Viavi Solutions Inc (VIAV) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the JDSU fiscal 2006 second-quarter results conference call. My name is Maria, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). At this time I would now like to turn the presentation over to Ms. Jacquie Ross, Director of Investor Relations. Please proceed.

Thank you, Maria, and welcome to the JDSU fiscal 2006 second-quarter conference call. Joining me on the call today is Kevin Kennedy, Chief Executive Officer, and David 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 Factor section of our Form 10-Q filed for the quarter ended September 30, 2005 and 10-K filed for the year ended June 30, 2005. The forward-looking statements including guidance provided during this call are valid only as of today's date, February 1, 2006, and JDSU undertakes no obligations to publicly update these statements as we move through the quarter.

Our comments today will include non-GAAP measures. A detailed reconciliation of these non-GAAP results to our GAAP results, as well as a discussion of the usefulness and limitations of these non-GAAP measures, is included in today's news release announcing our results available on our website at www.JDSU.com.

Finally, and as a reminder, this call is being recorded and will be available for replay from the Investor portion of our website, again at www.JDSU.com/investors.

I would now like to introduce JDSU's Chief Executive Officer, Kevin Kennedy.

Good afternoon and thank you for joining us today. JDSU's fiscal 2006 second-quarter results consistent with prior guidance includes some important milestones for the Company with our strongest revenue and profitability improvement performance in many years ago. As a framework for today's discussion, I would like to first share with you my own observations on JDSU's progress to date and on our continuing journey.

First, after a period of revenue re-engineering that involves simultaneous expansion throughout acquisition and divestiture of noncore or unprofitable products, JDSU is emerging as a leading player in a number of growing markets.

Second, we have invested in a portfolio of products that reaffirms JDSU's position as an innovator. While many products are in early stages of adoption, customers have begun to embrace our portfolio, including components for agile optical networks, triple-play service testing, solid-state lasers, anticounterfeiting coatings and custom optics.

Third, with our improving business model and reputation of technical expertise, JDSU is very well positioned to benefit from strength in broadband markets.

And finally, we remain intensely focused on improving the Company's bottom-line performance. I will touch on each of these themes today.

Taking the top-line first, we achieved our calendar 2005 objective to increase our opportunity in growing profitable markets. Importantly, JDSU is now a more diversified business that serves the needs of hundreds rather than tens of customers. With the outcome of our revenue re-engineering taking shape, our second-quarter results reinforced that JDSU represents $1 billion a year business. This compares to $636 million in fiscal 2004 and $712 million in fiscal 2005.

There are three complementary initiatives that taken together underpin JDSU's revenue engineering. They are investment in organic new product introductions, ongoing portfolio review and selective acquisitions.

Taking organic investment first, our focus has been on potentially high-growth higher margin opportunities designed to leverage our technical expertise and deliver differentiated products to the market. JDSU was first to volume, for example, with reconfigurable optical add/drop multiplexers, which have the potential to transform the way optical networks are configured. Innovations such as these underscore JDSU as the industry leader in optical broadband.

Concurrently we initiated an ongoing review of our product portfolio and identified candidates for divestiture or exit, depending upon market growth rates and operating contribution. As a result of this exercise, we exited or initiated plans to exit businesses that were not profitable for JDSU. Our December 31, 2004 results included a revenue contribution of approximately $30 million from products that we have since exited. Excluding this revenue, JDSU classic revenues for the second quarter of fiscal 2006 actually increased 14% year-over-year, which compares to today's reported year-over-year decrease of 6%.

The third major tenant of our revenue re-engineering strategy was the acquisition of companies serving well-defined, growing and profitable markets. To that end, we acquired four companies during calendar 2005, of which Acterna and to a lesser extent Lightwave had an immediately positive impact on our top-line performance.

The number of moving pieces on our top-line has made quarter to quarter and year-over-year comparison more challenging. Of course, we will continue to experience seasonal and quarterly revenue fluctuations. We will also continue to critically access each product's contribution and make adjustments to our portfolio accordingly. While our second-quarter results start to illuminate the past for an emerging JDSU business model, we have been equally focused on initiatives to drive bottom-line performance, although these initiatives tend to take longer to positively impact our results and in many cases have a negative impact on the near-term.

Dave will give you an update on each of our actions. However, in summary our previously announced initiatives are on track to deliver the targeted cost reductions.

It is important to remember that our revenue re-engineering cost reduction programs are designed to enable JDSU to achieve profitability over time and absent growth in the optical communications industry. This said, the environment we experienced over the last quarter continued to be favorable.

Now back to second-quarter results. Benefiting from a full and seasonally strong contribution from our Communications Test and Measurement business and continued growth in our Optical Communications segment, JDSU reported non-GAAP revenue of $315 million, representing our strongest performance since September 2001. Book-to-bill was once again greater than 1. Optical Communications segment revenue of $109.6 million was up 9% sequentially, representing our strongest performance since the quarter ended March 2002. Excluding approximately 3.5 million of instrumentation revenue included in this segment in our year ago results, the segment was up 5% year-over-year.

Communications Test and Measurement non-GAAP revenue of $146 million included Comm Test's strongest quarter in more than three years. And the Consumer and Commercial segment revenue of $59.4 million was down 6% from the previous quarter due to our ongoing phaseout of unprofitable products.

Moving to profitability metrics. Non-GAAP gross margin improved to 36.3%, our best results since March 2001 and up from 31.6% last quarter. GAAP gross margin improved to 33.3%.

As previously guided, we delivered non-GAAP earnings before interest, tax, depreciation and amortization or EBITDA of $7.9 million. This compares to a loss of $4.3 million last quarter and to a loss of $25.7 million in the year ago quarter and represents the first time in almost five years that JDSU has reported non-GAAP EBITDA positive results. And non-GAAP net loss narrowed to $3.7 million or just below breakeven on a per-share basis, representing JDSU's best EPS performance since March 2001.

I would now like to update you on each of the three business segments. With revenue of $109.6 million, our Optical Communications segment benefited from a favorable environment which drove demand for our more highly integrated and intelligent modules and subsystems. Customers now demand higher levels of integration, and as a result, our differentiated optical subsystems are performing well. During the second quarter, JDSU was awarded a two-year exclusive contract for multiple circuit packs for major North American OEM. At the same time, we see increasing interest from customers outside of North America.

JDSU's end-to-end agile product portfolio continued to gain momentum with notable activities including a double-digit million dollar order for our wavelength select switch, as well as a follow-on multimillion dollar deal for our PLC ROADMs products.

JDSU's agile optical network portfolio offers unparalleled reconfigurability, scalability and robustness at the optical layer designed to lower operators' capital and operating expenditures while enabling next generation services. Highlighting our technical expertise in agile optics, we believe that JDSU's share of this growing market is currently in excess of 60%.

Looking forward, few doubt the impact of tunable lasers on the communications industry with the discussion now firmly focused on when rather than if, tunables will become a standard element of the agile optical network. We believe that our Agility acquisition positions JDSU very well to play a leading role in this growing market.

Overall customer demand continues to be positive with solid activity in long-haul, metro and Enterprise. We believe that JDSU's technical expertise and leadership will enable us to benefit from favorable conditions as carriers continue to expand their networks to accommodate growing demand for IP-based services.

Our Communications Test and Measurement business performed well in its first full quarter as part of JDSU. The December quarter has historically been seasonally strong, and this proved to be the case in our second fiscal quarter with non-GAAP revenue of $146 million.

The underlying drivers of the Comm Test business remain strong. Adoption of JDSU's HST handheld triple-play services tester continues to accelerate as service providers deploy IP-based services including Voice over IP, DSL, IP video and others. During the quarter, we closed a multimillion dollar Voice over IP service assurance systems contract with a major U.S. based operator. JDSU is positioned with a broad Test and Measurement portfolio to support service provider investment in fiber-to-the-X networks and triple-play applications. Unlike competitors who offer test products for certain portions of the network, JDSU offers an end-to-end FTTx triple-play service test portfolio. Our solution spanning an entire set of requirements from our DTS productline with generalized quality of video before entries to network to fiber and copper plate characterization solutions, as well as test instruments and systems for service installation and ongoing service assurance.

Our fiber-optic test portfolio includes the recently released MTS-TBERD 8000 metro network fiber-optic test instrument which is also gaining momentum. We continue to believe that our metro and long-haul fiber-optic test portfolio is well positioned to benefit from growing demand for test solutions capable of supporting the higher transmission speeds necessary for broadband.

Moving to our Commercial and Consumer segment, revenue of 59.4 million was down 6% sequentially as we continue to execute our program of product phaseouts designed to improve the profitability of our custom optics business. Our laser business now under the management of Lightwave's former CEO, Phillip Meredith, performed well, with a portfolio that is strongly positioned to support the industry's ongoing transition to solid-state. As a result, JDSU continues to gain recognition for its high-power, high-performance precision lasers. As a leading innovator in this space, JDSU has just introduced a new industrial diode laser system that leverages our telecom class single-emitter diode lasers to deliver telecom class levels of power, life expectancy and reliability to a wide range of non-telecom applications.

Our brand protection and decorative business, Flex, was once again in line with our expectations, contributing gross margins well in excess of the corporate average. Brand protection continues to garner increasing attention from brand owners, particularly in the pharmaceutical industry.

On the decorative side, we announced the codevelopment of a line of custom automobile finishes with DuPont during the quarter. As anticipated, we experienced further downward pressure in our custom optics business as we transitioned our front surface mirror business to Cardinal Glass Industries. This transition, which we expect to complete by the end of March 2006, will further reduce custom optics revenue by several million dollars, but will improve operating results starting in the fourth fiscal quarter.

Summing up our business segments, it is interesting to note that a year ago more than three-quarters of the Company was focused on restructuring. To put it another way, less than 25% of the business was free from the distraction of manufacturing downsizing. Today more than half of JDSU's business is concentrated on sales and growth.

Of equal importance across our entire product portfolio, JDSU has invested in Next Generation technologies that serve young growing markets. In our Optical Communications segment, we are leading the market with our agile optical network products such as ROADMs and tunable lasers. With products such as our NetComplete service assurance, our Communications Test and Measurement segment is a key innovator in the market. In our laser business, we are playing a leading role in the industry's transition to solid-state. So while we have been focused on reducing the cost of our Legacy businesses, JDSU has also been diligent in building a strong forward-looking product portfolio.

Now a few comments on corporate development since our last call. We have been focused for several quarters on recruiting additional talent to complement our very experienced and long-serving Board of Directors. Last year we added Quantum CEO Rick Belluzzo. Kevin Denuccio, President and CEO of Redback Communications, was the next to join us in December, allowing us to benefit from his wealth of experience in broadband communications. Our third new board member announced in January is Hal Covert, Executive Vice President and CFO of Openwave. JDSU is very fortunate to have the opportunity to benefit from the combined experience these executives have amassed in sales and finance in turnaround context.

In other corporate developments, I'm happy to announce the appointment of Mike Clark to the position of Senior Vice President of Global Sales for Optical Communications. Formerly a sales leader focusing on network equipment manufacturers in our Comm Test business, Mike brings an extensive background in sales and business development to the role. Before joining Acterna in 2001, Mike held a series of increasingly senior positions at Agilent Technologies.

Finally, since our last quarterly conference call, stockholders authorized the JDSU Board of Directors to execute in its discretion a reverse stock split in the ratio of one for eight, nine or 10 at any time prior to December 1, 2006. As previously noted, the board continues to believe that a reverse stock split will allow investors to enhance visibility into the Company's performance on a per-share basis and will also increase JDSU's attractiveness to a broader range of institutional investors. The exercise of this authorization will be a matter of discussion for our Board of Directors.

As we progress through the remainder of this fiscal year, first we will continue to execute our program of manufacturing transfers and headcount reductions necessary to achieve the previously identified cost savings. David will give you more color on our progress. Second, we must decrease our operating expenses. Third, we must continue to strengthen our finance team to reduce the strain on the finance organization, as well as streamline our processes. Fourth, we will remain focused on integrating our recently acquired companies, notably on implementing Oracle in our Communications Test and Measurement segment. And finally, we will be spending more time on managing the manufacturing and supply chain and our responsiveness where there are signs of strain.

In conclusion, let me recognize JDSU's employees for their work to return JDSU to non-GAAP EBITDA profitability. That said, non-GAAP EBITDA profitability marks a milestone, not the end state for JDSU, and we must maintain our intensity as we execute our program of cost savings initiatives and further our journey to non-GAAP net income positive results.

I would now like to invite our CFO Dave Vellequette to discuss the financials in greater detail. Dave?

Thank you, Kevin. Let me remind you before I begin that all numbers are non-GAAP unless I state otherwise.

To recap, second-quarter non-GAAP revenue of $315 million included the first full quarter of Communications Test and Measurement revenue, as well as a partial quarter of contribution from our Agility acquisition. On a geographic basis, North America reported revenue of $195.7 million or 62% of non-GAAP revenue. Europe contributed $74.8 million or 24% revenue, and Asia-Pacific contributed $44.5 million or 14% of revenue. GAAP revenue of $312.9 million excludes $2.1 million of deferred revenue associated with our Communications Test and Measurement business. This revenue is excluded from GAAP revenue as a result of purchase accounting.

Non-GAAP gross margins improved from 31.6% last quarter to 36.3%, benefiting from a full quarter of Communications Test and Measurement revenue and the savings from our cost reduction initiative. As a percentage of revenue, non-GAAP operating expense were 38.1%, slightly outside our near-term target range of 35 to 38% as we absorb a full quarter of expenses associated with our Communications Test and Measurement business and one month of Agility-related expenses. In the longer-term, we are targeting operating expenses at less than 35% of revenue. Non-GAAP net loss was $3.7 million, which compares to a non-GAAP net loss of $15.4 million in the prior quarter. Non-GAAP EPS for the second quarter was slightly below breakeven which compares to a loss of $0.01 in the prior quarter. On a non-GAAP EBITDA basis, the Company earned $7.9 million, which compares to a non-GAAP EBITDA loss of $4.3 million the prior quarter.

This was our first non-GAAP EBITDA positive quarter since March 2001. A detailed reconciliation of our non-GAAP results to our GAAP results is available in today's press release announcing our fiscal 2006 second-quarter results. Our non-GAAP results exclude amortization of intangibles of $15.6 million, reflecting a full quarter impact from the Acterna acquisition. Stock-related compensation expense of $3.4 million and a $14.9 million charge for restructuring and non-recurring expenses primarily associated with the activities we announced on November 8th relating to our Ottawa, Rochester and Santa Rosa operations.

Including these items, GAAP gross margin improved from 20% last quarter to 33.3%, and operating expenses improved from 55% last quarter to 50%. Net loss on a GAAP basis improved from 67 million last quarter to 42.1 million for the second quarter. In total, our sequential results reflect the work we have done to improve our cost structure in the JDSU classic business and the strong contribution from our recent acquisitions, notably our new Communications Test and Measurement business.

Moving to the quarterly results for the business segments, Optical Communications revenue of $109.6 million was up 9% from the previous quarter. It included a one month contribution associated with our Agility acquisition. For the fourth consecutive quarter, the segment book-to-bill was greater than 1. The higher revenue in addition to our cost reduction programs resulted in improved operating results for the segment with an operating loss narrowing from $18 million last quarter to $10 million this quarter.

As you know, we have made multiple announcements regarding cost reductions in our Optical Communications segment over the last year. So in the interest of clarity, allow me to recap our initiatives and update you on our progress to date.

First, our Mountain Lakes, New Jersey facility was transferred to a contract manufacturing partner last May. Next, our products from our Ewing, New Jersey facility were either transferred to a contract manufacturing partner, end of lifed or sold during calendar 2005. Following the completion of the manufacturing transfer, our Melbourne, Florida facility was closed and sold.

And finally, within the last few days, we have sold our undeveloped land in Raleigh, North Carolina.

Looking forward, the closure of our Rochester, Minnesota facility is on schedule, and we continue to expect to exit this location before the end of fiscal 2006. Product and manufacturing transitions from our Ottawa, Canada site are progressing in accordance with our previously discussed plans and are expected to conclude as planned before the end of calendar 2006.

Additionally we have received an expression of interest from a potential asset buyer that could accelerate the schedule. If we sell the asset and accelerate our schedule, we expect to increase our previously communicated transition costs by mid single digit millions of dollars. The financial benefit of the Ottawa and Rochester initiative is heavily back end loaded in the last two quarters of the current calendar year. Once we exit the Rochester and Ottawa site, the number of optical communications manufacturing sites in the U.S. will stand at two -- Bloomfield, Connecticut and San Jose, California. At the same time, we will continue to maintain a JDSU Center of R&D Excellence in Ottawa.

In summary, the restructuring and cost reduction programs for our Optical Communications segment continues to progress with more than 80% of our Optical Communications revenue now derived from lower-cost manufacturing locations. These locations include both our own Shenzhen site and our contract manufacturing partners.

Moving to Communications Test and Measurement, this segment benefited from seasonal strength and delivered strong revenue of $146 million in the second quarter. This compares to a two month contribution of $95.4 million in the fiscal first quarter. As previously noted, the Communications Test and Measurement segment has historically benefited from seasonal strength in the December quarter. This has historically been followed by sequentially declining revenue in the quarters ending March and June.

While the segment contributed gross margin in excess of corporate average, product mix for the quarter reduced the segment gross margin by more than 2 points. This decline in gross margin, along with the impact of a full quarter of operating expenses, resulted in an operating contribution of 18% in the second quarter which compares to 20% last quarter. On a dollar basis, however, segment operating contribution improved from $19.3 million to $26.4 million. Our Commercial and Consumer business delivered revenue of $59.4 million, down 6% from the previous quarter and in line with our expectations as we phase out of the front service mirror business. This segment once again delivered positive operating results with operating income flat at 13% of segment revenue.

On a dollar basis, segment operating contribution was down from $8.4 million last quarter to $7.7 million associated with the lower revenue. While our commercial laser, brand protection and decorative businesses continued to perform well, we have taken a series of actions over the last several quarters to improve the profitability of our custom optics business. These sections included exiting the consumer integrated light engine business in the fourth quarter of fiscal 2005, exiting the coated micro display business in response to unfavorable market dynamics, transitioning our Fuzhou custom optics business to a contract manufacturing partner, selling our laser marking and microlaser business in the first quarter of 2006, and finally, the sale of our front surface mirror business due to be completed in the third fiscal quarter of 2006.

Looking forward, the previously announced headcount reduction in Santa Rosa is expected to be completed by the end of calendar 2006.

To summarize, while it is clear we have more to do to reach acceptable levels of gross margin and profitability, we did achieve the additional $5 million of cost savings, bringing our cumulative total to the targeted $9 million. Remember that the basis for comparison is our third quarter of fiscal 2005 results.

Also, we continue to expect cumulative savings to total $17 million in the third fiscal quarter and $22 million in the fourth fiscal quarter of 2006.

I would also like to remind you that we have yet to quantify the cost savings associated with the most recently announced initiatives impacting Ottawa, Rochester and Santa Rosa, and we continue to critically assess both our operations and our product portfolio for additional opportunities to reduce costs.

Moving to the balance sheet, total cash, cash equivalents, short-term investments and restricted cash totaled $843.9 million. Net Accounts Receivable increased to $223.4 million due to higher revenue in the last month of the quarter, and our DSO was 65 days. Net inventory increased to $181.2 million in part due to the Agility acquisition and also to increase the inventory positions to accommodate lengthening leadtimes in Optical Communications. Turns were 4.6.

As of December 31, 2005, headcount was 7234, up from 6938 the previous quarter. During the second quarter, we added additional headcount at our Shenzhen, China facility associated with the transfer of manufacturing, as well as approximately 100 headcount associated with the acquisition of Agility. Taken together, these additions more than offset headcount reductions in North America.

Now to our financial guidance. The December quarter has historically demonstrated seasonal strength in our Communications Test and Measurement segment. As a result, you should expect our Communications Test and Measurement business to report lower revenue in the fiscal 2006 third quarter. However, with the strong demand in Optical Communications, we expect the total company to report revenue between $304 million and $321 million.

As previously stated, we continue to expect our cost savings to ramp in the third quarter as the benefit of our initiatives continued to flow through to the bottom line. In the third quarter, we expect to achieve an additional $8 million of cost savings, bringing the cumulative quarterly savings to $17 million when compared to our operating results for the third quarter of fiscal 2005. We expect the majority of the cost savings to be in the cost of goods portion of the income statement.

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

Thanks, Dave. While we do not underestimate the challenge posed by execution across multiple fronts, we remain focused on deliberate and timely execution of our product transfers and exits from select North American sites. Restructuring inevitably brings risk, so I am very pleased that we have been able to execute our program on schedule while also growing revenues, investing in our future and without losing our commitment to customers. JDSU's commitment to both innovation and expansion, organically and through acquisitions, uniquely positions our Optical Communications and Comm Test segments for the proliferation of broadband. Despite an aggressive restructuring agenda, the financial benefits of which have largely yet to be realized, JDSU is playing a leading role in the adoption of transforming technology such as ROADMs, tunable lasers and transponders, solid-state lasers and our end-to-end portfolio of fiber-to-the-home products.

With that, I would like to open up the call for your questions. Operator, you may now begin the Q&A.

(OPERATOR INSTRUCTIONS). Subu Subrahmanyan, Sanders Morris Harris Group.

My question is on gross margin, Kevin. If you could talk about what the gross margins are right now for the classic JDSU business, especially in Optical Communications, and how the restructuring you are doing of manufacturing, how much more benefit we can see from that? And then just in terms of communications or I should say the Commercial and Consumer products, can you talk about how much more downtick in revenue there is from the front surface mirrors as you exit that business?

Yes, sure. We don't break out the gross margins per se on a per segment basis. But suffice it to say that an accurate portrayal of what happened in general was that both the CCP, as well as the optical comps gross margins went up. The Comm Test slid down a little bit due to mix within Comm Test, and of course, for the Company because the absolute value of the Comm Test gross margins is so much higher, the mix was very favorable given the revenue growth. So that was sort of the general scheme.

The institutionalized and structural piece of the mix was very favorable. The structural piece of the cost reduction was favorably up on the JDSU classic side, and we had some jitter on the Comm Test side.

As I had mentioned in a prior disclosure, we have a longtail on the manufacturing cost reduction. So when you see seek to get gross margins improved, the immediate transfer tends to raise your cost structure. The second thing that happens is you get a ratchet down because you have less overhead, and so you do that when you actually exit factories. To date we are physically out of about two of the ones that we have started in the September/August timeframe.

The next piece is you get bill of materials improvement for cost of localization and, of course, lower headcount costs. But that tends to take probably in the third or fourth quarter. So this tail on manufacturing cost reduction -- of course, after that you have value engineering. So there are probably about five or six phases to it, and the tail can be anywhere from three to six quarters, and of course, in parallel with that you have ASP compression.

So, as David said, the cost numbers that we were trying to take out are on track. The tail is fairly long, so we have to physically get out of buildings, not have we done resources on both shores. As you will note, our headcount is actually in total up, which is an indication of that. But in terms of removing the costs, things are very much on track. Okay?

And just a follow-up on the front surface mirrors. Are most of those revenues out so we can get direct comparables quarter to quarter for CCP, or is there still more to be taken out?

I think David mentioned if there is more to be taken out, it would be in the low single digits.

Michael Genovese, Citigroup.

Nice job on the quarter. It is good to see things continue to develop.

Could you just give us, first to all, your outlook right now having just brought in the Test and Measurement segment and with it seeming like optical strengthening. Within those two segments, what are your returns you use on seasonalities to sort of help us out with a four quarter view? You know if you talk about your physical first, second, third quarter, third and fourth quarters, what are the thoughts about seasonality in those businesses?

We don't have any reason to change our view of seasonality that we have expressed on the Comm Test side. Meaning that the prior two quarters, the last quarter would be the highest. The next two would sequentially drop.

On the other hand, if you think about the guidance that David gave you and the fact that we had book-to-bill that was fairly favorable, it means that we foresee strength in the Optical Comm's piece of the business right now. The Optical Comm's business has in general not been highly seasonal. Sometimes a little bit of a slowdown in this quarter that we are in, but not typically highly seasonal for us.

Okay. And then finally, it sounds like you're still talking about this 88 million in cost savings. But then you mentioned you reminded us that you have not quantified those other three locations -- Ottawa, Santa Rosa, etc. Can you remind us the size of those reductions, and is there any further thoughts you can give for the quantification or the timeframe?

The reason we have not quantified it, Mike, is because we don't -- we have not set in stone a specific timeframe, and that is really what drives the numbers. My recollection is that it was measured in hundreds. I will look to Dave Vellequette.

Yes, the numbers we talked about on the previous call was slightly over 100 people out of the Santa Rosa facility, about 80 people out of Rochester and around 300 people out of the Ottawa. So a total of about 500 people in that range, Mike.

John Harmon, Needham & Co.

Looking at the segment numbers you gave, I am just curious about what some of the operating margins look like. In your remarks, you talked about the contribution per segment. I mean, for example, the Test and Measurement division had (inaudible) 18% operating margins last quarter, which looks like pretty good margins for that kind of business. Are those numbers accurate, and one thing I wanted to ask about was a $30 million other operating loss, which was kind of an overhead charge. Can you tell me what that means, please?

Sure, John. This is Dave Vellequette. Let me help you with that. First, as you look at each segment, yes, the numbers are accurate.

The other thing to point out is in the -- if you look at the commercial -- the Communications Test and Measurement, if you look at their historicals, these are about the ranges that they have been at. They will change up and down a few percentage points based on their margin and mix.

The other thing to remember is in the Optical Communications area, if you think of it historically, we talked about the favorable benefits we got, the onetime benefits we got from warranty and E&O in previous periods, those benefits are basically gone. And so if you look at our financials from the last December of 2004, there was about a $4 million benefit that Optical Communications realized, and now that is no longer there. So as we transitioned the product lines and portfolios, also the E&O and warranty benefits we once received are no longer in the numbers, and yet we are still improving on our results.

Going to the other number you asked about, included in that are the proxy expenses that we incurred. Because of our shareholder meeting we have, we have some legal activity related around defending our IP, and also we're doing an Oracle implementation of the Test and Measurement area, and there are certain expenses there that we cannot capitalize and, therefore, run through that part of the P&L.

Okay. Thanks. One clarification if I could. It sounded like you said 30 million of revenue in the quarter represented discontinued product lines. Did I get that correctly?

No, when you related it to the year ago period, we have taken out $30 million of revenue that we realized in the quarter, December 31, 2004. So when you look at the revenues for JDSU classic of 180 million in the segment report and now you look at a number of about 170 million, you should note that 180 million included $30 million of revenue from products that we no longer ship.

I'm sorry. So that is just telecom?

That is in the Optical Communications and the CCPG.

Okay. And where do ongoing revenues trough for those businesses? In other words, where do you stop divesting things?

Well, we will continue to divest from product lines that are not meeting our profitability goals, and we will continue to expand our portfolio where we see opportunistic investment. So, as we said, the front surface mirror, we expect the impact of that to be low single digits millions in the coming quarter.

Okay. Thank you very much.

John Anthony, SG Cowen.

A couple of quick questions. I apologize if you went over any of this. If you did say that leadtimes were stretching, could you quantify it by how much and in what products if you could give some more detail there?

And then also if you could also discuss whether in your guidance there is any meaningful contribution from Agility. And lastly, could you talk about capacity utilization trends in Shenzhen and at the contract manufacturer what the trend was quarter-over-quarter and any relevance to book-to-bill?

So let me, John, take a step and try to answer a few of those. I don't think we explicitly said anything about leadtimes. We did the last time say that leadtimes stretched on a number of products, and that is probably -- I don't know that they have stretched out any further -- but they have probably not gotten any better. And so I would say that is a comment that is true at the high-end of the portfolio and as well in specific cases where we have struggled with specific transfers.

So we have a very broad portfolio. I would not know how to begin to enumerate them on a call here. But I would say the two causal realities are where there is new products that are introduced and there is more demand than we can deliver quickly, and secondly is probably where we've had some transfers.

On the second piece on utilizations, I would not know off the top of my head what the utilizations are at the contract manufacturers or Shenzhen. Shenzhen has bulked up significantly, probably doubled in terms of the amount of revenue that we have there in the last year, so that utilization is trending in a very very favorable fashion. The two primary contract manufacturers are moving in a very favorable fashion, simply because the amount of the percent of our portfolio that is now coming from Asia. So really the key for us is to fully get out of North America and be able to close down a number of our operations, and that is what will help us in terms of our overheads.

On the Agility piece in terms of what percentage is forward guidance, I would not break that out right now. But what I would tell you is that we had about a month of contribution in this particular quarter, and that probably represented approximately a percent of the Optical Communications piece of the business.

And in terms of book-to-bill, I simply said it was better than one for the company, and clearly given that we still believe that we will see seasonality in Comm Test and that there is still some revenue downside on the CCP segment, you should interpret that we saw good strength in our Optical Communications group. Is that helpful?

Yes, very. Thanks so much.

Brant Thompson, Goldman Sachs.

Yes, a few things that I wanted to hit on. First, as we look at this in the end of next quarter in terms of what you are indicating with the revenue mix shifting with optical communications really being stronger relative to the other ones on a sequential basis, could you talk about just how we should think about that versus the cost savings that we are going to be getting and where we are on that and how we should think about the margins impact for the next quarter?

The second thing, there is clearly a lot of expense going into building financial infrastructure, putting that in place. At what point do you think we kind of get to an end of that, and when would that start to come off the books?

And then lastly, any kind of comments around cash flow targets?

So, you know, we don't really go into the different segments and how each segment's specific revenues are going up or down. We did comment, as you know, that Comm Test will come down. We believe that the strength that we have had the last four quarters of book-to-bill greater than one as I noted, and we believe that that strength -- that is what has supported the guidance that we gave, which was slightly up from the prior quarter's guidance. So we expect that the improvement in the cost will obviously help offset the impact of the mix change between Op Comm and Test and Measurement. But we really don't comment about the specific changes in the gross margins.

From the expense side, the implementation of our Oracle across the Test and Measurement group, that has a longtail on it also, but at the same time, we're going to be very focused on reducing the expense structure to help pay for those costs. So we are not anticipating having our OpEx increase as a percentage as we noted. We're targeting to get that percentage of revenue down below 38%. So that is a focus for the Company, and Kevin mentioned it is a focus that we have to have to keep that OpEx below the 38% range and to longer-term get the OpEx below 35%.

On a cash flow perspective, we did benefit from the sale of two facilities during the quarter, which generated about $25 million of cash during the quarter. At the same time, we are actively reviewing our cash requirements and keeping our cash used -- generally from operations the impact of the cash used, I should say, minimized so to keep building on our cash. Does that help?

Yes, and on the cash burn, any ideas when you look at this operating cash flow when do we start to contribute more cash out of that bucket, if you will?

Well, that will be dependent obviously about improving the profitability of our financial results. So it will come as we realize more and more of these savings and as we continue to get -- as we start to get the benefit of these initiatives that we announced that we said will happen by the end of calendar year.

Okay. So, by year-end?

Yes, we are on a plan of continuous improvement.

Ehud Gelblum, J.P. Morgan.

A couple of questions if I might. First of all, on your conference call last quarter, I think you mentioned that you had some supply constraints that limited your revenue by about $5 million. Did you see some of that 5 million this quarter that has helped this quarter further on a natural basis, or is that revenue pretty much lost?

No, the specific areas where we had challenges -- I don't know if I remember all of them -- but the ones that stick in my mind we actually made significant improvements on and shipped to that revenue site. I think you had asked me whether I thought the revenue would be lost or not, and I think I told you I did not think it would be. And if my recall is on the same parts, we are not 100% out of the woods, but our flow through is very positive right now in that particular area.

Okay. Dave, if you look at Agility and Lightwave, you mentioned you had a month of Agility and I think in the beginning, Kevin, you mentioned that Lightwave was clearly less of a contributor than Acterna was this quarter, but it was enough for you to mention it. Can you help us break out roughly how large they were in the quarter and the contribution that they had?

Well, as we said on Agility, it was about 1% of the revenue in the Optical Communications group. The Lightwave revenue we have not really broken that out in the past, but it is a key contributor to our Commercial and Consumer products lasers part of the business. But we don't really break those revenues out specifically.

Okay. And I assume they are both, if you looked at them on a margin basis, both of those businesses are positive margin?

Yes, from a gross margin, yes.

Gross obviously I would hope so, but on an operating margin basis?

The Agility is -- as far as your question I think you're asking, is it EBITDA positive? And it is not EBITDA positive at this time. Lightwave is EBITDA positive.

Okay. Thank you. The deferred revenues, that was the difference between the GAAP and non-GAAP revenue, I am assuming it is all from Acterna. Was there any deferred revenue portion last quarter that I do not remember seeing that --

It was 900,000. If you look on the segment report, you will see it is a small amount. That is why you will see the six-month number for the deferred on the segment report of 3 million and 2.1 million being this quarter.

Okay. And do you expect any next quarter, or are we through the deferred revenue already?

It is less than $2 million of what is left to defer.

So we should expect the -- is that all going to come out next quarter, or that kind of gets --

The majority of that should come out this quarter.

Okay. And your guidance, 304 to 321 --

Non-GAAP.

Okay. So there is about $2 million discrepancy between the two? In as far as we're hearing obviously a lot about fiber builds from the RBOCs and your downstream end-users, fiber-to-the-home, fiber-to-the-curb, fiber-to-the-node, etc. If I remember correctly at your Analyst Day, I think you had a slide up there that said that you addressed -- I don't remember exactly the number -- but it was something like a 17% of that market or something of that sort. Do you address -- your products that move forward to be able to address a greater portion of that now, or do you expect it to really benefit from these fiber builds going forward this year? I remember at the time it seemed like a shockingly low percentage of exposure that you had directly to those fiber-to-the-prem deals?

You know, it must be my old age, I'm (multiple speakers) clicking on the particular slide. But what I can tell you is, where we were participating is largely in the back halls, the metro access, metro core, and in fact, this quarter long-haul was probably stronger than we had anticipated coming into the quarter.

So we absolutely benefit in the optical components piece. We have not decided to play in the pond arena because I don't think the profitability structure is there yet, and that we have said before and I'm still sort of in that mindset. So we are picking our places not by revenue growth, but actually by profitability at this stage.

So the good news is on the Comm Test side we tend to play well both in optical transport testing, as well as the services that get put on top, very very strong position in Voice over IP and very strong position in video services on top of the fiber. So that was an overchoice when we -- my view was -- is that you had to go up the stack in order to find profits in fiber-to-the-home buildouts.

Okay, two last questions if I could. Earlier in the year, I think it was at a conference you made the comment perhaps tongue in cheek, but it is very telling, that if the entire industry's manufacturing had been in your plants -- this is back in the beginning of '05 -- you would still be I think the number is like 50% utilized only?

Yes.

Can you update us on given that now you have had a lot of plant closings, the industry seems to be a little bit stronger, your revenues are a little bit higher, and there has been a lot of plant closings in other parts as well, how does demand fit versus supply or if you want to give another utilization versus capacity? However you want to kind of look at it, how does demand and supply of components sort of line up now versus they did not?

I would say that there is still more capacity than there is demand, and I think that will be the case in terms of facilities for several years. The reality is that there is a lot of fabs out there in the world, and so the good news is I think across the board most of the companies that have been incumbents in this market have taken strong strides in reducing their overheads and getting to Asia is a great thing. So big improvement there, but there is still a lot of capacity.

The second question is, is there a lot of competitors? There is still a lot of competitors in this market. But both are real.

The second part of the question was pricing. How have you seen pricing change over the last six or nine months? Is it better now, and how would you describe the pricing environment?

You know, I would say probably a year or more ago there was -- I have always answered the question in three parts, meaning that we what we saw in transmission tended to be different than what we saw in transport, which tended to be different than what we saw in switching or subsystems. That statement is still true. At one point in time, some of those areas such as transmission were almost on double-digit declines. I would say the pricing contraction has slowed somewhat. I think the last time somebody asked us the question we said low double-digits per quarter. If you amalgamated all three and that is -- low single digits per quarter -- if you amalgamated all three, and that is probably still true. So it has not gotten worse. It is probably better than it was a year ago. (multiple speakers)

Sorry. That is low single digits quarter-over-quarter sequentially?

Yes.

Paras Bhargava, BMO Nesbitt Burns.

A couple of questions if I might. The testing operating margins at 18%, how does that compare with the 5% that you disclosed testing had before you took over and filed a couple of 8-Ks in October? Is that on the same basis, or is it a different basis?

The 5% was their after-tax. So this is an operating margin, which is before interest income and taxes.

No, the 5%, Dave, was on a pretax operating margin. If you look at the operating income you disclosed in that 8-K not the net income, it was 5% of revenues.

5% of revenues on the -- okay, I was thinking of the 5 million net income. Okay. So the 5% as they were -- you know they built I think basically a stronger momentum, especially for that quarter. This is their strong quarter. In fact, a year ago this same quarter was a very strong quarter for them. So you're looking at a 12-month number there, and so what happens is, you know, this quarter number is always their strongest quarter, and so that is why they are hot in the teens here.

Also, there are certain expenses that we have now put in the all other that relate to corporate support such as audit fees that are now billed to corporate that they would have had historically. So we have not allocated those out to those groups.

I'm just trying to understand how if you have done it on the same basis, it would have been more like 12%, or would it have been more like 16% if it were on the same basis as the 5 so we can use that to forecast the profitability of this going forward? I figured it was a seasonally strong quarter. Just so much higher than the annual average, it is hard to take a look at trends and figure out what we're doing profitability and why is it testing?

Yes, I think that this quarter because of the strong revenue their expenses tend to be -- their operating expenses tend to be more consistent or flat I would call it other than their sales expense, which is a percentage of their revenues. And so this quarter is always going to be their strongest on an operating margin.

We really don't comment about where they really are as far as the total, but they have improved from the 5% level that they were in the numbers you're looking at. So, as we noted, the year-to-date they stand in at about a -- I'm looking at that right now -- what is that, an 8% range.

Well, that is very helpful. Now on the commercial side, there is a bunch of moving parts here and that business used to have 20% operating margins as you reported. It has sort of stabilized at 13. After you finish some of the actions there, it probably cannot get up to 20, but can it get above 13, or is it just going to stick around here?

You know, we have -- as we said, once we get through the -- we have not quantified the initiatives we have going on in Santa Rosa. Obviously we are looking at improving those operating margins, and I think once we get those savings quantified for you, I think you'll be able to see that we hope that there is more to come in that area.

Yes, that is very good. And then I did not quite understand the answer to the other loss. I understand there is some one-time events in there in that 30 million, 29 million. Is it possible that that could come down by 10 million a quarter, or where do you see that element come down? Because it seems to me, you know, it was stable at a certain time, and then, of course, there is going to be some other from testing. I'm just trying to understand how much of that is from testing and how much of that is sort of onetime stuff or transitional stuff as you're working through this very large project?

You know, there is some transitional, but as you look at the last quarter, it is about -- and that is what I was explaining the increase from the prior quarter. In the previous and you look at the year ago quarter, it was at 25 million, so we have incurred some incremental there. As we close the factories and do some of the other -- get implementations completed, we hope to bring it down. But right now we have not put a number on that, but 10 million would seem like a very large number to take out of there.

All right. And then one final question for Kevin. Kevin, as you're going -- as you are running this Company, it sounds like what you're saying is you can get -- you're trying to get OpEx down to 35. What sort of businesses do you want to stay in? Do you want to keep on exiting businesses with a certain gross margin hurdle, or how are you actually exiting businesses and adding more stuff on? Is there a fixed axis chart you're using, or how are you going about doing it?

It probably is a fixed axis chart actually. But you know we have been pretty explicit with the lines that we have used in the past at the investor conferences. The starting point is to look at revenue growth rates, as well as gross margins. And if you are negative growth rate and negative gross margin, you're probably not long for the world here. If you have high gross margins and we have to fix something to get the revenue growth up and it is fixable, we do that. And if we have great revenue growth but low gross margin but a path to improve the gross margin, then we go fix that.

So we do have a very disciplined lens with which we do it. The second lens that we use is in general if you look at many of the businesses that are in optics in general and specifically we're part of the Legacy of JDSU, they were businesses that I would classify as professional services businesses where you have one or two customers for some unique technology, and that was great when you were the only game in town. When there are four other competitors that entered and you don't have a unique level of intellectual property, well, that is probably not a great place for gross margin sanctuary in the future.

So we general have been exiting what I will call professional services businesses that are not protectable, and we are investing in what I would call markets where there are clear gross margin structures. Commercial lasers would be an example where we have expertise, product and has a clear structure. Comm Test is a place where I can say the same thing. Hopefully that helps you.

That does. Thanks a lot.

Thank you for your participation in today's Q&A session, ladies and gentlemen. You may now all disconnect your lines. Enjoy your day.