Viavi Solutions Inc (VIAV) 2005 Q3 法說會逐字稿

Thank you very much, ladies and gentlemen, for your patience, and good day, and welcome to the third-quarter fiscal 2005 JDS Uniphase Corporation earnings conference call. My name is Bill and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. However, we will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded for replay purposes. I would know like to turn the conference over to your host for today's presentation, Ms. Jacquie Ross, Director of Investor Relations. Please proceed, ma'am.

Thank you, Bill and welcome to the JDS Uniphase fiscal 2005 third-quarter earnings conference call. Joining me on the call today are Kevin Kennedy, Chief Executive Officer, and David Vellequette, Senior Financial Officer.

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 subject to risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to look at the Company's most recent filings with the SEC, particularly the risk factors section of our Form 10-Q filed for the quarter ended December 31st, 2004. The forward-looking statements including guidance provided during this call are valid only as of today's date and JDS Uniphase undertakes no obligation 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 the usefulness and limitations of these non-GAAP measures is included in the news release announcing our third-quarter results issued earlier today and available on our Web site 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 Web site, again at www.JDSU.com/investor. I would now like to introduce JDS Uniphase's Chief Executive Officer, Kevin Kennedy.

Good afternoon, and thank you for joining us today. At $166.3 million, revenue for the third quarter ended March 31st, 2005 slightly exceeded guidance and represented an increase of 3% from the year-ago quarter and a decline of nearly 8% from the previous quarter. Loss per share was $0.03 on a GAAP basis and $0.02 on a non-GAAP basis, in line with the guidance we set in January. Non-GAAP earnings before income tax, depreciation, and amortization, or EBITDA, was a negative 20 million, an improvement of nearly 6 million from last quarter.

For the third consecutive quarter, our communications business delivered triple digit revenue and closed the quarter at $101.7 million, down 5% from last quarter and up 28% from the same quarter a year ago. Our commercial and consumer business revenue was $64.6 million, down 13% from last quarter and down 21% from the same quarter a year ago. Strong demand in our communications business resulted in an overall book-to-bill ratio above 1.

David Vellequette will discuss our quarterly results in detail later in the call. As our recent announcements have highlighted, this quarter, the team took actions on a set of initiatives that we believe will result in meaningful improvements to our cost structure in the coming quarters. We expect these initiatives, when fully implemented, will reduce our cost structure by at least $20 million per quarter.

Now from the communications business, we have executed delivered actions to reduce our footprint, increase utilization, reduce costs and improve mix. In addition, we have undertaken a portfolio review to identify candidates for elimination or divestiture, which includes those products unable to contribute to our gross margin targets for strategic requirements.

Specific actions in the last few months include -- first, we announced that our Melbourne, Florida transponder and transceiver manufacturing facility will be closed. We will transfer the manufacturing of most of the products to a contract manufacturer and we will plan to selectively end of life certain others. We expect to exit the Melbourne facility no later than December 31st, 2005.

Second, as we announced last week, we plan to sell the assets of our Ewing, New Jersey facility and operations of our former VitroCom acquisition in Mountain Lakes, New Jersey to contract manufacturing partners. We expect these transactions to be completed in the current quarter.

And third, we are engaged in discussions with multiple parties for the divestiture of our cable TV business as part of our exit from the Ewing, New Jersey site. We expect to complete this divestiture in the current quarter. We have notified our employees of these actions, R&D talent from Melbourne, Florida and Ewing, New Jersey has been retained and will be relocated to nearby locales.

Taken together, we expect the headcount associated with the communications business to be reduced by approximately 465. Once fully implemented, we expect quarterly cost savings of at least $12 million. We believe that these actions collectively represent a significant milestone.

We have shared parts of our strategy with you before, but allow me to remind you of the key elements. First, to transfer product manufacturing to lower-cost locations and increase the use of our contract manufacturers. We are well on track to meet our previously announced target of deriving more than 50% of our communications cost of goods from lower-cost manufacturing locations by the end of the current fiscal year.

Second, to selectively close or divest noncore assets and products that are unable to contribute to our longer-term gross margins, objectives and that otherwise are strategically unnecessary.

Third, to physically disaggregate R&D from manufacturing. This step is designed to ensure the proper manufacturing focus on yield and other improvements and to allow the development of Next Generation products by the product leaders.

And finally, fourth, to stress in our portfolio profitable communications offerings, specifically in subsystems and intelligent optics.

In terms of the quarter, JDS Uniphase enjoyed a commanding presence at OFC in Anaheim, where we launched or previewed 30 new products. Customers continue to validate our commitment to a more intelligent and vertically integrated product portfolio and we continue to explore opportunities to broaden our discussions in this respect. We believe that our strategy has been validated by the market and enabled our widening lead as the number one supplier in this space. We believe we are uniquely positioned and qualified to continue to simultaneously engage in major operational restructuring, product realization, while also investing in Next Generation products.

On the commercial and consumer front, in this business, we have also initiated delivered actions intended to improve profitability, bolster our core competencies and eliminate distractions. In recent periods, we have determined that the margins of some of our optics and display products are unacceptable. With that in mind, we took the following actions.

First, as we reported last quarter, we will phase out our high-volume light engine manufacturing and rededicate ourselves to our component-level core competencies.

Second, in response to market conditions, including increased competition, average selling price pressures and demand volatility, we will phase out production of our DLP micro display windows and focus on our Next Generation technology coating platform. It is too soon to expect revenues from this investment, although early customer engagements with prototypes are underway.

Third, we are in discussion with one of our current glass suppliers to outsource the manufacturing of front surface mirrors over time.

Fourth, and as a result of the first three actions, we have announced headcount reductions at our Santa Rosa facility and the closure of more than half of the currently occupied buildings.

And finally, as was announced today, we plan to divest our bulk optics manufacturing facility in Fuzhou, China to reduce complexity and enable us to focus on our core competencies. You will recall that this facility was added as part of the acquisition of Casix in the year 2000.

Upon completion of these activities, we expect the newly streamlined commercial and consumer business to enjoy higher margins. Cost savings from these product portfolio transitions and phaseouts are expected to have a net positive EBITDA impact for the Company. During the transitional period, we expect a four-quarter phaseout of single-digit millions of dollars in revenue and inventory write-off charges and other expenses associated with our exit from these businesses. We expect that the majority of these reductions and divestitures to be complete by December 31st, 2005. Taken together, these actions are expected to reduce North American headcount by approximately 385 from our Santa Rosa, California facility. The divestiture of Fuzhou is expected to further reduce headcount by over 500 and altogether we expect quarterly savings in our commercial and consumer business of at least $8 million a quarter.

On the investment side, we announced our intention to acquire Lightwave Electronics Corp., which we expect to close in the current quarter. This acquisition is consistent with our strategy to invest in profitable, growing market and significantly strengthens our product portfolio in the commercial solid-state laser market. Going forward, Lightwave-related revenues will be reported in our commercial and consumer business segment.

In summary, these important actions are major milestones in the continuing multi-quarter initiatives we have discussed with you previously to transform JDS Uniphase's business model. As each action progresses, our estimates will firm up. But we currently expect existing headcount to reduce by more than 1350 by the end of calendar 2005, which includes approximately 850 individuals in North America and over 500 in China. As we remove lower and negative margin products from our portfolio, we expect gross margins to improve. However, we believe the elimination of these products will result in some negative revenue impact in the single-digit $1 billion range as we focus on the quality of revenue.

As a result of these actions, we expect JDS Uniphase's footprint to be reduced from 12 to 8 manufacturing locations worldwide. With approximately 75% of the employee base currently involved in manufacturing, we are keenly focused on driving our revenue per headcount up. The actions discussed today represent an important step forward and more work will continue in this pursuit. When complete, we expect the net quarterly savings to be at least $20 million.

Although these decisions have impacted nearly every part of our business, we have remained focused on customer satisfaction. Product transfers are being completed with the support of our key customers. And where we have decided to phase out a product, we are highly sensitive to our customer's need for continuity and are working with them to ensure as smooth a transition as possible.

Looking ahead, we expect to announce and implement further cost and product improvement initiatives. While the scope and benefits of these actions are likely to be more incremental than those announced over the past few weeks, we expect that they will nonetheless be important to our overall cost structure. We will update you when the relevant events occur. Before I hand over to our senior financial officer, I'd like to comment that the executive search for the chief financial officer position is well underway and we hope to conclude our search during the current quarter.

I will now hand the call over to Dave to update you on the details of third-quarter performance as well as help you understand how today's announcements are likely to impact our financials going forward. Dave?

Thank you, Kevin. Before I begin, let me remind you that all numbers are non-GAAP unless I state otherwise. Total revenue was $166.3 million, which compares to revenue of $180.5 million in the previous quarter and to revenue of $161.4 million in the third quarter of fiscal 2004. GAAP net loss was $38.6 million or $0.03 per share, which compares to a net loss of $41 million or $0.03 per share in the previous quarter and to a net loss of $7.3 million or $0.01 per share in the third quarter of fiscal 2004.

Excluding certain items, non-GAAP net loss was $23.5 million or $0.02 per share, which compares to a non-GAAP net loss of $28.6 million or $0.02 per share in the previous quarter, and to a net loss of $6.7 million or approximately breakeven on a per-share basis for the third quarter of fiscal 2004. On a year-to-date basis, revenues for the first nine months of fiscal 2005 were $541.3 million or up 17% from $461.4 million for the first nine months of fiscal 2004.

Now to the business segments. Communications revenue was $101.7 million, down 5% from the previous quarter and up 28% from the third quarter of fiscal 2004. Fiscal year-to-date, our communications revenue was $314.5 million, up 36% when compared to $231.6 million for the same period in fiscal 2004. This was communications' third consecutive quarter of revenues in excess of $100 million. Communications revenue continues to be driven by metro and long-haul market. Additionally, our circuit pack products continue to experience increased demand as our customers continue to value JDS Uniphase's integrated subsystem level products.

Moving to our Commercial and Consumer group, the Commercial and Consumer group delivered revenue of $64.6 million, down 13% from the previous quarter and down 21% from the third quarter fiscal 2004. The revenue decline reflects anticipated seasonal buying patterns for our front surface mirror products. Fiscal year-to-date, our Commercial and Consumer revenue is $226.8 million, down 1% when compared to $229.8 million for the same period in fiscal 2004. As a reminder, our Commercial and Consumer groups comprises -- is comprised of our Flex, Commercial Laser, and Optics and Display businesses. While we do not break out the contribution of these individual businesses, both our flex and our laser businesses continue to meet our internal expectations and have not been affected by initiatives outlined by Kevin.

Now for the rest of the income statement. Non-GAAP gross margins declined to 16.1% for the quarter as compared to 16.8% for the prior quarter. With communications products increasing to 61% of total revenues, our gross margin was negatively impacted by product mix, ASP declines, and higher overhead variances due to lower revenue levels. Non-GAAP operating expenses improved to $57.5 million or 34.6% of total revenue. R&D was down about $1 million, primarily related to reduced investment in the product lines we are phasing out. SG&A was approximately $35 million, significantly lower than last quarter.

Interest and other income increased slightly from $5.3 million last quarter to $5.4 million for Q3. Non-GAAP EBITDA improved from a loss of $25.7 million last quarter to a loss of 19.8 million for the quarter just ended.

I would now like to highlight the major differences between our GAAP and non-GAAP results. Included in our GAAP results are the following -- a $3.1 million write-down of our Ottawa facility; a $4.8 million amortization of intangibles, in line with the previous quarter; a $6.5 million charge for restructuring and non-recurring expenses associated with the recently-announced manufacturing consolidation and other cost-saving actions; and the remainder, which primarily relates to a reduction in the value of our investment portfolio.

Moving to the balance sheet, cash and marketable securities totaled nearly $1.4 billion, down $36.2 million from last quarter. Cash consumption included $21.6 million in cash from operations, $9 million for fixed asset purchases, and $4 million for strategic investments. Days sales outstanding increased from 57 to 61 days, which is within our historical range. Net inventory declined slightly to $118.6 million, and inventory turns declined from 5.0 to 4.8.

And finally, ending headcount was 5,602, up 82 from last quarter. The increase was primarily the result of hiring more personnel in Shenzhen, China to accommodate product transfers to that facility.

Now to guidance -- revenue for our fiscal Q4, including the impact of product phaseouts, is expected to range from 160 to $170 million. With respect to our cost of goods sold and operating expenses, the profitability improvement initiatives noted by Kevin will take several quarters to fulfill. We do not expect associated restructuring and non-recurring charges to exceed $30 million. We expect the related quarterly savings to ramp during the first two quarters of fiscal 2006. We estimate the real-life savings to be approximately $4 million in the first fiscal quarter of 2006 then $8 million in the second fiscal quarter, growing to $16 million in the third fiscal quarter, and the full targeted quarterly savings of $20 million should be realized in the fourth fiscal quarter of 2006. I will now hand the call back to Kevin.

Thank you, Dave. In summary, our focus continues to be on transforming the Company. Over the past three months, a number of steps have been taken to establish more definitive timeliness and quantify the impacts.

At this point, I'd like to thank our employees who have responded extraordinarily well to our aggressive program of improvements. It is to their credit that we achieved our third (ph) financial results even as we experienced downward quarterly revenue. Despite this, we remain committed to the challenge in front of us.

Going forward, you can expect further consolidation of our manufacturing footprint, progress on our product transfer program, continued divestitures of products incapable of contributing to our longer-term gross margin targets as we drive to continue to improve our product mix, investment in and development of higher-growth profitable products, and appetite for acquisitions that fortify or strategically complement our product portfolio, and a continued focus on execution as we drive these plans to completion.

As stated earlier, we remain focused on engaging the right scale of operational restructuring and product rationalization while also investing in our product portfolio to strengthen the Company for the long term. I will now hand the call over to the operator to start the questions and answers.

Thank you very much, sir. (OPERATOR INSTRUCTIONS). Daryl Armstrong of Smith Barney.

This is actually Mike Genovese for Daryl Armstrong. My question is when you talk about the savings reaching 20 million by the fourth fiscal quarter of next year, I assume you're not just talking about the operational cost savings, but you're also talking about the gross margin improvement impact. And I just want to make sure that that's the case.

Dave, why don't you take that?

That's correct. That addresses both operational and manufacturing cost savings.

Great. And then if you could talk a little bit about what you're seeing in the communications segment, I mean the results have held up pretty well and you're talking about metro and long-haul driving the results. Are you seeing more demand coming out of one or the other? And basically, what do you think is the outlook for things like DWDM and Next Gen SONET from the systems suppliers, and how is that flowing through to your visibility?

Yes, Mike, let me take that. I think I'm going to break it into two pieces. One is sort of the visibility that one has during a quarter and then the second is where the design wins and the activities by architectural relevance, as well as regional relevance.

I'd say on the first front, we've stated before that visibility is measured in weeks and I continue to see an industry that is operating that way. What you tend to see is buildouts tend to be operator dependent and of course, therefore, there's a trickle effect to which particular equipment provider is providing you orders in any one quarter. So that kind of start/stop activity is continuing as it has been for several quarters.

And so that's sort of the rhythm of the quarter from my perspective. It's still fairly short visibility, still very operator dependent. And whichever operator is moving, you can probably identify which one or two network equipment providers will be the beneficiaries of that activity.

From an architectural perspective, I think it's been certainly true for the last three quarters that the dominant number of design wins and the greatest percentage of our communications revenue are all centered in the metro. I do continue to see further penetration of DWDM away from the core, so I think that's true. Long-haul has continued to be a strong percentage, but as I've said several times before, it is second to metro for us. The architectural transitions to DWDM happening further out from the core are continuing to evolve, so I don't see anything -- I think that trend is perhaps accelerating if anything.

And then I'd say that there are certainly regional differences. In any one quarter, you might see a couple quarters, I saw more activity with long-distance franchises. Today, I'm seeing some of the regional franchises that are being threatened by cable become a bit more active with RFPs. And I would say that Asia is certainly picking up importance for both our customers and ourselves. And then I'd actually say there are reasons within Europe that there are pockets of significant strength in Europe right now, too. So it's very spotty, I guess, is my point, and that's what you have to be able to play in all regions and most of the segments simultaneously as we do. I hope that helps.

Thanks, Kevin.

Ehud Gelblum of J.P.M. Chase.

Hi, thank you very much. A couple of questions I have. First of all, in the past, there was some inventory that had been written off previously that you called geo (ph) cost inventory that flowed through the P&L. Can you just -- Dave, can you give us just a quick update on whether any of that flowed through this quarter? And then a follow-up to the prior question on the 20 million cost savings that you will phase in over the course of 2006. How much of that will go into the COGS and how much of that will go into the OpEx? Can you give us a handle on the breakdown there and then I've got a follow-up.

Okay, let me handle those in order. The inventory that we had previously written off, we continue to realize some benefits. But in the quarter, the net effect due to the write-offs that we have for the product lines that we terminated up in Santa Rosa was none from the P&L. As far as the costs related between manufacturing and OpEx, we haven't broken that out. The majority of the benefits will be in the manufacturing side.

Ehud, let me follow up on your question. I think you were most specifically trying to calibrate the write-offs that occurred in the legacy business of the communications so the old long-haul stuff. That inventory is becoming relatively de minimus -- low single-digit million per quarter. You can actually see it off of our P&L, so there's nothing hard to find there. And on one hand, it puts a negative pressure on the gross margins, and on the other hand, it's indicative of where our business is today that we've fanned out from long-haul and we're really predominately playing metro right now. So in some sense, it's really an advance of our business. But of course our financials are more indicative of where our product gross margins will be long term.

I agree. Just saying that the -- I't can find on the P&L -- is there a spot that says how much you sold this quarter that was previously written off? Was there a cost of inventory?

No, we don't break that out.

You had in the past.

We've highlighted in the past because we had a significant benefit between what we were recovering versus any additions. And since the net benefit was near zero, we did not highlight it.

So you're saying you wrote off as much this quarter as you recognized of prior written off?

Yes, there's benefits and then there's the provision that you're putting in, and right now those two forces are -- the single (technical difficulty) ratio is compensating one over the other right now. So --

Okay. All right. Let me -- if I could quickly follow up. The Lightwave acquisition that you announced several weeks ago, I'm assuming it's still on track to close this quarter. Your guidance of 160 to 170 million this quarter -- does that include revenue from that Lightwave acquisition?

It does not. Since it's not closed, it would be inappropriate for us to place that in our guidance.

Okay. Great. And then finally, as fiber to the prem, we see a number of announcements. From a number of other companies saying the fiber to the premise seems like it's going quite well. And there's a lot of strength behind it, especially coming out of Verizon and the various players that kind of feed into them. Are you seeing --and again back at your analyst day at the end of last year, (indiscernible) put up a few slides talking about the opportunity. How are you tackling that opportunity? Are you starting to see some pull from fiber to the premise helping your business? And where can we see that? And then how are we attacking -- I guess the triplexer would be the number one thing that you could get into as we get closer to that opportunity.

Yes, I think -- we are seeing -- we are playing mostly right now upstream and architecturally upstream and we are seeing pull from fiber to the premise in that regard. I'd say on the other hand, the significant volumes I think are still a year out. And the challenge right now is to be able to make money from wherever you decide to play. And as you know, whether it's a diplexer or a triplexer, there is a modest amount of differentiation and a lot of forward pricing, which means that people tend to engage unprofitably. So right now, we are stocking that, deciding what we want to go insert. And I'd say this quarter, we're focused on the restructuring activity. Okay?

Thanks so much.

Paras Bhargava, BMO Nesbitt Burns.

Good afternoon. Just a follow-up on the Lightwave question. I assume -- you haven't disclosed the revenues. I assume Lightwave revenues will be less than 10% of the commercial segment or you have a statutory obligation to tell us how much they are. Is that a good assumption?

Let me -- I think the lightwave acquisition is something that -- when we get to the point that it hits our top line on a quarterly basis, it will be someplace in small excess of $5 million per quarter. And of course, we think it has the right gross margin structure for the kind of portfolio that we're trying to put together. So that was the logic behind it.

Sure. How would you value that, Kevin? How did you -- on an IRR basis, MPV basis, when would you expect the $55 million to show up on your balance sheet again? If you could give us some metrics on how you internally justified the acquisition.

I think the justification starts first with we have a large embedded base of customers that buy gas lasers and want to buy solid-state lasers and this accelerates our ability to carry that customer base forward and perpetuate the cash flows that we have on our existing portfolio. That's probably the number one. As you would guess, when you do an acquisition, we probably use someplace between four and eight different ways of calculating what a potential value should be in terms of the price as well as how much is it worth to us. And this'll be a hard place to go through all eight of those mechanisms.

So key areas, it is consistent with our strategy to be a player in commercial solid-state; has the right gross margin structure; has a management team that has been embraced with many of the same customers, but on a new generation of technology. And so when we see that kind of fit, we move forward with it. I hope that helps.

All right. Just more question then. Debbie Showenquist (ph), when she was at your analyst day, suggested that 20% of your cost structure would be in low-cost countries I think by the end of fiscal '06. And I'm wondering is that -- is your -- that would have given me a little more than 80 million in savings. Is that 80 million saving include what Debbie said or is it in addition to what Debbie said? Or is it just we should just put away what we've heard before and say from today's cost structure, we're going to see sort of an $80 million reduction (multiple speakers)?

Sure. I tried to tie back to Debbie's statement. The statement that she made was relative to our communications business. Must specifically, the statement was about that 50% of our communications cost of goods would shift from low-cost regions by the end of this fiscal year and we are on track to do that. If anything, what you should derive from our call and the announcements over the last several weeks, I've tried to give you some bookends. We've actually now quantified in time when our North American sites would be closed. We've notified employees. So those are two important bookends that give you a determinism to the statements that we made back in December.

No, I really appreciate that. The thing that I'm trying to understand is if I take the $80 million a year at flat revenues, it would still mean like a penny or 2 of a loss, and you're sort of rightsizing your Company to have a penny or 2 of loss, maybe cash break even at flat revenues and preparing for a revenue uptick. Or is that 80 million on top of what we might have already built into our models from what prior actions you've taken? That's what I'm trying to -- it's just not absolutely clear to me.

I think you should think about the 80 million relative to where we've been, our last reported results. We've done that from a bottoms-up perspective, by knowing salaries, specific products that we're keeping, specific products that we're not keeping. And of course what we've said is we believe that we will achieve at least that number. I've also said that we probably have other things that we'll be doing. So I don't -- I'm not trying to leave you with the impression that we are stopping here, but I think this was an important step forward today.

So the 30% and 40% short-term and long-term gross margin targets still stand?

Yes, that's certainly what we're working for.

I didn't hear them today, so I was just confused. I wasn't sure if you were moving away from them or not. Thank you very much.

Jeremy Bunting of Thomas Weisel Partners.

Thanks very much. Kevin, if you could just comment on your plans for increasing the circuit packet gross margins. I think it's of interest that you're moving in your light engines in the commercial business to a component strategy, whereas clearly the goal is to bring intelligence and control to the circuit packs business. But that is obviously a more module area. What is your strategy there?

Well, I mean two very different businesses. I'd say we never made it to a subsystems business on the light engine side. So recognizing that and going back to our core competency in coatings, which are really the things that differentiate our components was the strategy on that side.

On the comp side, I think there's a couple of things happening. One is that our customers are -- the equipment providers -- are continuing to be fairly fragmented. We have about 13 customers with between one and 14 market share points. They are seeking ways of becoming more profitable and continuing to outsource at higher levels of integration. So modules and circuit packs. Secondly, the elements that make up those modules in circuit packs as you go into the metro are things like wave blockers, multi wavelength switches, ROADMs, Reconfigurable Optical Add/Drop Multiplexers, all of which, native to themselves, require a fair amount of software so you can translate one lambda to another destination. And then of course there's provisioning software and control software that sits on top of that as you look up into the network. So we are trying to be more software-centric so that we can support both a new generation of products, which are more subsystem like, as well as the packaging onto circuit packs. Also those things bring value that people are willing to pay more -- you get better gross margins from. So I hope that helps.

So with that, would you say that as the circuit packet business ramps as a proportion of comps, then that should give a positive trend to the gross margin then?

I'd say as our subsystem business, which includes one delivery element, circuit packs, we will continue to see better gross margins; that's true. And I'd say that we're hitting the point now where probably in North America, there is often a preference that if there is a ROADM win or a wave blocker win, we often have a conversation about doing it with a circuit pack at a circuit pack level of integration. Whereas in other parts of the world, people are buying at lower levels of integration. So this is going to take probably 24 months to play out.

Okay, thanks very much. And then Dave, could you brief us -- with products from discontinued product lines, is that going to be written off and what impact is that on the gross margin line and when?

We will be reviewing the discontinued product lines and we'll put programs together as we end a life (ph) to sell them to our customers. The near-term revenue impact is expected to be in the single-digit millions.

Okay that's fine. Thank you.

Dayle Hogg of GMP Securities.

In the $30 million restructuring charge, is that all cash or is there a separate cash component?

The cash component included in that will be slightly less than that amount.

By a (technical difficulty)?

Yes.

I was just wondering if I can just go back to the inventory write-down. Can you just -- on your last 10-Q, was it in fact 6.6 million that was written down in the quarter? I know the net impact was a million, but was that the proper breakout?

I'm sorry. You said $6.6 million write-down of the inventory?

Yes -- no, 6.6 -- you consumed 6.6 million of previously written down or zero cost inventory?

I believe that is correct.

Can you sort of comment directionally how it went this quarter?

It was approximately in the same range.

Low single digits.

Okay. And did you have any vendor cancellation revenue in the quarter?

No.

Because last quarter it was 1.5, so that's gone to zero now?

I don't believe that was vendor cancellation revenue. I believe those were vendor cancellation charges that we incurred last quarter. So, and we have none of those vendor cancellation charges this quarter.

Okay. Just give me one last -- can you just comment on going forward, how much do you think of your revenue will be related to the HDTV market? Is it like some (ph) of the immaterial going forward now?

I wouldn't say it's immaterial because I think most of our components are still being sold into that market. So I think whatever our current run rate is or percentage, which I don't know off the top of my head being sold, of our components into the HDTV market, I expect it will probably continue to grow off its current base. But that is where we are selling. I do want to clarify one thing. The $30 million number that we used is a not-to-exceed number.

Okay.

Restructuring. Okay?

Arnab Chanda of Lehman Brothers.

Hi, guys. A question about your consumer commercial business. Do you believe that there is a significant synergy between your communications businesses, and is there a situation where you would consider getting rid of some of that? Obviously during the telecom boom, that was not something that was a big focus. If you could talk a little bit about that and I have a follow-up. Thank you.

Hopefully, you can tell from the call today and the actions that we've taken, I don't think there are any sacred cows in the Company. The action that was announced just a few hours ago with the intent to divest of the Fuzhou operation, which was bulk optics, which is a good example of an acquisition that took place during the boom, is a good example of where if we see something that we think adds complexity to the Company, we will consider extricating it.

Now let me answer your question of synergies. If you take a look at the two businesses, one is our pigments business, which has been continuing to perform extremely well, both top line as well as bottom line, what it relates to on the non-comm side of the business is of course the coating specialties, which are the essence of the differentiation that we have on our optical components. So there's a very strong relatedness there.

If you look at the solid-state laser business that we have, the solid-state laser business uses the basically laser diodes from the telecom space, so a good synergy with the telecom piece. The packaging expertise that's associated with the telecom space. And thirdly, if you think of a laser diode being basically an electrical input, fiber output and two mirrors and a bar, as you goose up the electronics or the volume, you need to have coatings on the mirrors in order so that the thing doesn't get destroyed. So the coating technology again becomes a differentiator, and that's why people like Coherent and others have their own thin-film eye (ph) capabilities.

So at an R&D level, those are the synergies. The thing to be wary of is that the entire optics industry has struggled since the boom in terms of having too much manufacturing largess or lack of utilization. And making sure that you get your footprint right is really what it's about. So what I want you to take away is we will be focused on asset utilization. We'll make decisions on divesting when it's appropriate. But right now, the things that we're keeping we do think there are synergies in. I hope that helps.

Thank you, Kevin. And just one last question. I know you may not want to give us exact specifics, but if you can talk a little bit about what your methodology is in evaluating what business to keep and what product lines to keep and/or exit. Is it a -- assuming the facility was full, what kind of gross margin would you get? Is it a excluding manufacturing costs type of thing? If you can talk a little bit about that, that would be great.

Yes, let me walk through it in two ways and I apologize upfront because I'm sort of working from the top of my head here. But I think the first lens that you or anyone else would do would be to look at basically the profitability structure of a business as well as the growth structure of a business. And so if as you looked at a business and you found out that you had a humble growth prospect and you ended up thinking that after you spent a lot of effort, it would be dubious in terms of its long-term profitability, it would become a candidate for being extricated.

So Id say at the highest level, those are the two knobs that I look at as growth potential as well as long-term profitability. And I'd say second piece to that is to look at where we are differentiable and can extract value for being differentiated. And as you look at things such as the -- let me give you an example, frankly, of something that we just in this quarter, Vitrocom. For those of you that have followed JDS through the years, you'll remember VitroCom in Mountain Lakes, New Jersey being a very important boutique glassmaker that made barrels that allowed you to connect two fibers together. And their gift was that they could do it at a better tolerance and precision than anyone else in the world. That was important, being the only ones in the world that could do it back in the boom. Today, it's hard to extract dollars for that. So it adds operational complexity to the Company. If you can (ph) extract dollars, then it becomes a candidate. So I would say those are the two macro lenses that we look at. There's probably a lot more detail below that, but that's probably the best I can do in real-time. Hopefully that's helpful enough.

Thanks for the clarification.

Subu Subrahmanyan of Sanders Morris.

Thank you. My question is on the premier (ph) side. Kevin, could you talk about the display business, given some of the areas you're exiting, what kind of revenue phaseouts are we seeing? I know you mentioned comps (ph) in (ph) single-digit millions of dollars. Do we see the entire impact in the June quarter? Is that business kind of bottoming since given we've had two quarters of fairly significant declines there? And then are you still thinking on the comp side that we're in a 5% sequential or mid-single digit sequential kind of growth mode? Could you talk about that, please?

Sure. You know, Subu, we don't break out specifically optics and display versus any of the others. I would say that our downside risk on that segment is getting smaller and smaller. So I'll be cautious not to use deterministic words like anything has bottomed out. But I think it is becoming a relatively smaller risk at this point in terms of the downside. We have noted, by the way, that we have invested in a new set of -- a new generation of coating machines that will allow us to provide a broader spectrum of basically filters. If you think about what we've put into a light engine, you'll see a thing -- from the bulb, after the bulb, you tend to get a UV filter. You tend to have a light columnater (ph). You have some prisms. You had a window formally on the DLP chips. There might be a color wheel; there might be another filter.

So our ability to provide filters that provide unique differentiation in terms of contrast and brightness is still an area of focus for us. We do have to get this new generation of equipment in, and once we do, we think we'll actually have growth there. And I think we have a several-quarter transition period until we know whether that investment is going to pay off.

So what I'm trying to give you is we are hitting a point of modest to low downside risk. We have a couple of quarters to take our prototypes and see if we can begin a new revenue stream and we should see that some time over the next four to eight quarters.

On the comp side, I continue to believe that there is reasonable strength there. I'd say in Asia, there is good. We've made the comment earlier in the call that our book-to-bill this quarter was greater than 1. And that was largely because of the strength of the Comps business. That's probably the most deterministic way of describing how we see the quarter. So hopefully that's helpful.

Absolutely. And just to clarify on the revenue phaseouts, are you going to see the entire impact in June quarter in that 160,000 (ph) 70 (ph) million guidance, or is there kind of an impact over the next two or three quarters of that?

I think some of the revenue transitions could take a minimum of -- unlikely for almost any of them to be this coming quarter. Most of them will be in the second through fourth quarters after that. So it will be -- it's not a big number and it will be relatively slow.

Understood. Thank you.

Cobb Sadler of Piper Jaffray.

Thanks a lot. I know you don't break it out, but my question was on the DWDM strength. Are you seeing more strength from kind of camplus (ph) applications from course WDM products? Or is it more metro -- high channel count ring-based systems?

I'd say right now it's more metro ring-based systems.

Okay. Great. And then just one more question on -- so within optical or comm, you've got some businesses that are growing, some that aren't, obviously. What do you think the growth rate is on the businesses that are growing? So next generation is gone (ph) at WDM, metro WDM, next generation long haul. What do you think the growth rate is there? I guess less legacy SONET and so on that's probably declining.

I, just as I described earlier, the world we live in is almost operator by operator dependent. So the only thing that I can tell you that I have my own data to substantiate is that our our design wins for the last three quarters have just been solidly in the metro space. This quarter was no exception. If anything, we saw further strength. So that's probably the best I can do, Cobb.

Okay, sounds great. And just one last question. On -- do you break it out? I know it's probably really tough for you, but components that are driven by capacity additions versus common equipment maybe in a WDM system, so amplifiers being kind of onetime type expenses -- or costs for a carrier. Can you look at your comm business along those lines? Or is it just too difficult to break out?

Difficult that way. I mean if I was to -- in some sense, let me abstract out your question and where is the growth. And for us, I think we see growth at the circuit pack level. We see growth with the agile products, such as wave blockers, MWSs, ROADMs. It's pretty good strength over the last two quarters on whether it be waveguide or synthesized ROADMs. And then I'd say there are some things such as pumps -- good old pumps as well as TOSs (ph) and ROSs (ph) are. So those are probably the three to five areas that I think we see the most significant quarter-on-quarter growth right now.

Okay. Sounds great. Thanks very much.

Thank you very much, sir. And ladies and gentlemen, that concludes our Q&A session for today. I'd like to turn the call back over to our speakers for any closing remarks they may have.

Thank you. That concludes our third-quarter of fiscal 2005 earnings conference call. Thank you again for joining us. We look forward to updating you on our progress in future quarters.

Thank you very much, ma'am, and thank you, ladies and gentlemen, for your participation in today's conference call. That concludes the presentation and you may now disconnect. Have a good day.