Viavi Solutions Inc (VIAV) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for your patience, and welcome to the fourth-quarter 2005 JDS Uniphase earnings conference call. My name Bill and I will be your conference coordinator for today. (OPERATOR INSTRUCTIONS) I would now like to turn the conference over to your host for today's presentation of Ms. Jacquie Ross, Director of Investor Relations. Please proceed, ma'am.

Thank you, Bill, and welcome to the JDS Uniphase fourth-quarter and fiscal 2005 earnings conference call. Joining me on the call today are Kevin Kennedy, Chief Executive Officer, and Dave Vellequette, Chief 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 March 31, 2005.

The forward-looking statements, including guidance, provided during this call are valid only as a 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 fourth-quarter results issued earlier today and available on our website at www.jdsu.com.

Finally, another 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 would now like to introduce JDS Uniphase's Chief Executive Officer, Kevin Kennedy.

Good afternoon. Thanks for joining us for our fourth-quarter and 2005 year-end results.

Due to another a number of significant onetime transactions and the annual audit of these transactions we deemed it advisable to reschedule our call until today. Dave will provide more detail in his discussions of our GAAP results later in the call.

Overall, the fourth quarter of fiscal 2005 evidenced improved non-GAAP financial results and significant achievements in our cost improvements and complexity reduction programs. Our employees delivered improved quarter-over-quarter results as they executed a complex set of initiatives focused on longer-term cost and profitability improvement.

Summarizing our Q4 financial results, first, Q4 revenue was 170.9 million, up 3% from last quarter. For the fiscal-year 2005 revenue was 712 million, an increase of 12% over fiscal 2004. Our book-to-bill for the second quarter in a row was greater than 1. Non-GAAP gross margin was 17.6%, up from 16.1% last quarter. On a GAAP basis gross margin improved from 14.9% to 16.4%.

Non-GAAP earnings before interest taxes depreciation and amortization, or EBITDA, was a loss of 19.7 million, or flat from last quarter. On a GAAP basis EBITDA loss increased to 94.1 million from a loss of 28.9 million last quarter, principally due to asset impairment and restructuring-related charges.

Loss per share on a non-GAAP basis was $0.02, the same as last quarter. GAAP loss per share was $0.10, which compared to a loss of $0.03 in the prior quarter, again principally due to restructuring-related charges and impairment of goodwill and long-lived assets.

Our optical communications business delivered triple digit revenue for the fourth consecutive quarter, closing at 106.3 million, up 5% from the previous quarter. We continue to enjoy strength in our integrated subsystem level products with more than 10,000 circuit packs and 1450 wavelength management modules shipped so far this year, representing 50% and 100% growth respectively. And our commercial and consumer business delivered flat revenues quarter over quarter of 64.6 million. As expected, this business was impacted by previously announced product transitions which were offset in part by a partial quarter contribution from the Lightwave commercial laser acquisition. Dave will provide further details on these financial later in the call.

Before I turn to a business update, let me briefly note that going forward with the close of the Acterna acquisition we will be reporting revenue and operating income for the following three segments. First, our optical communications segment, which includes the classic JDSU communications business; second, our commercial and consumer segment which includes the Lightwave and Photonic Power acquisitions; and finally, a new communications test and measurement segment centered around the Acterna acquisition.

Now turning to the business, I'd like to update you on the multiple programs initiated over the last six months intended to provide sustainable cost reductions, improve the profitability of our product portfolio, and deliver improvements to our business model over the next four quarters. Actions include our program of product transfers to lower-cost manufacturing locations, including our facility in Shenzhen, China, and an expanded use of contract manufactures; the phaseout, divestiture or exit from non-core businesses that are incapable of supporting our longer-term profitability objectives; the reduction of our footprint through the consolidation, sale or closure of a number of manufacturing locations; and finally, the execution of a number of carefully selected portfolio-fortifying and profitability-enhancing acquisitions. In recent quarters, we have vigorously pursued these initiatives in each of our businesses. Our status is as follows.

Starting with the optical communications business segment, following our aggressive program of product transfers this quarter, over 60% of our optical communications revenue is now manufactured outside of North America by contract manufactures or by our Shenzhen factory. On May 27 we sold our cable TV business to EMCORE as part of our exit from the Ewing, New Jersey site. At the time of close, cable TV was contributing low single digit millions of dollars in quarterly revenue, but with an EBITDA neutral to negative impact to the bottom line. As part of the transaction, EMCORE and JDS Uniphase became preferred suppliers for certain optical components and JDSU will receive a royalty on licensed intellectual property.

We've closed the sale of our Mountain Lake and Ewing, New Jersey operations to our contract manufacturing partner, Fabrinet, on May 27th. As a reminder, JDS Uniphase acquired the Mountain Lakes precision glass operations as part of the acquisition of Vitrocom in 1996. This transaction is expected to have an EBITDA positive impact on our operating results.

Plans for the closure of our Melbourne, Florida facility remain on track for completion by the end of this calendar year. The transponders and transceivers manufactured at the facility are either being transferred to a contract manufacturing partner or end of life. Consistent with our exit plans, we have signed a non-binding contract to sell the Melbourne manufacturing facility.

Taken together, we expect these initiatives reduce costs and expenses by 12 million per quarter by the fourth quarter of fiscal 2006.

Since our last quarterly announcement in April we sold our 912,000 square foot Ottawa campus to a property development company but retained a leaseback option that allows us up to 18 months to find an alternative location in Ottawa for our local team.

Now turning to the commercial and consumer business, we advanced the manufacturing consolidation and product phaseout initiatives we announced last quarter, while concurrently strengthening our laser portfolio. The following points are, first, we sold our Fuzhou, China facility acquired by JDS Uniphase as Casix in 2000 to Fabrinet. Fuzhou manufactured bulk optics and was previously reported as part of our commercial and consumer products group revenues.

Our fourth-fiscal quarter results included end of life revenues from a small quantity of our coated micro displays for DLP projectors. We do not expect to ship any coated micro displays going forward, and our exit from this business is expected to have a positive impact on our non-GAAP EBITDA in our first fiscal quarter results.

Similarly, we've now fully exited the consumer light engine systems manufacturing business. We remain committed to leveraging our expertise at the component level.

And the acquisition of Lightwave Electronics closed on April 29 when we welcomed about 120 employees to the JDSU team. Lightwave strengthens our product portfolio in the commercial, high-powered, solid-state laser market whose revenues and bottom-line contribution for the partial quarter were in line with our expectations. We expect Lightwave revenues for the first quarter of fiscal '06 to be in the mid single digit millions, although we do not plan to break out actual revenues or profitability contribution going forward.

Exclusive of the Lightwave acquisition, as discussed last quarter, we expect our exit from Fuzhou and the phaseout of our light engine and DLP coated micro display business to reduce product costs and expenses by 8 million per quarter by the fourth quarter of fiscal 2006.

Moving to new initiatives, in the first quarter of 2006 we have initiated an additional set of actions intended to improve profitability in our CCP business segment. Further to our discussion last quarter, we intend to sell our front surface mirror business to our glass supplier, Cardinal Glass Industries. We expect the sale to be completed in the third fiscal quarter of 2006. In the meantime, Cardinal will be our contract manufacturing for front surface mirrors. Upon completion of the sale, Cardinal has agreed pay royalties based on the use of our proprietary technology.

Following the strengthening of our commercial laser business through the acquisition of Lightwave, we initiated further actions to complete the consolidation of our laser business. First, a few weeks ago we announced the execution of a definitive agreement to divest our Grenoble laser operation in France, impacting about 30 employees. Second, we signed a definitive agreement to sell our laser marketing business which allows us to focus on our more specialized and higher-margin commercial laser applications. And, finally we have consolidated employees and assets related to the Lightwave acquisition into our San Jose buildings. We expect that this set of commercial laser consolidation activities will be completed by the end of the first fiscal quarter and will improve the EBITDA performance of our commercial laser business by single digit millions of dollars per year.

During August, at our Santa Rosa, California site, we notified an additional set of employees that they will be impacted by further plans to reduce headcount. These actions will result in approximately 100 fewer jobs at the Santa Rosa site by the end of the calendar year. And we acquired privately held Photonic Power on June 6, which we at expect to have a non-GAAP EPS neutral impact through fiscal 2006.

In the future, as I mentioned, we plan to break out the communications test and measurement segment revenues and operating income separately, starting with the current quarter. As you know, the acquisition of Acterna closed on August 3, so our first-quarter results will reflect a partial quarter contribution. Just as we don't break out guidance for our optical communications and CCP segments, we do not plan to issue separate guidance for this new segment going forward. However, in order to help with your modeling for the new combined Company, Dave will give you selected results from Acterna's fiscal year ending March 31, 2005 later in today's discussion. He will also provide insight into our expectations for the revenue contribution from Acterna for the current quarter.

With regard to the communications test and measurement segment, the focus for the next several quarters will be on achieving integration success. The team is already moving deliberately forward in this regard. John Peeler, Acterna's CEO, is heading up our new communications test and measurement segment where he continues to lead Acterna's R&D, manufacturing and sales organizations. All SG&A functions, including finance, legal, HR and IT, are being quickly integrated into the existing JDSU structure, reporting to the appropriate functional leads. We will maintain a separate sales and R&D organization for the communications test and measurement segment. While there is some minor overlap in terms of our customer base, the fact is that many of the buyers of test and measurement are not the same people buying optical components and have different purchasing dynamics, and we will not disrupt either sales organization. Our immediate focus is therefore on back end integration, including the expansion of our Oracle capabilities to capture Acterna's operations within the next 12 months.

At the same time, we are exploring additional opportunities for synergies. As we stated last time, this acquisition was driven principally by product and market relevance rather than strict financial synergies. Areas we're looking at include using JDSU optical components in Acterna's modules, cross leveraging of existing customer relationships and differentiated joint technical programs. Let me emphasize, however, that any net benefits from these synergies may be four plus quarters out.

In the meantime, we expect JDSU will benefit from portfolio, geography, distribution and back end or shared service synergies resulting in combined quarterly cost of goods, OpEx and tax savings. However, in the first few quarters we expect these benefits to be more than offset by incremental process improvement investments associated with integration and lower interest income from the lower cash balances.

Moving to some miscellaneous corporate items, first in terms of corporate developments in the quarter, we formally welcome Dave Vellequette as our Chief Financial Officer. Dave has been a driving force behind the recent consolidation initiatives, and I'm extremely pleased that JDSU has the opportunity to benefit from his 27 years of experience. Since Dave started at JDSU about a year ago he has been systematically fortifying the finance department, which included a new financial planning team, and in the last four months a new corporate controller, director of tax, director of corporate accounting, and corporate treasurer.

On June 22 we announced the accelerated vesting of almost 34 million out of the money stock options with an exercise price of $2.50 or more. This action was consistent with those already taken at many other first wave companies in order to reduce compensation expense associated or as required by FASB statement No. 123R.

Today we're announcing plans to move out of our corporate headquarters in San Jose, California to nearby Milpitas where we have been able to secure higher-quality facilities at a lower ongoing cost. We expect the move, when complete in November, to save more than $1 million in annual operating expenses.

Finally, and consistent with our employee compensation plans, our most recent customer survey reported another improvement in our customer satisfaction metrics. Reflecting our ongoing commitment to our customers even as we execute an aggressive agenda of change throughout the Company.

In conclusion, the fourth quarter of fiscal 2005 was challenging as we executed our manufacturing consolidation agenda, closed a series of acquisitions and divestitures and grew communications revenues. Once again I would like to thank our employees who continue to drive an aggressive agenda of change without compromising our ongoing commitment to our existing customer base. I would also like to welcome former Acterna, Lightwave and Photonic Power employees to the JDS Uniphase team. It is an exciting time to be joining JDSU, and while our ongoing transition is undoubtedly challenging, it also offers an unmatched opportunity to personally impact the direction of this Company.

I will now hand the call off to Dave to discuss more detail about our fourth-quarter and year-end results. Dave?

Thank you, Kevin. Before I discuss fourth-quarter results, I'd like to comment on the delay in our fourth quarter and fiscal 2005 earnings announcement.

The delay was caused primarily by the number and complexity of transactions that we completed in the quarter and during the fiscal year, and the need to complete the year-end audit work in the midst of our first year SOX compliance work. These transactions included the transfer of our Bintan, Indonesia and our Ewing, New Jersey manufacturing to Fabrinet; the sale of our Fuzhou, China and Mountain Lakes, New Jersey business to Fabrinet; the sale of our CATV business to EMCORE; and the impairment of goodwill and intangibles associated with our optics and display business. The audit activities around these items are now complete.

These transactions, along with our product phaseouts, are two examples of how we are reducing ongoing operational complexity within our business. Other visible less visible examples of how finance and accounting are reducing their complexity include the appointment of four new finance and accounting leaders in the past four months, the elimination of certain unnecessary intercompany accounting processes, and the simplification of our investment portfolio including the reduction of certain investments such as minority equity investments in other entities held by the Company. Each of these changes, and similar anticipated future changes, are fundamental to our improved business model and collectively represents a significant undertaking.

However, given the extent and pace of activities, there is transitory risk and, not surprisingly, our actions have introduced near-term, entity-level strain on our organization, particularly within our finance and accounting department. This strain was a factor in our decision to delay this earnings announcement.

Moving back to fourth-quarter results, let me remind you before I begin that all numbers are non-GAAP unless I state otherwise.

To recap, revenue for the fourth quarter of fiscal 2005 was $170.9 million, up 3% from last quarter and down 2% from the same quarter a year ago. Loss per share was $0.10 on a GAAP basis and $0.02 on a non-GAAP basis, which compares to a GAAP loss of $0.03 and a non-GAAP loss of $0.02 for the previous quarter.

GAAP earnings before interest, tax, depreciation and amortization, or EBITDA, was a loss of $94.1 million, which compares to a loss of $28.9 million for the previous quarter. GAAP loss reflected a $62.7 million impairment charge associated with our optics and display business. Non-GAAP EBITDA for the fourth quarter of 2005 was a loss of $19.7 million, which compares to a non-GAAP EBITDA loss of $19.8 million for the previous quarter.

Turning to our fiscal-year results, revenue was $712.2 million, an increase of 12% over fiscal 2004, the first time since 2001 we have reported growing revenues year over year. GAAP loss per share was $0.18 for the year and non-GAAP loss per share was $0.06. This compares to a GAAP loss per share of $0.08 and a non-GAAP loss per share of $0.04 for fiscal 2004.

Moving to the business segments, our optical communications business delivered triple digit revenues for the fourth consecutive quarter with revenues of $106.3 million, up 5% from the previous quarter and up 24% from the same quarter a year ago. This growth was driven by continued strength in our long haul and metro markets. Also, our communications group's quarterly book to bill was once again above 1. For fiscal 2005 the optical communications business delivered revenues of $422.2 million, up 33% from $317.4 million in fiscal 2004.

Our commercial and consumer business delivered revenues of $64.6 million, flat from last quarter and down 27% year over year. As we noted last quarter, this business was impacted by the phaseout of selected products, which was partially offset by revenue associated with our Lightwave acquisition which closed on April 29. Lightwave strengthened our laser business, in line with our expectations, and flex continues to be stable with modest year-over-year growth and a steady stream of design wins. Revenues from our optics and display business declined as expected due to the series of transitions announced last quarter impacting our light engine and micro display window products. For fiscal 2005, the commercial and consumer business delivered revenues of $290 million, down 9% when compared to $318.5 million in fiscal 2004.

Now for the rest of the income statement. Non-GAAP gross margin improved from 16.1% last quarter to 17.6% in the fourth quarter. The increase was primarily due to the net excess and obsolete benefit with product phaseouts, which was partially offset by additional costs relating to the transition of products to contract manufacturers.

Non-GAAP operating expenses increased by $2.3 million to $59.8 million, but were flat as a percentage of revenue at 35%. R&D was down slightly from last quarter, and SG&A was up 4.7 million to 37.5 million due to the incremental charges for external consulting associated with integration and divestitures and an increase in legal costs largely associated with our divestiture and other restructuring activities and our pending class-action litigation.

A detailed reconciliation of our non-GAAP results to our GAAP results is available in today's press release announcing our fourth-quarter and year-end results.

Included in our GAAP results are -- a $62.7 million charge related to the impairment of identified intangible assets and goodwill related to parts of our optics and display business; a $7.6 million charge for restructuring and nonrecurring expenses associated with our manufacturing consolidation and other cost saving actions. As stated last quarter, restructuring related to our previously announced initiatives will be no more than $30 million and charged as we exit the impacted facilities. A $15.7 million gain on sale of investments, primarily related to the sale of Nortel tock connected to the sale we recorded an income tax expense of $10.8 million. A $29.8 million charge from the currency translation account associated with sold and substantially liquidated subsidiaries and a $10.4 million charge for loss on sale of the Ottawa facility.

Moving to the balance sheet, cash and marketable securities totaled approximately $1.3 billion, down 75.7 million from last quarter. Cash consumption included 28.2 million for operations and $59.4 million for acquisition-related activity. Net inventory declined from $118.6 million to $97.4 million, reflecting the sale of certain inventory to Fabrinet, the increased use of contract manufacturers and phaseout of certain product lines. Inventory turns improved from 4.8 to 5.9. Finally, accounts receivable were flat. The DSO improved to 60 days from 61 last quarter, which is in line with our historical range.

As of June 30, our headcount was 5022, down 10% from last quarter. Significant changes included a headcount reduction of approximately 800, representing more than half the 1350 positions we intend to eliminate as part of the restructuring plans we announced in April. Of the 800, approximately 500 related to the divestiture of our Fuzhou facility and 300 related to reductions in North America, primarily from the restructuring of our Ewing manufacturing operations.

We also added approximately 130 personnel from the acquisitions of Lightwave and Photonic Power. And we continue to hire additional headcount in Shenzhen, China to support our product transfer program. As expected, the actions taken in the fourth quarter reduced our manufacturing headcount as a percentage of our total headcount. Additionally, with the acquisition of Acterna, we welcomed approximately 1800 new employees, which will be reflected in our headcount when we report first-quarter results. Also note that our cash and cash equivalents will decrease this quarter by approximately $460 million as a result of this acquisition.

As a reminder, we expect to reduce our North American headcount by approximately 550 before the end of the fiscal year. These reductions are related to the manufacturing consolidations and product phaseouts we announced in April. The initiatives we have announced since then, including the sale of our Grenoble, France facility and additional headcount reductions in Santa Rosa, California, will impact approximately 130 additional positions.

Moving to JDSU's traditional business, and looking forward, we will be reporting revenue from a new communications test and measurement business segment. This segment will focus on Acterna's test and measurement group. To help you assess this business, I would like to share with you some details of Acterna's recent financial performance.

For the fiscal year ending March 31, 2005 Acterna reported unaudited results as follows -- revenues of $448.5 million; GAAP and non-GAAP gross margins of 56%; GAAP net income of $6.6 million; and non-GAAP EBITDA of 11% of total revenues.

Now, with so many initiatives under way, we recognize that the next few quarters will be challenging to track given the number of programs affecting both the top and bottom line. In the interest of clarity, I'm going to remind you of our internal expectations for the next several quarters.

Taking revenue first, we believe that the fourth quarter included the final production orders associated with a series of product phaseouts and asset divestitures that we announced last quarter. The combined quarterly revenue from our cable TV products, the Casix range of products out of Fuzhou, DLP micro displays and like engine systems it was in the high single digit millions of dollars. Going forward any revenues related to these products will be in the form of last time buys or royalties, dependent on product sales.

Second, our fourth-quarter revenues benefited from only a partial quarter contribution from Lightwave. When we announced this acquisition we commented that we expected a full quarter of revenues who will contribute the single digit millions of dollars.

And third, Acterna delivered revenues of $448.5 million in its most recently reported fiscal year. JDSU will only benefit from a partial quarter of revenue conjuration in its first fiscal quarter of 2006.

Moving to the bottom line, during our last conference call we outlined a set of initiatives that we believed would enable cost savings of $4 million, $8 million, $16 million and $20 million sequentially over the four quarters of fiscal 2006.

Second, with the actions was have subsequently announced, including the move of our San Jose headquarters facility, the sale of our Grenoble laser business, and the additional account reductions in Santa Rosa, California, we now expect total cost savings from our announced initiatives to be $4 million in the first quarter of fiscal of 2006, $9 million in the second quarter, 17 million in the third quarter and 22 million when the full impact of our initiatives are realized in the fourth quarter of fiscal 2006. Again, these savings are relative to the operating results for our fiscal Q3 2005.

Related to the Acterna acquisition, we are expecting quarterly cost savings of between 3 to $5 million to phase in over the first four quarters. However, we also expect these benefits to be offset during the first year by higher IT costs as we integrate back end systems, costs associated with SOx compliant processes and procedures, and lower interest income associated with our lower cash balance.

Now to our financial guidance for the first quarter of fiscal 2006. Following our acquisition of Acterna, we intend to be consistent with JDSU practice and issue revenue guidance only at a Company level going forward. However, for this quarter only we will break out JDSU revenue guidance from the combined Company's revenue guidance.

Due to the product transitions noted above, we expect the communication and the commercial and consumer segment to contribute between 163 and $173 million in revenues for the first quarter of our fiscal 2006. Together with the acquired communications and test and measurement segment, we expect first-quarter total revenues to be $250 million, plus or minus $10 million. Bear in mind that the Acterna contribution will be for a partial quarter as this acquisition closed almost five weeks into the quarter.

I will now hand the call back to Kevin for closing remarks. Kevin?

Thank you, Dave. In summary, fiscal Q4 was characterized by execution on multiple fronts, all focused on improving the business model for the future. Once again I'd like to thank our employees who delivered revenues at the very high-end of our guidance range while executing on an ambitious agenda of initiatives.

As we enter fiscal year '06 we are mindful that there is more to do to reduce complexity. Going forward you can expect further consolidation of our manufacturing footprint, more progress on our product transfer program, and continued divestitures of non-core products or products that cannot deliver margins in line with our longer-term goals. Simultaneously, we will continue to drive for improvement in our product mix and to invest in higher growth profitable products.

I will now hand over the call to our operator to start the Q&A session. Bill?

(OPERATOR INSTRUCTIONS) Ehud Gelblum, JPMorgan.

If I could, I want to try and put things on an apples-to-apples basis with respect to guidance. And, David, thanks very much for putting together all the divested products into one kind of blob.

You mentioned that that blob was high single digits in revenues I guess in the most recent quarter. Are we to assume that that high single digits revenues that you're shedding takes into account all the partial quarters that you had? Each one of those different products that you either shutdown or the divested came kind of mid quarter, so should we -- if we wanted to put an apples-to-apples basis next quarter, just by virtue of those moves you would be down high single digits? Or do we have to kind of account for mid quarters? I guess Where I'm going with that is when you add back in the mid single -- a partial quarter of mid single digit revenue growth from Lightwave, is the guidance of 163 to 173 -- in your mind is that essentially flat, or is that up or down sequentially from if you hadn't done any of this?

Let me try to take it. The fact of the matter is for some number of quarters we're dealing with this single digit millions of dollars of downward pressure. On the other hand, what you can extract from that guidance is we're getting -- of the residual products that are still here, they're obviously growing. Otherwise we would be moving the window down, not just being cautious with the setting of the window.

So the window was essentially moved up. There is a single digit million dollar per quarter downward pressure that plays out over several quarters, yet we're seeing growth in our residual businesses. And that's why we have picked the guidance number that we did.

When you say window move up, you mean from the prior 160 to 170 last quarter (multiple speakers) 163 to 173 now?

Yes.

Again, let me just -- I just want to rephrase it to make sure that I understand it. You're saying you're moving that up because the pieces that you held onto are doing better, but the pieces that (multiple speakers)

They're still a downward pressure of single digit million dollars. That's right.

From what? From the pieces that you're getting rid of?

Yes, that's right.

So if you had never owned those pieces that you now will no longer be owning going forward, you would basically be -- the 170 wouldn't be 170 this quarter, it would have seen somewhat less. And you're saying you would actually be guiding up sequentially this quarter versus last?

That's correct.

Pat Chiefalo, Merrill Lynch.

To follow up on Kevin's detailed review of the restructuring efforts, which I appreciate are sizable and difficult and represent substantial undertaking, can we continue to expect more ongoing restructuring? And will these results in more modest cost savings? Or could we expect similar cost savings to the initiatives you're currently talking about, i.e. in the $12 million range, $8 million range? Like what are we thinking about for further restructuring?

Let me talk about activities and then the nature of activities. And then I don't know how much guidance I can give you on the orders of magnitude since we haven't sized some of them.

Clearly we're trying to continue to minimize the amount of North American manufacturing, and in North America have only those things that make sense, so perhaps those things with larger capital investments that are highly specialized. So there is in fact, or will be, further restructuring of our footprint. So that's a fact.

There's -- the timing of that and the magnitude of the savings, we haven't necessarily sized. We haven't provided guidance, and I'm not going to do that today. There are basically only three major locations that are associated with that review, and I think over the next -- over the rest of the fiscal year we will come forward with what we think the savings might be.

That's fair. Just to follow up with another question, if you could please help us direct us in terms of your thinking with respect to other M&A activity. I know sometimes these discussions can be hard, but can you help us -- direct us in terms of if you're thinking about more the sizes that you could be potentially looking at? Are we thinking about sort of smaller acquisitions, or could we see another large one, maybe one not as large as Acterna, but sort of larger type of acquisitions? If you could sort of direct us in terms of the strategic direction of where you're thinking, that could also be helpful.

I'd say we should all be clear, including the management team here, that our number one responsibility is to digest that which we've done, which we've already closed. And so the Acterna -- doing an excellent job with Acterna is a priority for the Company.

That being said, we will continue to be opportunistic relative to what I would call fortifying acquisitions, which in general will be small. I'd say the Lightwave acquisition that was accomplished and announced in the April/May timeframe has basically already been integrated. It's a super team, relatively low overhead on the integration, and we can do things of that size I think fairly well.

So highest order of business is we're going to be focused on digesting and serving the team that we've just acquired. Second is we're going to continue to be aware of opportunistic pieces. And third, we will -- certainly things that are more knowledge worker and higher value add will be areas that we're focused on. So intelligent optics, test and measurement, any of those areas could be places where we will be having our eyes open, is probably the best way to say it for the time being. Hopefully that helps you.

No, that does. Maybe just one last one. Just maybe if you could discuss any potential integration risks with Acterna over the coming quarters, if you could sort of help us understand does and in terms of how your thinking how material those risks could be. Is it likely to be pretty smooth given there's not a ton of integration that has to be done except with some back office stuff, or are there risks we're not appreciating yet?

I think we've devised a strategy for the integration as something that is priced to maximize the continuance of customer facing momentum, hence the reason that John is going to continue to run the sales force, the R&D, and basically the product delivery aspect of it.

I think the risk is not so much in the actual integration of the back office; it's more the time and the cost to do that. You go through several quarters where you're discovering each other's processes and you're deciding which process takes precedence. So I don't think it is a risk that ends up with a major problem; it is just the amount of hard work that's required and the cost to do it. So I think that's all I can help you with at the moment.

John Harmon, Needham & Company.

Good afternoon. A couple of questions, please. You talked about strength in long haul and metro. The question is about your communications business. It was up nicely sequentially, even given the divestiture of your cable TV business. Any particular product lines or markets that contributed to that?

I'd say the agile products, so the wavelength management systems, wave blockers, our MWS and our ROADMs, are all areas that are customer by customer moving from trials to operator mini-deployments, if you will, and integration. So I think it's really that area, the reconfigurable optical add-drop multiplexers and some of the higher end subsystems that have been the higher growth areas for us.

Thank you. Secondly, could you talk about, even qualitatively, how far along in your actions to divest products that don't meet your margin guidelines, 30% near term, 40% further out? Are you mostly there, or are you still mid phase or just getting started doing that?

I think we've gone through a significant phase of making decisions. And so I think that's a true statement pretty much across the Company. As you can see from some of the new initiatives we even announced on the call on the non-com side, decisions are being made every month.

I think the hard part of this kind of business is because it usually is built upon a manufacturing platform which has to be closed down, buildings exited, and if you're moving it to Asian manufacturers you have to go through a phase of actually incurring more cost, then getting lower labor, then getting your utilization up, then getting localization of content for your bill of materials improvements, and then value engineering, it really takes -- you can hit the nadir of the turn in two quarters, but actually to feel good about getting the full impact it sometimes is four to six quarters. So we are in that state where we are very early in beginning to feel the impact of some of the decisions we made a quarter ago. So that's really where you see it, is a lot of decisions. I think the purpose of this call is to tell people that we've closed the things that we said that we were going to do, but we're early yet in feeling the financial impacts of it.

If I could clarify just a little, we're sort of in the pipeline between making the changes and seeing the effects.

Yes, that's right. That's exactly right.

Michael Genovese, Citigroup.

It looks like, relative to our expectations at least, there was some upside coming from Acterna in the revenue guidance that you gave today, maybe having to do with the timing of when the acquisition closed. Given the higher gross margin on those sales, and I know you didn't offer really EPS guidance for next quarter, or at least I didn't hear it so correct me if I did, but is it possible -- do you think that it would be too aggressive to think that you guys could actually earn a breakeven result next quarter?

You're right that we abandoned giving either gross margin or EPS guidance probably one or two quarters ago.

Now, that being said, you're right that the Acterna acquisition does bring a significant mix benefit to our portfolio, and you can do the math. The JDSU classic trajectory is going to improve, I believe, based upon the decisions that we made. And given the guidance that we've given you, you can understand the range of outcomes. Clearly if we were to hit the low-end of our guidance I don't think your question would be -- the outcome of your question would be attainable. But we also gave a pretty broad range.

Jeff Evenson, Sanford Bernstein.

In an earlier call you gave some helpful buckets of gross margins and talked about the percentage of revenue from each of those buckets. Would you be willing to tell us some buckets that you're thinking about now, and where you are and where you might hope to be over the next few quarters?

It could be my old age; I'm not so sure I remember the buckets. The most significant thing that we -- I keyed people on was to give people a sense of progress on where we are at moving things out of North America, and we're probably a bit ahead of plan on getting the revenue bucket to Asia. I used the number of 60%. Before this we had said that we would be by summertime 50%.

In terms of the buckets, if you're referring to the notion that mid-term and long-term a 30% and 40% attainment of gross margin on the JDSU classic, we're still in the very early stages, as I have just said to John, of making the changes and feeling them yet. So I don't think I have any new update to the fact that first you have to make the decisions, let them -- execute the activities. The way I would say it is, while we're out of the Vitrocom, Fuzhou and Ewing operations, places like Melbourne we still own the facilities and the SG&As and the utilization impact of that. So we're still pretty early in feeling the impacts of that on our P&L. I think we're going have to let the story play out, and we'll give you guidance quarter by quarter.

Could you give us a bit more color on the joint technology development efforts between the traditional JDSU businesses and the Acterna business that you mentioned during the call?

We probably are looking at two to three programs, things like where we have an opportunity to make one portfolio or the other a leadership. So I might pick an area like 40 Gig to be an area to collaborate on. And so I don't think the team would appreciate me sort of giving away where we're going to focus, but I'd say we do have three areas of focus and the 40 Gig areas is probably one of those.

(OPERATOR INSTRUCTIONS) Arnab Chanda, Lehman Brothers.

This is Kenneth Lee for Arnab. I just had a question about your manufacturing. You guys are selling the facilities off and moving stuff -- products to Fabrinet. Can you guys talk a little bit about what you guys see going forward and how long you think you guys will continue down the path?

Could you explain what you mean, continue down the path?

I guess in terms of consolidating manufacturing (indiscernible) China, like how fast do you guys see you building out in China, and whether are we -- have we not seen the last of it in terms of what you guys have announced?

Sure. Let me take a stab at it. I think the last call I provided the insight that this Company was comprised of -- 75% of its employees, or more than 75%, were manufacturing related, and that might not be a typical model for a high-tech company. So my real message was we're going to be at this for awhile in until we change the dynamic there.

I think we have accomplished the goals that we had set, which is to get on the coms business enough momentum so we could see the majority of our revenue in Asia.

My view, we have two primary contract manufacturers. Thailand is one destination; Singapore is another. And our own factory in Shenzhen, China is a third. We're going to continue be somewhat diversified in the way that we do that. We're going to absolutely focused to get things to lower cost areas such as any of those three. And I think we have probably another year ahead of us of making the changes that will get us close to a point of stability in an ongoing manufacturing model. So we have a lot more work to do, I would say.

Hopefully the notion of being at greater than 75% manufacturing worker content for the Company as one book end of where we do want to be anymore is a useful piece of data for you. And secondly, the book end that we probably have one more year of significant footprint consolidation to have labor-intensive stuff abroad and more process and capital intensive items here in the states would be the other book end for you.

Thank you. And then, if I may, one more question. Can you just talk a little bit about the flexes? This quarter it was flat.

The question, for those that didn't hear, was the status of our flex business. And frankly, it has not been flat. Over the last year or two it has continued to grow. Maybe the words Dave might have used were modestly. It continues to be very profitable and it continues to improve its contribution. So it's a very clean business, well-run, with a modest growth.

Paras Bhargava, BMO.

First, a couple of questions about Acterna. Of the 404 odd million number that you're giving, Dave, is that an audited number or is that subject to change? Because they're a private company, I'm just trying to understand what the baseline number is and are you comfortable with that as a baseline number. And then are you continuing with all the businesses that Acterna was in from that number?

The $448 million revenue number is an audited number. And so that number, as far as it changing -- I don't expect that number to change because it is the audited number. And the as far as going forward, we will see how we do with our growth in the business. We commented earlier that that market is growing at an 8 to 10% on an annual basis.

But you're going to be -- I understand that there are some retail businesses within that number. Are you going to continue with all the businesses that contributed to that 448 million?

Right now we have no reason to change the strategy. If John were to recommend a new direction to take the business, we will certainly listen to it and try to help him. But we have -- at the time that we concluded this deal we have no reason to change the trajectory of what we're doing.

In terms of the margins, you're still expecting a similar sort of 55, 56% gross margin contribution from that business going forward?

We're not trying to provide long-term guidance, but I would say in the near-term we think that those numbers are representative of what we will see in the near-term.

And then if I look at your operating margins by segment this quarter, the other item sort of went up significantly, even before the onetime items, and the CCP product got worse, as you might have expected because of the changes. What kind of -- what are the dynamics that are causing these two elements, especially the other one, which jumps around a fair bit, to fluctuate so much? And what might we expect from these two segments in the future?

The other costs include consulting costs related with some of these transitions we're making and these legal fees that I mentioned earlier. That's why that number came to fluctuate. It will be reflective of some of these time sensitive charges.

When might we expect it to stabilize? Is that in '07? Is that a '07 kind of number? Because I think I'm hearing Kevin say, and the team say, that probably '06 is going to have a whole bunch of moving parts and it will be '07 before -- fiscal '07 before the stuff stabilizes.

I think the way that you should think about it is that we have created a bias for significant improvement. We will begin to see that significant improvement over the next -- we will see some in fiscal Q1, but certainly much more in fiscal Q2. Dave has given you sort of the expectation.

That being said, as we have more moving parts we will increase some noise level on that bias of improvement. But in all these cases, the jitter tends to last for about a quarter, at most two, and then you see the bias. So high (indiscernible) for your model is there is a curve with a strong bias. Dave has given you the number. And there will be some noise about that as we increase with any new change of site or consolidation.

Let me just ask one more question. Longer-term, including Acterna, the model sounds to be high-40s gross margin, what you're aiming at. And would the OpEx be sort of low-40s or mid-40s? I'm just trying to understand what is the longer-term model we're aiming at because we got a lot of information today, and I'm just trying to put the details aside and look out longer-term.

It's a fair question, and I think I'm going to resist the temptation of responding to your thirst for a long-term gross margin model of mid-40s. I think you're obviously stating something that's important, which is if the T&M business mix were to increase proportionally, those higher gross margin levels could be attained. So I think that's of the truthfulness. But I think we're going to take it quarter by quarter for the time being.

And in OpEx, Kevin?

I'd say that for both companies we are somewhat higher than we need to be. And I think we will stay somewhat higher for the first three to four quarters because of the integration work. It's almost like transferring a product out of North America. You have a redundancy on both ends. Once we get things on Oracle, which I think is a three to four month -- three to four quarter process, I believe there will be opportunities for us to significantly -- well, observably bring down our OpEx.

So in the 40s or in the 30s after all is said and done?

I'm going to wait until we get through next quarter to give you a number. I think it's a fair request that you're asking, but --

I'm just trying to figure out your earnings power. Because we've got so many moving parts, Kevin, anything you can help us in terms of what earnings power you're aiming at, even if it's a conservative forecast that you're aiming at.

Yes, down. (multiple speakers) get them down, and I think I want to come back next quarter and I will try to be more helpful on that. We've clearly given you a lot of information today, so we should try to digest this first.

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

Just to say thank you very much for joining us today, and we look forward to updating you on our progress in future quarters.

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