Viavi Solutions Inc (VIAV) 2004 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the fourth quarter fiscal 2004 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 Ms. Jacquie Ross, Director of IR. Ms. Ross, you may begin.

Thank you, operator and welcome to the JDS Uniphase fiscal fourth quarter and fiscal year end earnings conference call. Joining me on the call today are Kevin Kennedy, President and CEO, and Ron Foster, EVP and CFO. Before we get started I would like to remind you that this call is likely to include forward-looking statements about the future financial performance of the company. Forward-looking statements are subjects to risks and uncertainties that could cause actual results to differ materially from management's currents expectations. We encourage you to look at the company's most recent filings with the SEC. Particularly the risk factor section of our Form 10-Q filed for the quarter ended March 31, 2004. The forward-looking statements including guidance provided during this call are valid only as of today's date and JDS Uniphase under takes no obligations to publicly update these statements as we move through the quarter.

Our comments today will include non-GAAP measures. A detailed reconciliation of these non-GAAP results to our GAAP results as well as a discussion of usefulness and limitations of these non-GAAP measures is included in the news release announcing our fourth quarter and year end results issued earlier today and available at our website at www.jdsu.com. Finally, and as a reminder this call is being recorded and will be available for replay from the investor portion of our website again at www.jdsu.com/investors. I'd now like to introduce JDS Uniphase's President and CEO, Kevin Kennedy.

Good afternoon. Thank you for joining us. Today we will discuss our quarterly and year end results. At a summary level, progress has been deliberate. First indicators of market recovery span our business segments and are reflected by our strong fiscal fourth quarter revenue. We have entered the current quarter with a strong order backlog, book-to-bill for fiscal Q4 was the strongest it has been for 14 quarters, design wins are increasing yet visibility remains limited. Importantly our customers continue to validate the importance of our vertical integration strategy in concert with an intense focus on operational execution.

Specifically in this quarter, consistent with our product strategy, integrative sub systems level products particularly circuit packs on display engines continue to be key growth drivers. This new mix of integrated products has resulted in faster time to market, with more revenues derived of one year of R&D engagement and in line with commitment to our customers during the quarter our quantitative customer satisfaction measure grew 10% growing and moving JDSU to the midpoint on a scale ranging from medium performance to best in class performance in our semi annual survey.

Second measures we have taken to reduce our operating expenses over the past several quarters combined with our revenue growth have brought these expenses in line with our current goals. And third in line with the operational and strategic trajectory we have discussed over the last few calls we established the quarantine strategic strategies necessary to address the remaining operational infrastructure challenges in a customer focused manner. This ground work will enable us to drive the next phase of cost reductions at the gross-margin level and provide additional operating expense improvements. More progress is required. During the quarter we initiated the next series of measures designed to establish and achieve sustainable profitability targets.

With that let me start with the financial highlights, Ron will provide more detail later in the call. With one exception we achieved and exceeded our financial objectives for the fourth quarter. I'm extremely pleased to report that for the third consecutive quarter revenues trended upwards increasing 8% to $174.5 million. This represented our strongest revenue performance since September 2002 and exceeded our guidance expectations. Book-to-bill was over one for the fourth consecutive quarter and, in fact, exceeded 1.2. Our strongest performance since the first quarter of 2001. Non-GAAP loss per share was a penny in line with our earlier guidance, as in recent quarters, both segments of our businesses grew, each accounting for roughly 1/2 of the total fourth quarter revenue in line with our international growth strategy revenue from outside of North America particularly in Asia-Pacific increased in fiscal 2004 and now represents 39% of total revenues up from 30% a year ago.

Relative to profitability measures, for the 12th consecutive quarter non-GAAP operating expenses declined. Opex now represents 33% of total revenues as compared with 47% a year ago reflecting ongoing operating expense efficiencies initiated last fall. These efforts continue as we drive implementation of our next series of cost improvement programs focused on gross profit. As we indicated in the past we believe gross profit improvement will be derived largely from our customer focus, integrated product strategy and principally a renewed focus on a product by product plant to transfer manufacturing to more cost-effective locations. We expect these programs should drive sustainable gross margin improvement in the mid to longer term.

Non-GAAP EBITDA improved from a loss of 9.7 million to a loss of 6.8 million representing a 30% improvement over the last quarter and within our previous guidance but not satisfactory. Gross margin was 24%, one point below our previous guidance range as a result of the lower margins associated with the ramping of our newer more highly integrated products.

Let me now update you on the two growing business segments. Communications revenues grew 8% to $85.8 million or just under 50% of total revenues. Our communications business growth is increasingly led by our burging surf pack business which accelerated in the fourth quarter, this business enables JDS Uniphase to serve as an original design and manufacture or ODM partner to equipment providers. As such we expect JDSU will more optical integration confidence into these systems over time in order to improve both revenue and margins. On the revenue side we expect this business to grow to double digit millions of dollars within the first few quarters of fiscal 2005. In the fourth quarter of fiscal 2004 we shipped to a number of Tier One customers where we have earned tens of new design wins. For the first time this business contributed more than 5% of communications revenues. Importantly this business continues to support improved time to revenue as Q1 through Q3 '04 design wins have translated into significant Q4 revenue.

Our cable TV business continued to benefit from the growth in video and demand with shipments [quam] transmitters doubling sequentially. Data com also performed solidly, and we're encouraged by strong design win traction for our 4 gigabit fiber channel products and our 10 gigabit XFP products. And of course, as a leader in the space we continue to invest in technologies. For example, we expect our reconfigurable optical edge drop multiplexers or ROEDM's to scale production shortly. ROEDM's enable operators to save on costly manual labor by remotely reconfiguring signal allocation and direction. This is a new market and we were very pleased with the number of early design wins we achieved in the fourth quarter.

More broadly we are encouraged by the series of announcements by our customers and partners to invest in both optical datacom and telecom infrastructure. Notwithstanding that is too early to forecast in detail how or when these initiatives will impact our business, we believe that any implementation of fiber to the node or premise will result in increased demand for fiber, optical devices and lasers. In turn we believe that this will impact long haul and metro demand. In general, all implementations move fiber closer to the consumer, displacing copper infrastructure and increasing the availability of wider band with services.

Turning to our commercial and consumer products group, revenues grew 8% to 88.7 million, as a reminder this segment builds on our expertise in optics and offers innovative technologies for a range of commercial and consumer applications such as large screen television displays, document and brand security and commercial lasers. Although we do not break out revenues within the commercial and consumer product group, let me offer some discussion on the performance and opportunity in each of the two subsegments as appropriate. First we look at the business internally as one subsegment of optical elements and the second subsegment of coatings known as our flex group. The bulk of commercial and consumer revenue come from lasers, optics and display products which include commercial lasers, custom optics and television display components. Additionally we supply front surface mirrors, digital life processing, or DLP, package components, color wheels, subsystems such as projection display engines. The growth of display components and subsystem businesses accelerated in the fourth quarter as our customers prepared for the coming holiday season. A long-term customers increasingly turned to us as the supplier of choice for display components, and we began to experience light engine traction driven by the move to high-definition television.

Light engine like the motherboard for a computer represents a systematic assembly of platonic elements including a bulb, image producing panels like the CPO equivalent from companies such as Texas Instruments and Intel, [Lamdids] and numerous JDS Uniphase optical elements. In the fourth quarter the dollar value of the light engines we shipped approached $1 million with an average selling price in the range of $800 to $1300. Hence we participated in this market by selling optical elements as well as subsystems. JDS Uniphase's light engine were developed in conjunction with partner Advanced Digital Optics and addressed two of the major projection high-definition television display solutions, Liquid Crystal on Silicon or LCOS on DLP. Both light engines are now in production as the transition from CRT to high resolution display continues we feel strongly about the leadership of our light engines and in terms of cost and performance specifically. As we are well positioned to capitalize on the growing demand for larger television screens and high definition images.

Regarding LCOS, during the fourth quarter we began shipping our LCOS light engines to Brilliant an early high end supplier in the space. Interest in LCOS is growing with a number of brand name TV manufacturers evaluating the technology for the next generation products. JDS Uniphase LTREX--LCOS light engine is already receiving industry accolades, positioning the company to gain traction in this growing market. We will be looking for an increased revenue contribution from LCOS this fiscal year particularly in the later stages as this market gradually unfolds.

The other subsegment of the commercial and consumer product group is our Flex business. At the heart of the Flex business is our Security Pigment used to protect more than 90 currencies around the world and other high value documents. Building on that expertise but still largely in incubation, our products that enable brand and product security and optical coatings. Although still relatively small contributors within the segment we're seeing some traction. For example, our color shifting technologies are being trialed by several large pharmaceutical companies. Also of interest the fourth quarter was the first full quarter of Superstore Targets iridescent evolution. Which employ JDS Uniphase color shifting technologies on a range of Motorola and Phillips consumer products.

As I mentioned, on the last call the company's in the midst of a multiphase transition. The first three phases which are now largely complete involve the recalibration of the organization along customer focused goals, assessing augmenting and streamlining the team and consolidating functions all by improving processes and then evolving in growth and operational improvement strategy. It's of credit to our employees that we have been able to grow revenues throughout the first three phases of our transition. The full benefits of the changes we have made will not be realized for several quarters, but now that much of the associated risk is behind us I'd like to thank our employees for their continued commitment and hard work. With the critical new executives announced last quarter now fully up to speed I believe that we have the core team and resources in place to embark aggressively on site trajectories designed to bring sustained profitability.

During the quarter we experienced a number of transitions in our team, of particular note, our report that my good friend, advisor and former CEO Joseph Strauss elected to retire from our Board of Directors. Joseph has provided invaluable assistance. He's worked tirelessly to support the leadership transition and to sustain and nurture our customer relations. This focus and legacy will continue as Joseph has agreed to be a part-time advisor. Also this quarter the leadership of our Laser Optics and Display business transferred from Joseph Zils to George Christensen, Joe has been extremely supportively during the transition and has agreed to help us in an advisory capacity.

In the fourth stage of our improvement plan we have identified a multistage plan to reduce the company's footprint, rationalize the manufacture of our products based on core competencies, cost efficiency and alternative manufacturers where appropriate. The challenge will be to effect this plan without adversely impacting our customers particularly in a time of apparent resurge and growth. Our plans will be effective deliberately, conservatively and necessarily over a 18 to 24 month period. While I'm not prepared to delve into all the details of our plan at this time I I can tell you that we have already completed several actions to reduce our footprint including the just completed sale of our Columbus, Ohio facility and the 2004 fiscal year end closure of our Eindhoven facility. I'd also note that a key aspect of our plan moving forward will be to move manufacturing where practical to lower cost locations. At present, less than 20% of our communications manufacturing overhead derives from lower cost facilities such as Shenzhen, China. By the end of fiscal 2005, we expect this figure to exceed 50%. Additionally, in fiscal Q1 we expect to complete our revised contract manufacturing strategy. This will result in stronger leverage, fewer contract manufacturers, specific product sourcing on each contract manufacturer and improved leverage of JDSU internal resources.

Through these plans and our continuing focus on operational excellence we believe that we will be able to improve our predictability, visibility and report significant gross margin improvements over time. Relative to external growth, with the acquisition of E2O in May you can see that we are committed to investing in discreet digestible acquisitions consistent with our strategic goals. The integration of E2O is proceeding well, and we're particularly please with E2O's revenue contribution of 3.7 million in the last half of the quarter. Based on the operational progress made to date, we expect to increase our level of fortifying activity over the next several quarters as we continue to pursue our growth and profit objectives.

In conclusion, continued indicators of growth exist. Revenue and bookings are on a positive trajectory, continue to believe we're experiencing an inflection point towards growth with customer seeking both to reduce the numbers of suppliers they engage and to ensure that those partners are reliable, financially sustainable, broad thought leaders in optical solutions. We realize we have much more work to do on our operating leverage and have initiated a new set of consolidation initiatives led by our new SVP of Operations.

At this point I will now hand the call to our CFO Ron Foster for a more detailed discussion of the financials. Ron.

Thank you Kevin, before I begin let me remind you that I will be commenting primarily on the non-GAAP presentation of financials available in the press release schedules.

Just to recap, total Q4 revenues grew 8% sequentially to $174.5 million, communications grew 8% sequentially and represented $85.8 million or 49% of total revenues. Revenues in this segment grew across our customers with no customers in this segment accounting for 10% or more of the total JDSU revenues. Growth was driven by optically dense circuit pack integrations that grew faster than expected. Our subsystems business of which circuit packs are a part grew at double digit rates. Long haul markets also continued to show strength and represented about a quarter of communications revenue. Commercial and consumer products group 8% sequentially and represented $88.7 million or 51% of total revenues. As Kevin reported our light engine business gained traction and we started shipping DLP light engines against orders received in the third quarter. We continue to see strong demand although as we move throughout our first 12 months we will be watchful of seasonal variations. We are also seeing better than expected growth in front surface mirrors, especially the new digital mirror product.

The geographic split of our revenues was similar to the third quarter. Europe contributed 36 million or 21%. Asia-Pacific contributed 31 million or 18% and North America contributed 107 million or 61%. For the fiscal year our net revenues were 636 million compared to 676 million for the previous fiscal year. Net revenues for the fiscal year 2004 were evenly split between our communications products and our commercial and consumer products. As Kevin reported our overall book-to-bill for fiscal Q4 was stronger than expected at over 1.2 and, in fact, we saw increased book-to-bill in both segments of the business. Back log increased sharply and is at its highest level since the fourth quarter of 2002. Our largest customer in the quarter, Texas Instruments, once again represented more than 10% of our overall revenues. In fact, we experienced a sequential increase in our business with TI and roughly in line with the growth they recently reported in their DLP business.

Gross margin was 24%, down from 25.4% last quarter and just below our target range. There are three key factors to understand here. First we experienced an increased volume of first generation circuit packs in the quarter. The volume increase exceeded our estimates and is a positive indicator of our strengthening relationships with key customers. However, first generation circuit pack programs where we build to a customer specification have lower margins than original design and manufacturer or ODM circuit packs. As we transition and begin investing in cost reduction and redesign efforts associated with an ODM model we expect the margins to improve. Second, the significant growth we are experiencing in our optical display business, especially with new digital front surface mirrors and light engines, is bringing with it high initial start-up costs. Once again, volumes are exceeding our initial expectations and we expect margins to improve over the coming quarters as production ramps up. Third, we experienced lower utilization of our fab facilities as we rebalanced our production between fab and assembly operations in the quarter and between our Eindhoven fab which is now closed and our San Jose fab.

We continued to experience sequential decline in pricing all though rates of decline continue to moderate to the low single-digit range. This ASP decline was offset by a net benefit to gross margin of inventory recovery compared to excess inventory write-offs of about $3 million. The benefit is consistent with our expectations although we still expect it to vary from quarter to quarter. Kevin outlined a number of the initiatives we are taking to drive gross margin improvements over the coming quarters, notably moving some manufacturing to lower cost locations. While we believe that these projects will greatly enhance our operational leverage it is clear that these improvements will not be realized immediately. Toward the end of fiscal 2005 we expect to see significant and sustainable improvements to our gross margin. We believe that gross margin should be driven toward a mid-term goal of 30% and 40% longer term.

At approximately 58 million, non-GAAP operating expenses declined 4% sequentially and 23% year-over-year accounting for 33% of net revenues. In line with our ongoing focus on cost reduction R&D expenses decreased slightly to $25 million and SG&A expenses decreased from $35 million to $33 million. In the near term we expect operating expenses to be in the range of 30 to 33% of net revenues.

As Kevin reported, non-GAAP EBITDA improved from a loss of $9.7 million to a loss of $6.8 million but below our expectations due to the lower gross margin performance. Our acquisition of E2O which was not included in our guidance had a negative impact on our non-GAAP EBITDA result of less than $1 million. Interest and other income increased by about $1 million to $6 million primarily the result of higher interest rates. Included in GAAP results for the quarter restructuring and other related charges increased from $3 million to just under $5 million reflecting severance for approximately 80 people during the fourth quarter. Our GAAP results also reflect $2 million in gains associated with a sale of marketable securities which is down from approximately $19 million in the previous quarter due to reduced sales activity. During the quarter we recorded an income tax expense of $4.5 million, this expense is primarily related to the decrease in the market value of our public equites. Partially offset by a tax benefit of $5 million related to a prior year carry back claim.

Moving to the balance sheet, our total cash and marketable securities was approximately $1.5 billion. Cash consumption of $109 million in the quarter included $33 million for operations, $35 million in net cash used for the acquisition of E2O and $37 million from reduced value of marketable securities. In cash for operations, 15 million was spent on inventory. Approximately 10 million was used to pay off E2O obligations and $9 million on restructuring and realignment. Restructuring and realignment out lays were $53 million for the year. We expect to spend another $84 million over the next several quarters in settlement of obligations associated with previous restructuring activity. As Kevin mentioned we are working on a multi-stage plan to reduce the company's footprint and to rationalize manufacturing. We will have future restructuring impacts which will be called out as these plans are completed.

Our DSO's or days sales outstanding improved four days to 59 with past due receivables again lower. This makes nine consecutive quarters where the past due AR percent has declined. Net inventory increased to 124 million of which 5 million was associated with the acquisition of E2O, excluding E2O, inventory increased 14% primarily related to inventory build up required to execute against our strong backlog. Overall inventory turns decreased from 4.6 to 4.3 and we are aggressively pursuing more efficient inventory management but need to do so without compromising our customers's expectations. We expect our turns to improve next quarter. Goodwill and acquired intangibles increased by approximately $42 million with the addition of $49 million associated with the acquisition of E2O. Capital spending was approximately 6 million for the fourth quarter and approximated 66 million for the entire fiscal year.

Finally, headcount increased from 5300 last quarter to just over 6,000. More than 550 were associated with the acquisition of E2O and the remaining increases were related to increased manufacturing head count for our growing consumer and commercial group.

Now to guidance, our guidance for the next quarter is as follows: for the first fiscal quarter we expect net revenues to increase in the range of 8 to 13% sequentially. We expect that our non-GAAP gross margin percent will be similar to the fourth quarter just reported. Finally we expect non-GAAP EBITDA to be in the range of minus 5 million to break even depending upon revenue, transient variations in our cost structure and product mix in the quarter.

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

Thank you, sir we'll now begin the question-and-answer session. If you have a question you'll need to push star 1 on your touch-tone phone. You'll 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 that they are received. If you are using a speaker phone, please pick up your handset before pressing the numbers. Once again if you have any questions or comments please press then one on your touch tone phone. Thank you, and our first question comes from Subu Subrahmanyan from Saunders Morris pleas go ahead.

Thank you, good quarter gentlemen. I have one clarification and then one question. The clarification of E2O can you tell us what the revenue contribution for E2O was in the June quarter, if any, and then what is expected in the September quarter, how much of the sequential growth is being driven by the addition of E2O?

Subu hello, this is Ron. We commented around $3.7 million which was about a half a quarter's worth of contribution was in the fourth quarter. We're not calling out Q1 but we got about a half a quarter's worth of contribution in the fourth quarter.

Got it. And then Kevin, if you can just talk about the fiber departments opportunity, Corning is kind of a leading indicator in this stage due to fiber business indicated they're seeing some sales already from that business. If you could talk about what you're looking at, how the pipeline looks, how do we quantify?

Probably, you know, three sets of comments there. First is generally we think the industry is certainly getting excited about the opportunity and from as a technologist, I think the positive part is that even in the case of fiber to the node, you know, people will be moving fiber or reducing the copper loop from any where is to currently 12 to 15 killa feet to probably three to five. So whether it's fiber to the node or fiber pot premise the good news is there's more fiber getting closer to the consumer. I think that's a positive, certainly more fiber, more lasers, more optical content. Secondly we do think fiber to the premise brings a greater percentage of optical content. Because obviously of the ONU that sits in the home. Third, we have decided to take a more of a horizontal or component strategy, so we make a number of things anything from a bidirectional SFP receiver, video transmitters, high-powered EDFA's, whole sort of potpourri of items that play at a components level for fiber to the home, and we're beginning to see some tention in terms of design wins as well as early revenues, there although I truly believe as I said in my comments, it's a little bit early to predict when any major revenue impacts will hit for any of us. So we're still early in the process. Good signs out there, and net positive for people in the optical industry. Hope that helps.

Yes it did, thank you very much.

Thank you. Our next question comes from [Pat Chipalo] from Merrill Lynch. Please go ahead.

Thanks very much. In regards to the guidance for next quarter and it seems like it's good guidance, can you talk about sort of the key areas in both segments where you're seeing that growth and if you could also quickly discuss where are the limitations to the business model that's causing sort of no really upswing in earnings with that good top-line growth?

Pat, this is Ron. To take your first question in terms of growth we haven't specifically called out in our guidance the breakout, but we're as you could discern seeing good strength in both segments of our business. And the drivers as mentioned on the earlier conversation are in both businesses the display business is showing good strength and also in our communications business with some of our subsystems activities such as circuit packs really picking up. But it's fairly broad based. I also commented that long haul is showing some strength through this quarter. And so we're seeing signs of recovery there. In terms of the limitation to driving results to the bottom line, as I commented in the gross margin discussion, we are in start up mode in a number of product areas, and notably in the display area with our both our light engines and the new generation of front surface mirror and also in communications with our circuit pack products. So that is having some near-term effect and drag on our gross margin performance. As Kevin also commented and I elaborated we've got plans in place to realign our manufacturing infrastructure and as we do that we expect to see the benefits of that occur in more towards the second half although actions are beginning immediately.

Let me put just a little more color on that. You know, let me reiterate my point that things are pretty broad-based which is a blessing, you know, for this quarter. On the structural shift that we are dealing with is this notion that people are buying things with a greater level of integration both light engines and circuit packs. That being said, the components that serve light engines as well as the components that are bundled in some of the long haul circuit pack designs, things like wave blockers, dynamic gain equalizers and then other things like 10 gig transponders, these sort of high end optical devices, if you would ask me what's selling and many these by the way hit the long haul this is what's selling. So whether they buy it as components or they buy it integrated in a circuit pack we're benefiting in either case. Hope that helps.

Yeah, thanks very much.

Thank you our next comes from Stephen Savas from Goldman Sachs. Please go ahead.

Good afternoon.

Hey Steve.

I guess I just wanted to follow up on the last question to get a sense of, you know, next quarter with the growth that you're seeing which is strong and in the top line, is it similar pressures that are keeping gross margin roughly flat or maybe even slightly down, similar pressures that you experienced in the June quarter are you expecting for September quarter, or is there something very different in the contribution margin from what you're getting than what we would ordinarily expect?

Steve, this is Ron. In the Q1 outlook, we don't see a whole lot of swing in the structure of our business or any unusual shifts. We're continuing on a deliberate path to improve our cost structure. We are transitioning products. I mentioned we also just, we shut down the Eindhoven fab as Kevin mentioned and we had some rebalancing and inventory actions that relate to those kind of moves so there's nothing, nothing specific to call out other than the fact that it takes a few months to start up some of these new activities to get them on a stable trajectory to higher margin performance and especially with things like circuit packs it's a strategic move that can take certainly more than a quarter to get a stable business and manufacturing process in place. So don't see any big swings on mix other than the fact that we indicated strength in our business earlier.

Okay. And then so, in other words, no change in the way one might think about contribution margin once those things are more fully ramped, whether that's another quarter or two or three down the road, it would be less than a software company and higher than your current gross margins?

As indicated yes, we expected to get traction or our manufacturing efficiencies and our new products in future quarters and that's also why I commented that we still expect as we've said previously we should get into the 30s and ultimately the 40s kind of performance range on margin, gross margin.

Alright, thank you.

Okay. Steve.

Thank you. Once again if you have a question, please press star 1 and as a reminder please limit your question to one. Our question comes from John Harmon from Needham & Company, please go ahead.

Hi, good afternoon,.

Hi, John.

With moving your transmission laser, I assume into the former FDL fab can you talk about how many semiconector fabs you currently own and where they are and what you're making there.

John, this is Ron. We've -- we have a fabs basically now located in San Jose, when you talk about standard fab production. We had one in Eindhoven, Netherlands, that has been shut down as of the June quarter and we now have several in the San Jose area, three I believe. And one small one in Connecticut.

Okay. I guess to clarify the one in Connecticut is for lithium niobate--

Yes.

And then the bay area, lasers, diodes and hump lasers, things like that?

Wave guards too.

Wave guards.

Yep.

Okay. Thank you.

Thank you.

That you. Our next question comes from Steven Koffler from Wachovia, please be go ahead.

Hi, Ron, hi, Kevin.

Hi.

You know, you talked a little about the plants closures, further rationalization, I, frankly, lost track of what we used to call the global realignment program. I kind of thought it was almost over if not completely over. Should we be thinking about, you know, we have almost like a mini restructuring going on here and that we should be thinking about not only charges, maybe some charges increasing but also some noticeable margin impact like we generally see from restructuring activities?

Steve, this is Ron. I'll take a first shot at it and Kevin can add some other elements if he wishes. In terms of plant structure right now, with the closure of the Eindhoven facility, we're down to 12 major facilities in the company as was originally planned under the global realignment program, and we have stated all along that we didn't see this as our long-term ultimate structure and what's been communicated today and other times are we're working toward more deliberate and specific plans to continue to consolidate our structures. To your question about whether that will incur restructuring charges. Yes, I did mention that as plans develop we will call out those plans for you, but there will likely be restructuring elements associated with some of these actions.

And I'd say just for others on the call, given the nature of your question, the context here is the company has reduced from about 41 to 12 manufacturing locations, so I believe that we will still reduce further and as we do that we will have a greater emphasis on new product introduction which is actually one of the key elements of feedback that we've gotten from our customer satisfaction survey. So more focus on new product introduction, less site to site transfer, fewer sites and, of course, this is the next stage having gone from 41 to 12.

Let me of just follow up quickly. So I mean with all the restructuring that's gone on across the supply chain, generally the big, especially when you were dealing with manufacturing models, the biggest impact was on gross margin. Is that what we should be thinking about?

Yes, Steve. I would say that the largest impact would be on gross margin and, in fact, if you look at our operating expense percentages and the reason I sort of range that is that we're approaching a range where we would view that as more normal and it's our gross margin structure which given the communications we've made about our cost models needs to move up significantly and part of that will be through infrastructure realignment.

I see, thank you.

Okay.

Thank you. Your next question comes from Chris [Zuringo] with American Tech Research. Please go ahead.

Thanks. Good morning guys.

Good morning Chris.

If you could just briefly talk about, last quarter you mentioned how there were some OEM's on the comp side that wanted to push orders out from the March and June quarters, did you see any of that maybe reverse itself in June and is that the big driver of growth outside of E2O revenues in the September quarter?.

Let me take that. I didn't say OEM's I basically said it's two customers or three customers, and the fact is that two out of the three actually spent less money with us last quarter. The good news is that most of the other customers spent more money with with us last quarter which reaffirms Ron's message that we've had just a very broad based increase in purchases with JDSU over this last quarter so that's where we are and I don't see any change to that current state of affairs at the moment.

And can I just add, we don't see them as any permanent shifts in relationship with customers at all. They were temporary transitions.

So those orders are probably going to be seen in the September quarter and that is part of the backlog improvements that you guys witnessed?

I think Ron is saying that we expect business with those customers will continue to grow. There's nothing that will propel it in a different direction right now.

Thank you.

Okay.

Thank our next question comes from Steven Feinberg from Morgan Stanley. Please go ahead.

Hi, can you hear me?

Yes we can.

It's actually David [Feinberg] with [inaudible]. Question on the gross margin, did I hear you correctly that there was $3 million of zero cost inventory in the non-GAAP gross margin and then corollary to that, how can we forecast guidance given zero cost inventory and third, E2O their margins, were they, if you can give us some sort of direction whether or not they were in line below or above JDSU's corporate average before the acquisition.

David, this is Ron. What I specifically commented is that we, and I've commented in prior quarters, that we experienced a $3 million net benefit of inventory recovery. When you compare -- when you net inventory write-offs against recovery of previously written off zero value inventory, we had a net $3 million favorable number. Last quarter we had a $1 million net favorable number. I also indicated that that although difficult to predict, and we'll see variations, we expect to have net favorable impacts going forward especially as businesses such as our more well established long haul business where some of that inventory is associated begins to gain increasing traction. So that's--- we haven't given you specifics about numbers going forward other than the fact that I expect to see it affecting our numbers for a while to come. In terms of E2O margins we haven't specifically called that out. General comment it's not, it's not materially different from our normal range of performance.

Okay. Thank you.

Okay.

Thank you. Once again if you have any questions or comments please press star 1. And as a reminder please limit your question to one. Our next question comes from Alex Barros from Deutsche Bank, please go ahead.

Hi, nice quarter, gentlemen. Two quick things. One if you could talk about pricing environment particularly as we move to FTTP and in some of you areas with DLP's and the like, I don't think we're all as familiar. And second on taxes particularly as you move toward profitability if not in 1Q then hopefully by 2 or 3Q.

Yeah, I would say the pricing environment has not changed dramatically. I think Ron used the comments that the ASP's or any ASP erosion has moderated or slowed over the last period of time. Fiber to the home in or fiber to the premise where we are playing in general, the components sales that we're making there are not deviating significantly from our existing components although I would say every vendor that we're talking to is looking for cost -- very aggressive cost reduction road maps more through design than anything else over time so there's sort of a double edged sword on that. On the DLP, Ron might have more info than I do.

I don't have a specific guidance that we've provided on DLP. We provide both components and now we offer light engines, so we have been involved for some time in the component business. And as the general comment as the pricing -- as the TVs and specifically rear projection TV's come down over time obviously all of the cost structures of the elements of those TV's need to come down as well so I'd expect that we'd see, expect to see declines and we certainly have cost reduction activities in place with all of our activities including DLP.

But perhaps the right, you know, statement is that we're aware of Texas Instruments sort of trajectory on pricing, and we're trying to be a partner to them. So.

Fair enough. In taxation?

I assume your question is with regard to what's happening to tax rates over time.

Exactly.

We've had, we've had interesting challenge discussing taxes every quarter for some quarters. The -- I guess the general comment in thinking about the forward-looking view is that we do have this accounting rule which causes us to have to adjust our taxes as a result of gains and losses in our equity portfolio that we're carrying. And that does move tax gains and losses up and down quarter to quarter which we've been seeing for several quarters. But bottom line, if you look at the base--basic tax rate, over time, it's going to be a small number related to some statutory taxes in other jurisdictions, et cetera and the reason why the tax rate is going to be quite low is because of the large net operating losses that we're carrying. Net operating loss carry forward.

And how about for your NOL's?

It's about $4 billion.

All right. Thanks very much.

Okay.

Thank you. Our next question corporation from Jane Dragone from Soleil Securities. Please go ahead.

Hi congratulations on the quarter and nice forward-looking guidance. I have a question on inventory. They grew 21% sequentially including E2O and last quarter they grew 24% sequentially. I'm just wondering as the customers are outsourcing more of the design and manufacturer that they would traditionally have been done in house because you guys are doing the circuit pack and subsystem work, does that mean that they are pushing the responsibility for streamlining the supply chain back on JDS?

Jane, this is Ron. That's a good question. They're obviously many discussions that go on in conversations our partners and with our suppliers about how to generate more efficient supply chains and what part we play in it. So there are thoughts, designs, work and effort that go into better supply chain design and servicing our customers through better supply chain design and providing them services the way they want them. That being said, the specifics of our inventory growth as I've commented in the last two quarters are relating one to build up activities that we've had going on in the -- as you can also see in our backlog and our order file, and responsiveness to customers and some production balancing that's been going on and I do expect that our turns will improve next quarter as I mentioned, and going forward into a materially better range.

Okay. Thank you. Now, just on that question, talking to the equipment vendors like Nortel and Lucent are they telling you that or in so many sentences that they want to reduce their own inventory to, not zero levels but certainly a very low level? So this they can improve their return on assets?

I think most of us want to make sure that we're being as streamline with inventory as we can and that's true of any of the equipment manufacturers that when we supply as well as to ourselves. Jane, the you know, figures of merit that I walk through from the quarter is that we grew our inventories probably on the order of 15% which is greater than our revenues but is actually less than our bookings revenue.

Okay.

And so my point here is that we have significant improvements to make. I wouldn't draw a conclusion that our current inventory situation is being driven largely by suppliers at this point.

And also with regard to our customers, the way it's actually shifting is that we are taking over increased responsibility in an ODM model as was already mentioned, and we're taking both the product and the inventory, of course, as we take over those responsibilities.

Okay. That's fantastic. Thank you for clarifying that. I just have one additional question. The products in telecom, where are you seeing the strength? I mean we know that there are several RFP's that are there for metro optical networks where there is a significant RFP for integrated amplifier transponders and reconfigurable add/drop boxes.

Yeah we've seen it both actually in long haul and metro. In the long haul I'd say the wave length agile products that include things like wave blockers, as I said, dynamic equalizers, another piece is metro which is very [roadom] oriented so another form of wave length agile systems so we see both and it's probably 25%, 75% or something like that.

Okay. Great thank you.

Okay.

Thank you. Our next question comes from Arnab Chanda Lehman Bothers, please go ahead.

Thank you, I have a quick question about your optics, business. Can you talk a little bit about in the communications business especially, talk about your strategy whether you're still considering vertical integration from the wavers, the components, all the way up to even modules it sounds like you're trying to do ODM's. Or do you thin there is going to be a bifurcation of the industry as we've seen in electronics and what that means for margins? Thank you.

Let me take that. I think that the strategy that we've laid out continues to have us moving along the path of vertical integration which means that we'll have a components business, a set of modules and a set of what I'll call subsystem integration, Ron used the word generation one and two circuit packs or ODM model. The way to think about it is in order to have the time to revenue that is associated with the optical industry, you have to have something that generates cash flow pretty quickly and the thing that does that is the subsystem assembly. As I pointed out the design wins that we made two or three quarters ago are turning into dollars today and it's helping the environment, realize, we have about 13 systems vendors that participate in a optical equipment market each with between one and 14 market share points so they're beginning to outsource designs that their circuit packs to people. That represents a better time to revenue opportunity for us so that they want it we're responding, and so, therefore, you should anticipate that we will have this hybrid model components modules as well as subsystem assemblies.

Okay. Great. And I just have a quick follow-up. You know, you're obviously improving your revenues and eventually, you know, the Opex and margins will also go up. Your share count is high such that it's hard to produce a meaningful EPS. Do you have any strategy on that or have you thought of that as a question at all?

We've thought of it as a question that we hold the belief that the first thing for us to do is to get the EBITDA to break even.

Thank you.

Thank you. Our next question comes from Dennis Gallagher from Schwab Soundview. Please go ahead.

Thank you. Just wanted to follow up with a question on transceiver market in general. Obviously you talked about the new acquisition, E2O, but in terms of your Legacy transceiver business and the telecom rather than the data com part of it, is there any progress?

Could you expand on what the word "progress" means in your mind?

Well, is that market advancing at all? More sales?

Yeah, I think in general we saw more sales, our sales tends to be at the higher data rates. And the market is going through some product transitions right now so we certainly have had, you know, have been flows in past quarters, but right now we're seeing good sales on most fronts. Okay?

Okay. Primarily to the long haul vendors or still metro oriented?

There's a mix but definitely as I've said before, we're seeing design wins in both of those. I'd say long haul has been reasonably good for us although they're probably is more design win activity on the metro side.

All right. Thank you.

Yep.

Thank you. And we have time for one more question our last question is from Ping Zhao from Credit Suisse, please go ahead.

Hi, how are you?

Hi.

I have one quick question. Last quarter you had some problems shipping to one customer. Are you shipping to this customer on that particular project at the expected run rate?

Well, Ping I think you've asked several questions in that one. We have continued to ship to that one customer again, yes. At the run rate, probably not. But we have the relationship and the product flow has begun. And future business going forward.

How much---

Ping, we wouldn't break out that kind of detail.

Okay, thank you.

Have a great day.

Thank you, I'd like to turn it back to Jacquie Ross.

Well, that concludes our conference call for today. Thank you all for joining us and we look forward to updating you on our progress in future quarters.

Thank you. Ladies and gentlemen, this concludes the fourth quarter fiscal 2004 earnings conference call. You may all disconnect and thank you for participating.