is available on the website, www.jdsu.com, as well.

Now, I'll turn it over to Jozef.

Good afternoon. Thank you, Ron. We completed our fourth quarter with sales of $161 million, consistent with our guidance. We have sales of $676 million for fiscal year 2003. We anticipate first quarter sales of fiscal '04 to be in the range of $145 to $155 million. Ron will provide further details on our guidance.

Our reported results show continuing positive advancement in our cost savings and the restructuring efforts commensurate with our existing and anticipated revenue levels. We are pleased with our progress towards bringing the company to profitability, and believe we are transitioning well in the face of our current market dynamics. All communication product groups still operate in the market with few signs of a robust recovery in the near term. However, we believe that the fundamental trend of increasing network traffic, either through internet deals or broadband adoption continues unabated, providing in impetus for recovery and future growth.

The recent request for a proposal by [R-Box] [phonetic] to introduce fiber to the premises, due in part to recent FCC decisions, supports the growth opportunities for our markets. We are aggressively engaged with companies [indiscernible] market opportunity, and we expect to see ongoing design activity through 2004 with possible real deployment stretching over several years. Our meaningful revenues from this opportunity are not likely to be generated until 2005. Still, we do believe that the new FTPP build-out and the resulting business is a matter of when and not if. Also note we are working with customers to support fiber-to-home applications for use in Japan, where there is an aggressive promotion for FTTH technologies leading to more immediate opportunities for JDS Uniphase.

We believe, as build-outs of fiber to home continue, supplying more broadband users with high capacity access, the resulting increased traffic will ultimately require upgrades in the aggregation and backbone portions of the networks.

Overall, as stated in previous calls, our ongoing strategy for our communication business is to focus on the network edge, metro enterprise aggregation access, [CATV] [phonetic] as storage area networks, and subsequently leverage our network edge opportunities and capabilities to position ourselves for very invigorated long haul and [summary] [phonetic] markets in the future. We look to increasing our international revenue, especially in Asia and Europe, and to diversifying of customer base overall, while maintaining a strategy concentration and technical engagement with our key customers.

Our customers continue to focus on systems design and network architecture. As a result, we see ongoing trends in the demand for more highly integrated solutions from JDS Uniphase, which of course has been our stated focus for the past several quarters.

We believe our ability to meet such needs through our breadth of product is an increasingly important competitive advantage, and vertical integrations of our subsystems is a continuing priority for our company. All design win activities in this regard continues strongly, as is true for all the new product development and all recent acquisition sources. As you are aware, we have acquired the optical business of data communications, which augment our ability to integrate optics, electronics, and software to provide subsystem level products, allowing us to expand our offering in different segments, especially in metro markets. This acquisition has been [indiscernible] by some of the top tier customers.

Consistent with current trends, we are also continuing to focus on [customer action] [phonetic] activities and product strategy roadmap to meet customer demands in a changing environment. We believe the benefits of our ongoing [customer action] [phonetic] efforts provide a balance, offsetting against the pricing pressures we continue to experience. To have the lowest price is not only the determining factor in doing business with all customers. Also of significant consideration are factors such as quality of product, financial stability, R&D innovation, and the value of long-term partnership, which we believe is a substantial differentiator for JDS Uniphase, providing our customers with a total value proposition.

The other major segments of our business, our thin film product group, is seeing areas of both strength and challenge, reflecting the current macro-economic conditions within the diverse base of applications and markets.

For our Flex division, we continue to see opportunities in product differentiation, using our color-shifting pigments for both OEM and after-market automotive applications and other consumer products. In security applications, [all dedication] [phonetic] technologies remain a key priority, and we are seeing positive indicators in the pharmaceutical, imaging supplies, and luxury goods markets.

Also a new U.S. twenty dollar bill was officially unveiled in May, where optical identification technology was highlighted as one of the key features in the re-design. In commercial lasers, opportunities exist in applications ranging from biomedical to material processing internal printing.

Finally, within our OCLI products division, our future growth is expected to be more vertically integrated modules and the sub-assemblies for display and biotech instrumentation markets as examples.

In summary, [PPFG] [phonetic] product category will continue to focus on new opportunities with its key strategic markets, such as display, security and biomedical instrumentation, where their core technologies and well-established customer relationships offer greater value and potential. While some of these markets are currently impacted by the general economic situation, we believe they represent real opportunities for long-term goals.

Overall, we are pleased with our performance during a fiscal year highlighted by continuing uncertainty. We believe we have made considerable advances in strategically positioning the company for near and long-term market opportunities. While it has been a tremendous challenge for all of us, we have pursued our aggressive operational markets and product development objectives with commitment and resolve, and have seen great progress as a result.

I would like to take this opportunity to thank our management team and all our employees for their unquestioning support and commitment. Syrus?

Thank you very much, Jozef. My comments are intended to give you additional insight into two areas which have been the focus of our efforts company-wide. First, to restructure the company for profitability and size the costs to the current level of revenue. Second, to optimally position the company in partnership with key customers to fuel the growth of JDSU.

In the first area of focus, restructuring the company for profitability, the progress has been steady and significantly during this past year. In particular, despite a revenue decline of $422 million year over year, from $1 billion 98 million to $676 million, we were able to improve our GAAP gross profit by $128 million. On a quarter to quarter basis, we have also realized steady improvements in gross margin. With this last quarter, non-GAAP gross margin of 25 percent as compared to the same for the fourth quarter of fiscal year '02 being 3 percent.

In a similar way, we were able to reduce operating expenses significantly, in particular, the non-GAAP operating expenses were reduced by $156 million dollars during the year. From $495 million to $339 million. In addition, the non-GAAP operating expense run rates for this year, for the last quarter, supports an additional reduction of $39 million for a total reduction of $195 million. More specifically, non-GAAP R&D expenses decreased by $75 million, and non-GAAP SG&A expenses decreased by $81 million during the year. On a GAAP basis, the reduction in R&D and SG&A expenses were even more significant, with the reduction of $217 million during fiscal year 2003.

Consequently, the gross margins improvement and operating expenses reduction has resulted in significant quarterly improvements in operating losses. More specifically, the non-GAAP operating loss has been reduced from $398 million in fiscal year 2002, to a loss of $259 million in fiscal year 2003. A reduction of $139 million dollars. Of course, the improvement in operating loss on a GAAP basis has been much more significant, with an improvement more than $7.8 billion dollars. At the same time, we have moved the company substantially closer to EBITDA break-even. Previously, we had anticipated the EBITDA cash breakeven to be achieved at $200 million dollars of revenue by quarter ending December, 2003. We are currently on track to achieve this breakeven target. Additionally, we have plans to lower EBITDA cash breakeven to $170 million of sales and achieve this milestone by the end of fiscal year '04.

As most of you are aware, we have achieved these improvements in our financial results by implementing a major restructuring of the company, including many site closures, consolidation of manufacturing capabilities rationalizing product line portfolios, transferring products overseas, and to contract manufacturers, and shifting the focus of the company to more fertile markets. These restructuring activities, implemented under the name Global Realignment Program, for the most part have been completed already or are on schedule to be completed by December, 2003.

We remain on path to both realize the expected costs of the program, as well as the annual saving the company will realize going forward. Ron Foster will provide you more visibility into our financial results, as well as update you on the financial status for the Global Realignment Program.

Now, as to the second company-wide area of focus, namely, optimally positioning JDSU for growth, Jozef has already covered the steps we are taking to optimally position the non-communication businesses, so my comments principally cover our communication businesses.

To that end, we have shifted our marketing and R&D efforts on network edge market segments, including metro enterprise access aggregation, CATV, and storage area network. This shift of focus has paid good dividend for the company this past year, as these markets provided about 65 of communication products revenue for the year, with the balance coming from the traditional markets of long-haul and submarine.

Going forward, we expect a percentage revenue contribution from network edge markets, as stated, continue to grow faster than the rest of the communication revenue for the next two years. In line with our objective to increase market share for network edge market segments, we have also increased our focus on international markets, in which JDSU has not had traditionally much penetration.

And as such, these markets represent off-site potential for JDSU. In fact, for this past quarter, our sales into international markets as a percentage of total sales has continued to grow to the last quarter level of 30 percent , with Asia accounting for 13 and Europe for 17. Fueled by sales from communication products, we expect these percentages to continue to grow.

Our initiatives to increase market share, both for network edge markets, as well as international markets, are driven by our design win efforts corporate wide. We believe design wins are the most salient leading indicators of growth in revenue and market share gain. While the design wins have always been considered to be very important at JDSU, during this past quarter, we formally launched a corporate-wide emphasis on design wins. To this end, during this past quarter we captured about 240 design win points, which has the potential for $24 million dollars of additional business over the next two years. Going forward, we continue to track design wins for our communication product.

As was mentioned in Jozef's comments, we are seeing a trend for system providers wanting to outsource an increasing amount of their hardware development. This represents very attractive new markets for JDSU, in which we can leverage our unique expertise in photonics with our knowledge in electronics, firmware and software, to offer customers card-level and rack-mounted shelf level products, with very high level of functionality. In fact, in order to take full advantage of these new markets, we have co-located several synergistic businesses in Ottawa. These businesses, combined with our recent acquisition of the optical products of Ditech, are gaining excellent traction with customers. And in fact, recently we have secured several card-level opportunities from Tier One system providers.

Of course, we can only optimally position JDSU for growth by developing a diverse set of innovating products. During this past year, we introduced 64 new product platforms from which we can readily drive additional products to meet unique requirements of our customers. So far, these products are being received very well, as reflected by the number of design win points we have been able to capture.

To summarize, during this past year, we have made excellent progress towards profitability. We believe our market position and relationship with customers are substantially stronger. These two areas continue to be the focus of the company during this new years. Now I would like to ask Ron Foster to give you more detailed insight into our financial results and outlook. Ron?

Thanks, Syrus. I will review the key financial numbers for the quarter, beginning with the income statement. I will then discuss the balance sheet, and finally, guidance for the coming quarter. I will be commenting primarily on our non-GAAP presentation of financial results.

Sales of $161 million in the quarter were in the mid-range of our sales guidance of $155 to $165 million. Sales for the fiscal year were $676 million, compared to $1.1 billion in fiscal year 2002. Our sales for the quarter included revenue from order cancellations of approximately $6 million dollars, compared to $3 million dollars last quarter. Our communications products group represented $76 million dollars in sales, or 47 percent of total sales. Revenue in this segment was up $2 million dollars sequentially. For the fiscal year, our communications product group accounted for 49 percent of total sales.

Our thin film products group, that is, our non-communication sales, accounted for $85 million dollars in sales, or 53 percent of our total sales. Sales in this segment showed an 8 percent decrease from last quarter, primarily in the display business. For the fiscal year, thin film products group accounted for 51 percent of sales.

By geographic region, sales for the quarter were 70 percent for North America, 17 percent from Europe, and 13 percent from Asia, similar to last quarter. Our overall book to bill ratio was .94 in total, but above 1 for the first time in 10 quarters or 2.5 years, in the communications business.

As Syrus indicated, we're continuing to see positive effects of our global realignment program on our cost structure. We will anticipate annual savings of about $1.3 billion dollars as compared to our cost structure at the commencement of the program. In the fourth quarter, we recorded restructuring and other charges under the program of $20 million dollars, bringing the total program cost to date to about $1.1 billion dollars. We anticipate that the remaining cost of this program of about $50 million will be incurred mainly through the first and second quarters of fiscal 2004, as Syrus mentioned.

On a cash basis, we spent $27 million dollars in our fourth quarter under the global realignment program, bringing the total outlay so far to approximately $280 million dollars. We anticipate additional cash outlays of about $170 million in future quarters. Included in the costs of the global realignment program are primarily charges for employee severance, lease costs, accelerated depreciation, write-downs of restructured assets, and moving and employee costs related to the phasing out of certain facilities and equipment.

Gross margin improved to 25 percent in the fourth quarter from 19 percent in the third quarter on a non-GAAP basis. These results are better than our guidance of 17 to 19 percent. This improvement of gross margin results from the global realignment program, other cost reduction activities, and reduced royalty expenses. The gross margin in this quarter also reflects the benefit of $5 million when you net $10 million dollars in inventory write-downs against $15 million of inventory we consumed that had been previously written down. I will note that the communications business segment has continued to experience sequential increasingly positive gross margins.

Now, to operating expenses. Our total non-GAAP operating expenses were $75 million dollars, or 47 percent of sales for the quarter, down $8 million dollars or 3 points sequentially. For the fiscal year, our non-GAAP operating expenses were $339 million, or 50 percent of sales for the year. Non-GAAP R&D expenses were $31 million dollars, or 19 percent of sales for the quarter, relatively flat sequentially as we had guided last quarter. For the fiscal year, R&D expenses were $141 million, or 21 percent of sales for the year. Again, consistent with our guidance, non-GAAP SG&A expenses for the fourth quarter dropped to $44 million, a $7 million dollar improvement from the third quarter.

Non-GAAP operating loss for the quarter improved to $34 million in the fourth quarter, from $51 million dollar lost in the third quarter, a 33 percent improvement. For the year, the non-GAAP operating loss was $259 million dollar compared to $398 million in fiscal 2002.

The segment non-GAAP operating loss for the communication business narrowed from $46 million to $32 million, while non-GAAP operating income for the thin film products group dropped from $18 million to $10 million on lower revenue.

Interest and other net income was approximately $6 million dollars for the quarter. The GAAP net loss for the quarter was $62 million dollars or 4 cents per share, and the non-GAAP loss was $29 million dollars to 2 cents per share, coming in at the favorable end of our guidance of 2 cents to 4 cents loss.

For the year, the GAAP net loss was $934 million, or 66 cents per share, and the non-GAAP net loss was $229 million or 16 cents per share. The company recorded an income tax benefit of $6 million dollars for the quarter. In compliance with FAS 115, the benefit resulted from a reduction in the valuation allowance for deferred tax assets due to the unrealized gain on our investments in public equities. Fluctuations in the market value of these investments may create volatility in our income tax provision or benefit in future quarters.

Now, to the balance sheet. Our balance of cash and marketable securities at the end of the quarter was $1234 million, of which $1160 million was cash, money market and other highly liquid fixed income securities. The company used $53 million in cash for operations in the fourth quarter, including the $27 million dollars of cash used by the Global Realignment Program. Although this is similar to the $51 million dollars of cash used for operations last quarter, Q3 had the benefit of $58 million dollars of higher tax refunds in the operating cash flow number. We used $220 million dollars in cash for operations in fiscal year '03. Capital spending was $8 million dollars in the quarter. For the year, capital spending was $47 million. And DSO decreased slightly to 55 days for the quarter, compared to 56 in the prior quarter, and overall net A/R declined by $5 million dollars. Net inventory decreased 16 percent in the quarter to $84 million dollars.

During the quarter, we recorded a $2 million dollar reduction in the value of long-lived assets classified as held for sale, in accordance with FAS 144. We currently have $34 million dollars in assets held for sale that are included in other current assets on the balance sheet. In addition, the company completed a review to determine if impairment indicators existed related to its other long-lived assets for the quarter. The company determines there were no impairment indicators, therefore no impairment review was required under FAS 144. Additionally, the company performed its annual review of goodwill impairment pursuant to FAS 142. The company determined that there was no impairment related to carrying value of goodwill at June 30, 2003.

Employment dropped by 900 in the quarter to about 5500, and is down from 9200 at the end of the last fiscal year.

Now, to the guidance for the first quarter of fiscal year 2004. Net sales are projected to be in the $145 million to $155 million dollar range. Revenue for the communications products group is expected to remain flat, while revenue for the thin film products group is expected to decrease. Non-GAAP gross margin is expected to be in the 19 to 21 percent range of total net sales. The expected drop from the Q4 level of 25 percent is caused by projected declines in the level of favorable inventory and warranty adjustments and reduced cancellation revenue from $6 million dollars to zero.

We expect all categories of operating expenses to decline sequentially, and we expect non-GAAP net loss would be in the range of 2 cents to 3 cents per share. As a reminder, our non-GAAP projections exclude Global Realignment Program charges, as well as other acquisition and impairment-related expenses such as amortization of purchased intangibles, reductions of goodwill, and long-lived assets; stock-based compensation expense, and gains and losses on investments.

In July, as Jozef mentioned, the company purchased the optical components business of Ditech Communications, Inc. We believe the transaction enhances our vertical value-added business strategy, and is not material to our Q1 outlook.

As stated in previous quarters, the company expects to achieve non-GAAP EBITDA, that is, earnings before interest, taxes, depreciation and amortization, to be at break-even at a revenue level of $200 million dollars by the second quarter of this fiscal year. In addition, the company projects to reach EBITDA break-even at a revenue level of $170 million dollars by the fourth quarter of fiscal year 2004.

As a reminder, these break-even forecasts represent a projection of our anticipated cost structure and are not a prediction of future revenue levels. We are expressly not providing any revenue guidance beyond the first quarter. The company expects to see continued improvement and use of cash by operations during fiscal year '04. Capital expenditures for fiscal year '04 should be in the $40 to $50 million dollar range, and cash used for Global Realignment should be about $75 to $85 million dollars. In addition, we plan to dispose of our assets held for sale during fiscal year 2004.

Now we will open the call for questions. In order to allow us to respond to as many questions as possible, we'll ask you to limit yourself to a single one-part question. Time permitting, we'll come back around to subsequent questions. Operator, we'll open it up for questions.

Thank you. We will now begin the question and answer session. If you have a question, you'll need to push the 1 on your touchtone 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 # sign. Your question will be queued in the order that they are received. If you are using a speaker phone, please pick up your handset before pressing the numbers. Once again, if there are any questions, please press the 1 and your touchtone phone.

Our first question comes from Robert [Sangl] [phonetic] from William Blair. Please state your question.

Thank you. Could you just comment on the outlook -- we're just hearing at least a few positive signs from some system vendors that they're interested in replenishing inventories and that they're at least possibly thinking about seeing some activity in the wire light side, heading into the end of this year, early next year. Jozef, can you just give us an update on what the mindset is of the major systems vendors and what their plans are going into the fourth quarter? Thanks.

Well, I can just [indiscernible] with respect to general trends what we think. As we indicated in our previous calls, most major vendors are coming to us for designs and corporation [indiscernible] that they have products to a high degree of complexity and integrity for the design. They don't have the same manpower as they used to for the design activities, and we are feeling very comfortable, and we have a very good product portfolio to offer that capability. The same applies with respect to almost across the entire board, and so our design win activity, as Syrus has indicated, is reflecting that involvement with some of our customers.

We are seeing some customers falling short of some parts and expediting, so that's a few indications that in certain instances, the inventory is running lower. But those are spot kind of incidences.

It's still fairly spotty, Syrus? Is there any degree of consistency?

No, I don't think it would be accurate to say there is consistency there. It's happening more frequently than it did, say, six months ago, but it's not quite in a consistent manner.

Okay. All right, thank you very much.

Thank you. Our next question comes from [Steven Poplar] [phonetic] from Wachovia. Please state your question.

Hi there, and good afternoon. On the telecom side, Syrus, I believe you said that for the full fiscal year, the growth areas that you called out, metro enterprise, etc., represented 65 percent of total revenues. So I would think, given the mix shift that was underway all along for Q4, it was significantly higher than that. So my question is, are you surprised -- you're giving flat guidance for fiscal Q1 – are you surprised that it's not actually growing a little bit sequentially now, given the fact that you've mix-shifted pretty substantially to the growth areas you targeted more than a year ago?

Well, I do believe the network [edu-applications] [phonetic] market segments are growing much faster at this point than long-haul and ultra-long-haul, certainly, and submarine. So, quite a bit of our revenue will come from those market segments. In terms of relative to the next quarter, whether they grow fast enough to account for incremental growth rather than the flat kind of outlook that Ron described. I think part of it really relates to how much turns business we'll be able to get. But based on the kind of visibility we have, I think the most prudent judgment we could render is to say that's going to be flat.

Just to follow up, is my understanding correct, if it was 65 percent for the fiscal year, are we significantly higher than that 64?

Frankly, I don't have that off the top of my head and so I beg your pardon for that.

No problem. Thanks very much.

Thank you. Our next question comes from [Jim Young Johann] [phonetic]. Please state your question.

Hi, guys. On [display] [phonetic], I think you mentioned it was down 8 percent this quarter. Any more color? I think there might have been a little seasonality. And then just generally more color on why the [indiscernible] 1.0 book to bill in thin film and the non-telecom business. Just to have a little more comments there on Flex and thin film.

Hello, Jim, this is Ron. In terms of the overall thin film business, as I commented, we were seeing some downward decline in the display business. It was down sequentially and we said overall TFPG was going to be down somewhat in our Q1 guidance related predominately to our display area. So that is in fact where we're seeing it. We are making significant investments in developing new light engine and display technologies, and we will get traction on that in our Flex business. We're investing in new security authentication areas. We believe that it will take us a couple of quarters to get significant traction in those areas, and to return back to a growth track.

Okay. Thanks, then.

All right. Thanks, Jim.

Thank you. Our next question comes from [Arindum Vestu] [phonetic] from Morgan Stanley. Please state your question.

Ron, clarification on a comment you just made about the decline of the display business. Curious if you're referring to the optical coating business, where you supply the optical coating to Texas Instruments. And then a question actually for Jozef on [Vitesse] [phonetic]. They actually commented they intend to sell or exit their optical modules product business. Have you had any discussions or do you have any sense of quality of products or ease of integration for whoever the buyer may be of that business? Thank you.

I'll take the second part of the question, but really I cannot comment on what [indiscernible] strategic plans are. Feel free to call Vitesse.

With regards to the optical coating business, [indiscernible], that's part of our total business. We've got a number of things going on there. We have front service mirror coatings; we have different products that go into the display business, light engines, etc. So it is a general downward trend in a number of those areas that is affecting the downward projection, both in results this quarter and next quarter.

So it wasn't any one specific area – it's across the board?

Well, there are customers that account for a larger portion of our revenue in the display market, and so what happens with those customers clearly impacts the totality of the revenue we drive from the display market. So there are some customers that affect it more than others. And as Ron mentioned, we have quite a diverse set of products that go into different applications within display and different customers use them. But there are customers that have a significant portion of our revenue, and as our revenue from them is impacted, I think that would impact the total display revenue.

And Jozef, just a quick clarification on my question on the Vitesse business, do you have any sense of the quality or competitiveness of the products coming out of that business? If you could just address that, I'd appreciate it.

Well, really, I would not like to comment. I'm very happy with our product category and with our market penetration, and I'll be more than happy to discuss our product.

All right. Thank you very much.

Thank you. Our next question comes from [Raj Shrinkonch] [phonetic] from Deutsche Banc. Please state your question.

Can you sort of generally give a comment with regards to your own visibility? On a quarter to quarter basis, is it improving, or is it getting worse? And then the second question is, based on most of your business is now probably dependent on the turns business as opposed to any backlog-driven business. Given that, [indiscernible] your backlog lead you to making some sort of a judgment call on the business, but how are you sort of making assumptions regarding the turns business? Thank you.

This is Syrus Madavi. We do have sort of rules of thumb within the company as it relates to turns business. We have not in the past shared that publicly, so if you would at this time, we don't like to share that either. But we do look at how much of the business is already on the backlog, and how much of it we need to bank on doing turns business. And that really forms the basis for us giving the outlook that we do provide. So of course, if the turns business happens to be higher, then the end revenue ends up being higher.

Now, for the first part of your question about visibility into different parts of the business, this is a very general kind of statement. I think my sense is, the visibility into the communication side is getting a little bit better on a relative sense than, say, six months ago. On the other hand, because of the economy and some of the ups and downs we've had in the non-communications business, I think the visibility in the non-communications side is slightly lower. So they sort of balance each other off, if you would.

Thank you.

Thank you. Our next question comes from David Wade from RBC Capital Markets. Please state your question.

I just had a follow-up question on the thin film side, in terms of the outlook in the quarter. Could you just provide a bit more color around, aside from the display business, how the outlooks are looking for the other parts of the thin film business? Thanks.

Certainly. I think aside from the display business, there are certain segments of the market that are very closely link to the economy, and the economic growth. For instance, we have in the optical OCLI division of the non-communication business thin film products group. We have a product line that's tied into decorative type of items, and that has not done quite as well in today's economy, even though we see much, much potential for it. So there are segments of the business that are not doing as well. But then, in turn, there are segments that are really doing excellent, and we're gaining a lot of traction in the product authentication area. You may recall we made an acquisition called L.A. Label, and that allows us to take our optically valuable pigment directly to an end product and put it in the hands of a user. And so that has provided a lot of leads. We are getting connected with a lot of really good customers, where we can provide product authenticity, authentication, to their products. So there are segments of the markets that are growing very, very nicely, that we are quite optimistic about.

And overall, on a longer-term basis, we do see the revenue from our non-communications side grow and prosper. But in the interim is the outlook that was provided as accurate.

But just to be clear, in terms of the guidance in that the thin film business will be weaker next quarter – is that almost primarily driven by the display business?

I would say for the most part, yes, that would be an accurate statement.

Thank you.

Thank you. Our next question comes from Dennis Gallagher from Soundview. Please state your question.

Thank you. In some previous quarters, you talked about the progress that you're seeing in CATV components and modules and short-reach transceivers. I'm wondering if you could update on those things?

Syrus can comment a little bit more, but those are products which we have included [indiscernible] with respect to those [metallurgical] [phonetic] applications and generally, in the general blanket, we feel those segments of the business remain reasonably healthy within the current macroeconomic environment. [Indiscernible] some of the data from related products clearly, there is a competitive environment and what are timing-related issues. But we are positioning our product with some design wins, as Syrus has indicated in his discussions.

I think overall those markets, on a relative basis, continue to be fertile, and we believe we have an excellent position in those markets. There is some level of customer consolidation, as I'm sure you've had visibility into. So as the number of customers get smaller, clearly you have to make the bigger impact with the number of customers that do remain, and that is our objective. We also are pursuing the international markets, where traditionally we haven't had as much of a presence, and we're gaining some traction in the international markets. I think the overall market seems to be pretty good. There are a couple trends in the market. This digital return capability that seems to be coming up is a good fuel for the growth, and [Comstock] [phonetic] kind of applications, I think, are very good. So we like the market segments, and we think we have a good position in it.

International progress with new customers?

Yes, with some new customers that traditionally we have not had as much business. So we're putting more focus on the international customers at this time.

Would you characterize the CATV part of the business as doing better than the short-reach transceiver at this time?

I wouldn't necessarily describe it that way. I think the transceiver business, particularly for the data com market, is quite robust. Certainly on a unit volume basis. But it is, as you may know, subject to quite a bit of price pressure.

Thank you very much.

You're quite welcome.

Thank you. Our next question comes from Max Shutes from Credit Suisse Boston. Please state your question.

I was wondering if you would comment a little bit on the pricing environment you're seeing in some of the network edge products. I guess we had a period where that was quite a bit more competitive than some of the core products. I was wondering if that was stabilizing a little bit. And also, I was wondering if you can give us some color on fiber to the home and what's going on there – whether you have any content in the Japan deployments currently where your [indiscernible] opportunities were, and just what you saw sort of the addressable market for fiber to the home, maybe on a optical component content per sub basis?

This is Jozef here. Well, generally, [indiscernible] the market in Japan. We are aggressively pursuing the opportunities, not only in the component part of the business, but taking our product portfolio and offering, I would say, sub-system on a card level type of activity, and this is the effort we score as higher value-added opportunities. In some level, this is the same application or same effort we would do here for the [indiscernible] premises, which today you see from requests from proposals. We consider this as a growth opportunity. Again, with respect to positioning [indiscernible] the company with some of our OEM's who are [indiscernible] asked that we worked with them on this high level of product complexity. And that is what Syrus and we have indicated our product and company's focus and strategy has been. In effect, this also provides some kind of an offset with respect to price increases. You'll see that in some products there is a [commoditization] [phonetic], especially in passive components, but by offering newer type of components, [indiscernible] components, [indiscernible] offering products; they're offering some products which provide a new higher value-added that, commensurate with our aggressive cost-cutting structure, provides the offset with respect to the ongoing pricing pressures which we experience.

Jozef, could you maybe tie this up with some numbers for us? You were thinking of something in the hundred dollar per sub-opportunity, or this is a five hundred dollar --

We are not ready at this stage. We are in the discussion and design level stage, and as I said, the design level activity will continue throughout 2004, late 2004, with real numbers around some design prototyping in 2005. So we will update you as time develops.

So no sense of what kind of ballpark those could be in?

Well, Joe Straus would say the sky's the limit, but we've got to get going for it, right?

All right. And the pricing environment around the edge components today?

Well, those are standard pricing pressures which apply in this difficult environment. The macroeconomic conditions dictate that each of our customers [and customers' customers] [phonetic] are constantly looking at decreasing the system costs and transmission costs and then they're asking their suppliers to share some of the burden. We are willing to share the burden if we have a higher level of complexity to offer them. And also, we're working very hard on a cost component – on cutting the costs to offset those pressures.

Probably consistent with what we've seen in the past couple of quarters?

Absolutely right.

All right, thanks.

Thank you. Our next question comes from [Arnold Tranda] [phonetic] from Lehman Brothers. Please state your question.

A couple of questions. First of all, could you just review what the cancellation charges were for the June quarter and what the dollar value inventory adjustment you received that helped the higher gross margin?

The cancellation charges – are you talking about cancellation revenue? That was up $6 million dollars. And I'm sorry – what was your second question?

What were the inventory adjustments – what was the [indiscernible] you received for gross margins for written-down inventory that you had sold again?

I mentioned that there was a net of $5 million dollars net benefit which was the offset of additional excess inventory of about $10 million in recovered, previously written-off inventory of $15 million.

Right. And then one last question. I'm not familiar – maybe some others are – about the thin film division. I understand the communications decently well. Could you talk a little bit about why the profitability for that division seemed to fluctuate? It seemed like it was up quite a bit last quarter and then it was down this quarter. On an operating basis, maybe you could shed some color on that, on how we should model the profitability of that division? Thank you.

The division is made up of a group of businesses made up of three different divisions, and they service different market segments. Some of them are very close to the consumer markets and as such, as you might expect, subject to a lot of price erosion and price pressure. Some are not consumer – some are more industrial, such as the commercial laser division, which is embedded in that group. So there is different level of variation of pricing. But I would say the profitability mostly is impacted because of the mix of the revenue that we would have from different types of products. And so in fact, the revenue mix, revenue composition, affects the gross margin and the profitability to a good extent.

And we also had revenue lift and then a decline in the last quarter, so just the absolute level of revenue movement quarter to quarter has some effect on our profitability in that area.

Thank you. Our next question comes from Jeremy Bunting from Thomas Weisel Partners. Please state your question.

Hi, it's Reuben Wright for Jeremy. Jozef, a question for you. I was wondering again on the communications side. If you look at what you said ultimately, [indiscernible] were going to require upgrades to the backbone of the network. I was just wondering, how do you think the inventories for long-haul and perhaps [indiscernible] components are today and what do you think about component obsolescence? When can we start thinking about perhaps OEM's starting to ramp their inventories back up? Thank you.

The question of inventory has been always in the forefront of some of these questions for several quarters. We believe [indiscernible] visibility from customer to customer. We know some of the customers are, as Syrus indicated, buying some products from stop to stop. But what's most important, as time goes on, the customers are working themselves and together with us, to decrease the operating cost and maintenance cost of their products. This leads to some new re-design of circuit cards. This leads to redesign of some of the system for lower, I would say, power consumption or lower footprint in the central office, which then requires from us to develop [indiscernible] new product for the high degree of complexity. Some of those products may be pulled out from the inventory, but I cannot assume what we will be seeing. And we will are experiencing some new product designs with respect to that activity. I kind of believe that those products which are in the inventory of some of our customers may be reaching in our next four quarters some [indiscernible] to really pulling them for heavy use.

Okay, thanks. And quickly for Ron, is there a material difference between the gross margins on the network edge markets versus the traditional core long-haul products?

We don't break that down specifically in terms of our communications. And I don't have that readily available at this point.

Thank you.

Thank you. Our next follow-up question comes from Arindum Vestu from Morgan Stanley. Please state your question.

Ron, one housekeeping thing. Depreciation in the current quarter? And then secondly, on the fiber to the premise question, Jozef, have you gotten any sense of passive optical component RFQ activity, given the fiber to premise activity at the R-Box and the FCC? And if you could comment about pricing activity in [indiscernible] for the Japanese premise builds?

Hi, Arindum. The depreciation number for the last quarter was $10 million dollars.

As we are engaging the customers, the discussion engages not only about components for some of those applications, but really comes with respect to since our very strong technical capability and technology re-reviewing system designs and network designs. [Indiscernible] optimizing those, with respect to wiring again modules, what I call them, against sub-systems, so that we incorporate some of those components and provide a little bit of software customers so they can engage higher. So the previous question in this conference was already, what is the level of content. I think we [indiscernible] to look at it, but from the model side of it, how much design we can incorporate going forward. And that will take several quarters to firm up.

With respect to applications in Japan, again, the architecture is all slightly different, and also the needs are slightly different, and while we are still engaging in some of those activities through directly our sales and through end users and through our representatives to redefine what other products we can provide and what other product modules can we provide. I must say that the product category in Japan, where they [indiscernible] fiber to the home and fiber to [indiscernible] is going to be different. It's not the same product, but if you look at the product family with respect to our strategy into sub modularization and higher value, we all want to do the same thing in [indiscernible].

Okay, thanks, gentlemen; that's very helpful.

Thank you. At this time, we show no further questions.

All right. This concludes our conference call for our fourth quarter results for fiscal year 2003. Once again, you can hear the replays on our website, and we thank you all for joining us today.

Thank you. Ladies and gentlemen, this concludes today's conference for today. You may all disconnect at this time. Thank you for participating.