Viavi Solutions Inc (VIAV) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the JDSU fiscal 2006 fourth-quarter and year-end results conference call. My name is Jeff, and I will be your coordinator for today. (Operator Instructions). I would now like to turn the call over to Ms. Jacquie Ross. Please proceed.

Good afternoon, everyone, and thank you for your patience as our conference provider worked through some technical issues. Welcome to JDSU's fiscal 2006 fourth-quarter and year-end conference call. Joining me on the call today are Kevin Kennedy, Chief Executive Officer, and David Vellequette, Chief Financial Officer.

As always, 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 March 31, 2006. The forward-looking statements including guidance provided during this call are valid only as of today's date, August 30, 2006, and JDSU 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 today's news release announcing our results 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 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.

Our fiscal 2006 was a foundational year of restructuring, acquisition and heavy lifting critical to JDSU's continued growth and progress. Since April 2005 when we outlined our detailed plans for an ambitious program of profitability improvement actions, we have shared specific goals which could be used to measure our progress. With much more yet to accomplish, it is already clear we exit fiscal 2006 a very different company compared to fiscal 2005.

First, fiscal 2006 revenue reached more than 1.2 billion and compares to just over 712 million in fiscal 2005 thanks in large part to an M&A program designed to expand our addressable market and in concert with our organic innovations, particularly in the area of agile optics.

Second, without compromising the breadth of our product portfolio, we exited seven product lines with more than $80 million of annualized revenue from our optical communications and commercial and consumer businesses. To attain a sustainable business model, JDSU chose disciplined profit improvement over revenue growth where necessary.

Third, our extensive cost reduction program resulted in annualized cost savings of more than $88 million when compared with the third quarter of fiscal 2005, meeting or exceeding the quarterly savings targets that we shared with you.

Fourth, our non-GAAP gross margin improved from a run rate of 17.6% as we exited fiscal 2005 to a non-GAAP gross margin of 33.9% exiting fiscal 2006. Non-GAAP gross margins for the fiscal year was 35% and we are currently targeting 40% as the next major milestone.

As a result of the series of deliberate actions we executed throughout fiscal 2006, non-GAAP EBITDA improved from a loss of 70.5 million in fiscal 2005 to a positive non-GAAP EBITDA of 17.2 million in fiscal 2006. Non-GAAP net loss narrowed from 86.9 million in fiscal 2005 to a loss of 23.8 million in fiscal 2006 or from a loss of $0.06 to a loss of $0.01 on a per-share basis.

Finally, fiscal 2006 was our second consecutive year of revenue growth and our first year of non-GAAP EBITDA positive results for more than five years.

Financials alone however fail to capture the full extent of JDSU's transition to date. Other notable items include;

With our unscheduled exits from our Rochester and Allentown facilities, JDSU's optical communications manufacturing footprint in North America reduced from seven locations as of September 2004 to three locations as of June 30, 2006 excluding acquisitions. As a result, nearly 80% of our optical communications manufacturing personnel are now located outside of North America compared to about 50% when we announced our consolidation plans in April 2005.

More than 1800 of approximately 2000 targeted positions were eliminated between March 2005 and June 2006 as part of our manufacturing consolidation activities. At the same time, we welcomed nearly 2000 new employees associated with three acquisitions;

And we relocated our corporate headquarters in California from San Jose to Milpitas, marking an important new beginning for the Company in addition to reducing our overhead costs by more than $1 million a year.

Organizationally, we have continued to streamline the Company, ensuring that each function is optimized to support execution. During the fourth fiscal quarter for example, we united our two optical communications groups under a single leader, which we expect to improve customer responsiveness and product development efficiency. Additionally, our operations group was also realigned to enable improved responsiveness. As we enter fiscal 2007, JDSU is poised for operational efficiency improvement.

Finally, we have strengthened our Board of Directors with three new members during fiscal 2006, each bringing a unique and valuable perspective to our operations.

Before I move to the fourth-quarter results, I would like to thank our employees for their ongoing commitment through this period of transition. As we begin fiscal 2007, the majority of our operations and organization is focused on growth and improving execution.

Now for the fourth-quarter results.

Non-GAAP fourth-quarter revenue of 318.6 million was in the upper half of our guidance range and up sequentially, reflecting another strong quarter in our optical communications business. Fiscal 2006 revenue of just over 1.2 billion compared to fiscal 2005 revenue of 712.2 million, recognizing that our fiscal 2006 results include 495 million, largely derived from the test and measurement segment acquired during the year.

Non-GAAP gross profit was 108.1 million or 33.9% of revenue, which compares to 37.5% last quarter and to 17.6% in the year-ago quarter. While we successfully executed the cost savings targeted for the quarter, these gains were more than offset by an unfavorable mix in both the optical communications test and measurement segment, and transitory costs associated with product line and manufacturing transitions. Dave will walk you through the detail of our gross margin results later in the call, but without these transitory costs, our non-GAAP gross margin would have been in excess of 35%.

Non-GAAP EBITDA was 5.5 million, down 2.4 million from the last quarter but significantly improved from the non-GAAP EBITDA loss of 19 million reported in the year-ago quarter.

Finally, book-to-bill for the Company as a whole was over 1 for the sixth consecutive quarter.

Before discussing each of our three market segments, I would like to bring to your attention a change we have made this quarter to financial reporting structure of the Company impacting our commercial and consumer market. The change is visible in our segment report included in today's press release.

Our commercial and consumer business comprises three elements -- custom optics, flex, and commercial lasers. Going forward, we will report on custom optics and flex as one consolidated business segment named advanced optical technologies. Revenue and operating contribution information for our commercial lasers business will be included under the heading "all other."

The formation of the advanced optical technologies segment unites our custom optics and flex coating businesses under the leadership of Roy Bie. With an extensive program of product phase-outs behind us, our slimmed down Santa Rosa site where both our flex and custom optics businesses are headquartered is now united in one business segment and focused on profitable growth.

Our laser business under the leadership of Phillip Meredith, who joined us as part of the Lightwave acquisition, will now be included in “all other”. Note however that we will continue to group our custom optics, flex, and commercial lasers businesses together when we discuss our commercial and consumer served markets.

I will now update you on each of the three market segments in turn.

Coming off a strong performance in the third quarter, our optical communications segment grew 4% sequentially or 25% year over year to 133 million. The general trend of broadband build-outs continues to support an overall favorable environment with full fiscal year growth of 11% over fiscal 2005. Additionally, we continue to see promising traction in our agile optical network portfolio with several multi-million dollar engagements secured during the quarter.

JDSU continues to extend its leadership in high-growth areas, including tunable lasers, ROADMs and circuit packs, where our experience is unmatched. In some cases, demand is outpacing our supply ramp. In others, we believe that our delivery milestones are unmatched. For example, we have now shipped more than 50,000 circuit packs and close to 8000 ROADMs.

We continued to strengthen our AON portfolio last quarter, shipping several new products including our 40-channel PLC ROADM and several agile optical components including 10 gigabit per second long-haul modulators and agile passive products, such as our new family of variable optical attenuators. Our newly-introduced 40-channel PLC ROADM highlights our innovation in photonic integration. We have integrated the equivalent functionality of almost 500 discrete components, including multiplexing function switches, photodiodes, and shutters. In fact, as reported in our recent RHK report, customers around the world specifically recognize JDSU as one of the leading innovators in agile optical technology.

As we have discussed previously, growth of our agile optical network portfolio is expected to outperform the segment as a whole year over year. For example, revenue from this portfolio doubled, confirming both the unmatched breadth of JDSU's agile product family and our leadership in this growth area.

Our communications test and measurement business was flat sequentially at 126.3 million or up 21% from the same quarter a year ago. This segment benefited from a partial quarter of contribution associated with our Test-Um acquisition, which closed in early May, contributing approximately 1% of segment revenue. Year on year, our communications test and measurement segment grew more than 10%.

JDSU continues to expand its test and measurement portfolio focused on the deployment of IP networks and triple-play service. During the quarter, we introduced more than a dozen new products and enhancements targeting this market. Our T-BERD fiber-to-the-curb or home instruments, including a new lighter weight, more compact version continues to enjoy strong customer traction, highlighting the critical role of test and measurement and enabling providers to offer optimized customer service while also minimizing the cost of delivering broadband triple play.

The growth of Voice over IP, IPTV and other IP-based services is driving significant demand for Ethernet test instruments. During the quarter, we established the most complete set of Ethernet test solutions. We introduced a new Ethernet test module for the widely-deployed HST access network test instrument, a new SmartClass Ethernet handheld, part of our growing set of high-value, high-performance test instruments, and a new Ethernet monitoring feature for our Ethernet service assurances.

Consistent with the broader Company's strategy, our communications test and measurement segment is focused on diversifying its business and expanding into key growth markets. For example, with the acquisition of Test-Um, JDSU is now a leader in home networking solutions. In addition to the new Ethernet handheld, we introduced the new SmartClass ADSL test instrument, booking and shipping our first orders and further building our low-cost handheld offerings to meet the mass deployment of new broadband services. We also introduced a new end-to-end test for IPTV and Voice over IP service assurance.

Both our optical communications and communications test and measurement segments continue to be driven by the deployment of high-bandwidth triple-play services. The rate of deployment continues to be fueled by consumer consumption, competitive vigor and the capacity limitations of legacy systems. We do not believe that consolidation of carriers and network equipment manufacturers threatens these fundamental growth drivers. And we continue to see general favorable demand for agile optical network and test and measurement portfolios that serve geographical broadband deployments.

That said, the consolidation activity has created the potential for pauses as a consequence of the new decision frameworks and periods of operational streamlining. As a result, we observed this quarter some near-term forecast softening and delays coincident with several consolidating operators, albeit amid a generally favorable environment.

Getting back to our segment results, we are now providing greater insight into our CCP market by reporting separately on advanced optical technologies, which comprises our flex and custom optics business and commercial lasers.

Advanced optical technologies delivered revenues of 36.7 million, which compared to 40.7 million in the third quarter and to 48.2 million in the same quarter a year ago. For the full year, advanced optical technologies delivered revenue of 162.8 million, which compares to 231 million in fiscal 2005, highlighting the scale of the product divestitures within our custom optics product line.

Within advanced optical technologies, our flex business continues to perform well delivering full-year triple-digit revenue for the first time in its history. The bulk of flex's revenue is associated with sales of our optically variable pigment, or OVP, for currency protection. But non-currency-related sales continued to outgrow OVP overall. In our custom optics business, our investment in a next-generation coating capability developed at the Santa Rosa site resulted in the shipment of our first customer orders during the fourth quarter.

Our commercial lasers and photonic power businesses delivered revenue of 22.6 million during the fourth quarter, up 10% sequentially and 38% year over year. For the full year, commercial lasers delivered 80.5 million in revenue, up 36% from 59 million in fiscal 2005. This increase reflects our commitment to target the higher growth opportunities within the broader laser market, specifically solid state and fiber, which now make up just over half of our sales versus about one-third a year ago.

Our incubating photovoltaic technology, Photonic Power, achieved recognition this quarter when it was included in R&D Magazine's top 100 most innovative ideas of the year. While still a very small contributor in terms of revenue, we're seeing growing interest in the pioneering concept of delivering power over fiber, expanding medical, communications, industrial and aerospace applications.

Moving to corporate developments, we took steps to further strengthen our balance sheet by raising nearly 416 million through a convertible offering that concluded in May. The primary rationale behind this offering was to the need to prepare for the maturity of our 2003 convertible notes. Although our 2003 notes will not become due until 2008, we acted opportunistically to take advantage of attractive capital market conditions. Importantly, our 2006 notes include a net share settlement feature that requires the principal amount of the notes to be settled in cash, not stock. As a result, our 2006 convertible offering is significantly less dilutive than a traditional convert. Additional information regarding our 2006 convert and its net share settlement feature is available on the Investor Relations pages of our website.

Finally, I will remind you that the stockholder authorization for a reverse stock split remains in effect until December 1, 2006. The exercise of this authorization remains a matter of ongoing review by our Board of Directors.

Fiscal 2006 was a year of investing in our strengths, fortifying the team, establishing the roadmap and laying the foundations for execution and achievement. With this in mind, focus in fiscal 2007 is execution as we reconstruct and integrate. As execution improves, the Company business model is poised to advance. With a more streamlined organizational structure and continued commitment from our employees, we believe we have the tools to be successful.

As we reconstruct and grow the Company through fiscal 2007, cost reduction and control will remain an area of particular focus. By the middle of the fiscal year, much of the heavy lifting should have been completed, at which time we will be increasingly focused on continuous cost improvements in areas, such as complexity reduction and process improvement.

In short, the team has accomplished a great deal to date and is compelled by the opportunities ahead. With that, I will hand the call over to our CFO, Dave Vellequette, to discuss the financials in greater detail. Dave?

Thank you, Kevin. GAAP revenue for the fourth fiscal quarter of 2006 was $318.2 million. On a non-GAAP basis, revenue was $318.6 million, which included 400,000 of revenue associated with acquisition accounting and in total was up slightly from last quarter. The increase is due to growth in our optical communications and commercial laser businesses, which more than offset a modest decline in advanced optical technologies. For the full fiscal year, non-GAAP revenue of $1.2083 billion was up 70% when compared to $712.2 million reported for fiscal 2005.

Fourth-quarter non-GAAP gross profit of $108.1 million or 33.9% of revenue declined from the previous quarter's $118.3 million or 37.5% of revenue. Our non-GAAP gross margin was negatively impacted by several factors, which include ASP pressure and product mix in the optical communications and the communications test and measurement businesses. Additionally, we incurred approximately $5 million in transitory charges associated with manufacturing consolidation activity, product line divestitures, acquisitions and RoHS. These factors more than offset the $4 million of cost savings that we realized through our restructuring activities.

Moving to operating expenses, our non-GAAP operating expenses declined to 37.3% of revenue from 39.7% of revenue last quarter, benefiting in part from the realization of some cost savings originally targeted for the September quarter but primarily the result of onetime gains, including adjustments in our bad debt reserve and our health insurance and variable pay accruals. We continue to target non-GAAP operating expenses in the 35 to 38% range for the December quarter; although we note that for the September quarter, operating expenses could be slightly above this range.

Fourth-quarter non-GAAP net loss of $2.1 million improved from a net loss of $20.5 million in the year-ago quarter and a net loss of $2.8 million in the prior quarter.

A detailed reconciliation of our non-GAAP results to our GAAP results is available in today's press release. In addition to the deferred revenue adjustment noted above, our non-GAAP results exclude: amortization of intangibles of $16.6 million; 9.1 million of charges for restructuring and non-recurring expenses, primarily associated with the transfer of manufacturing operations from our Ottawa facility; a $4.3 million charge related to stock-based compensation; a $22.4 million goodwill write-down, primarily associated with our investment in da Vinci, a subsidiary of Acterna; and finally, a $10.3 million credit, primarily for tax refunds related to prior years associated with the SDL acquisition.

Including these items, fourth-quarter GAAP net loss of $45.8 million compared to last quarter's net income of 3.7 million, which you'll recall included a $37.7 million gain on the sale of an investment. On a per-share basis, GAAP net loss of $0.03 per share compared to breakeven last quarter.

For fiscal 2006, GAAP net loss of $151.2 million or a loss of $0.09 per share compared to a loss of $261.3 million or a loss of $0.18 per share for fiscal 2005.

Moving to the quarterly results for the business segments, optical communications revenue grew 4% sequentially and 25% year over year to $133 million. Due to negative mix and ASP impacts as well as the transitory items noted earlier, the operating contribution was a negative $1.9 million for the quarter, a decline of just over 4 million from the previous quarter.

For fiscal 2006, optical communications revenue grew 11% year over year to $470.5 million, our second consecutive year of double-digit growth in this segment. The segment's operating contribution improved from a negative 13% in fiscal 2005 to a negative 6% in fiscal 2006, highlighting the impact of the cost reduction programs implemented during the year.

Most of our optical communications manufacturing is now situated in lower-cost locations. Our current manufacturing model will see us continue to transfer our non-fab manufacturing to lower-cost locations. JDSU's own Shenzhen facility continues to ramp and now manufactures the majority of our optical communications revenue. In addition, we continue to partner with contract manufacturers to cost effectively meet our customers' delivery requirements.

Moving to our communications test and measurement segment, revenue of $126.3 million was essentially flat sequentially and included a partial quarter of contributions from Test-Um, which closed in early May. The segment grew 21% year over year or 12% for the full fiscal year. Operating income of 9.3 million or 7.4% of revenue was down from last quarter's 12.1% of revenue due to ASP pressure and product mix as we noted earlier.

Integration of the communications test and measurement segment is ongoing with our Oracle cutover of their North American operations in progress and expected to be completed by quarter end. As a reminder, this multi-quarter project incurs incremental costs but will afford greater efficiencies through the consolidation of processes and systems throughout the Company.

Moving to the commercial and consumer market, our advanced optical technologies segment, which includes our flex and custom optics businesses, delivered revenue of $36.7 million which compares to $48.2 million in the year-ago quarter and to $40.7 million in the prior quarter. Sequential and year-over-year declines were associated with the phase-out of multiple product lines in our custom optics business. The operating contribution for the quarter was 24% of revenue, up from 13% a year ago and up from 18% last quarter, reflecting the impact of our restructuring activity.

Within advanced optical technologies, our next-generation coating platform began shipping product for the first time during the fourth quarter. This new platform uniquely offers a more cost-effective means to apply custom coatings in microscopically thin layers, improving yields and turnaround times relative to previous technology.

Our commercial laser and photonic power businesses, which are now reported under the heading "all other," delivered revenue of $22.6 million in the fourth quarter and an operating contribution of 700,000 or 3% of revenue. Highlighted by the acquisition of Lightwave in April of 2005, we have been investing in the commercial laser business to position it as a leading player in the industry's transition from gas to solid-state lasers.

Taking the Company as a whole, our optical communications segment contributed 42% of total revenue for the quarter. Communications test and measurement contributed 39% of total revenue and the commercial and consumer businesses, which combined advanced optical technologies and commercial lasers, was 19% of revenue. On a geographic basis, the Americas contributed 61% of total revenue, Europe was 22% of revenue and Asia-Pacific was 17% of revenue.

Moving to the balance sheet, total cash, cash equivalents, short-term investments and restricted cash totaled $1.238.6 billion at the end of the fiscal year, reflecting the addition of $415.9 million in net proceeds from our senior convertible note offering as well as cash outflows associated with the acquisition of Test-Um. As noted previously, this new convertible offering includes a net share settlement feature that makes it significantly less dilutive than a traditional convert.

Net accounts receivable increased $16.4 million, primarily due to a higher percentage of revenue shipping near the end of the quarter. Therefore, DSOs increased from 63 days last quarter to 67 days. Net inventory increased 13 million and inventory turns remained at 4.4. As of June 30, 2006, headcount was 7099, up from 7005 last quarter. The increase was due to the continued ramp at our Shenzhen facility in China and additional headcount from the Test-Um acquisition.

Next, I would like to update you briefly on our restructuring activity.

With the completion of our fiscal 2006 cost-reduction activities and the achievement of more than 88 million in annualized savings, we are now focused on executing the targets we set for the first three quarters of fiscal 2007. As a reminder, we expect to achieve cost savings of approximately 2 million in Q1 '07, 3 million in Q2 '07 and 5 million in Q3 '07. The savings relate to three specific activities -- closer of our Rochester facility, manufacturing transition out of our Ottawa site and further consolidation of Santa Rosa.

As planned, we exited the Rochester site completely in the fourth quarter, and the Santa Rosa and Ottawa actions are expected to be complete by the end of the calendar year. Of the 2 million of cost savings targeted for Q1 '07, we have already realized approximately $0.5 million of Santa Rosa operating expense reductions in the fourth quarter.

Related to the Santa Rosa consolidation, we have entered contract negotiations to sell our 13-building campus. As part of an agreement, JDSU will lease back six buildings to accommodate our advanced optical technologies team.

Now to our financial guidance.

Looking forward, forecast uncertainty is greatest in our communications businesses, specifically communications test and measurement due to carrier consolidation related to deployment delays. Therefore, for the fiscal 2007 first quarter, we expect revenues to range between 312 million and $328 million.

With that, I would like to invite the operator to begin the Q&A.

(Operator Instructions). Ehud Gelblum.

I actually have several questions, so let me try to form them in the form of 1.5 questions. First one is -- if you look at the gross margin and you compare that on a sequential basis, you mentioned three things -- transitory costs, ASP pressure and unfavorable mix. Can you go into detail or just give us a sense as to how you calculate those? The unfavorable mix, where is that coming from? At least based on prior conversations, I had anticipated that the Acterna test and measurement business would actually be down this quarter. Seasonally, it had been down. In fact, it ended up being roughly flat, even when you take out the Test-Um part. So I would've thought that from a mix perspective, it would have actually been favorable versus what I was expecting. And so if you can kind of quantify how much the unfavorable mix had to do with the gross margin pressure this quarter.

The transitory costs, if you could give us a little bit of information on that. I believe you said 5 million in transitory costs for RoHS and other types of things like that. How do you bridge the gap between -- is that really just one time and next quarter, we could basically add 5 million to our gross margin and just trying to see what the trend is going forward? So that's one piece -- is really just to dig down and understand the gross margin.

The other one really has more to do -- why don't we start with that I guess and then I can follow up? It's really more important to understand the moving parts there.

It's Dave Vellequette. So let me take your question in the pieces. So, between the segments, I hear what you are saying about the mix between the segments. Within the segment, the test and measurement business has a number of different product lines with a number of different margins. So, within that segment, that mix was such that it put pressure on the margins. And I think you can see that when you look at the segment report and you can see the operating income from that group, it's down. It's heavily -- the decline is driven by some OpEx expense but from Test-Um and also some R&D investment we did. But also, it is driven by the mix within that segment.

Within test and measurement?

Within test and measurement.

How much though the drag on total gross margin came from that? I did notice that. I wasn't trying to do the math on it though; it's a GAAP number.

We don't typically talk about that -- the margin on a quarterly basis. We have guided that the margins for test and measurement are usually in the mid 50s. So, this quarter compared to last quarter, they were down.

Were they down more than 10%, like 5 points versus 50 something?

No, no, no. They're down more like points.

Okay, (indiscernible) those are points.

So as far as the transitory costs go, when we did announce the end of life programs on a number of our product lines, we go and we identify product that we believe we'll be able to -- portions of that product we believe we have programs to sell them over a period of time. As we reach the end of the year and I reviewed the status of programs with everybody and we decided that we would write off the remainder because I did not see the momentum in the sales of those products. And so, we fully reserved for those products, mostly in the optical communications space. So it's a more conservative approach I would say on that inventory.

So that's mainly on reserves and accruals?

In the RoHS area, there was a slight impact of RoHS but it was less than $1 million for the quarter.

Did you say it was 5 million total for transitory costs? Was that correct?

Yes, that's what we said. It's $5 million.

Is that by transitory -- what does that word mean? Does it mean just one quarter non-recurring?

Yes, they are designed to be non-recurring. But you know when you are going through a transition, as we move our products from Ottawa let's say to the contract manufacturers in Shenzhen, if -- as we go through that and if we see changes in demand, we will be periodically taking charges for products. But these were specifically associated with products that we had end of lifed.

I understand. And a clarification, I was under the impression from prior conversations and prior conference calls that Acterna test and measurement would seasonably be down this quarter. It was the weakest quarter of the year. And then also, I am under the impression that the guidance you gave this quarter took into account a lower Acterna number. Given that Acterna surprised me and I'm guessing surprised you from your own basis before that, I can only guess that the optical communications surprised on the downside. That's how we ended up with the revenue that we ended up with. A, I want to see versus your own expectations the optical communications data point versus what you had kind of had in your head for the mix. And if so, why? And if not, then is it just in line with kind of exactly what you thought?

This is Kevin. You know, I would say the fact that we ended up providing you a guidance range and ended up well within the guidance range should be an indication that we felt that the way the quarter turned out was in the realm of what was likely when we had set guidance. So, the fact of the matter is that the model and the guidance that we have given in terms of looking at commtest in the past was that the ratio of the peak quarter, which tends to be the December quarter as a nadir, could be anywhere from 1.1 to 1.3.

We of course -- that's a model. As we set guidance, we begin to look at our coverage and backlog and sense of order and then we try to build up what we think our most likely outcome will be as well as what could happen if we are wrong. And so, a high order bid is the numbers that we saw for all of the businesses were in the realm of likely outcomes. That's really why we ended up within the guidance range.

John Harmon.

Talking about your laser business, looking at the profitability that you reported, it's a bit below other laser manufacturers but you talked about investing in the business. Is that -- is that the primary reason? And if I can sneak in my half question, it will be a bit shorter. Could you talk about which products were detrimental to mix on the communications test and measurement side? Thank you.

Let me take it. There have really been two major things going on in our laser business. One is we began to complete the restructuring of the manufacturing of our laser business. Remember, our laser business had two pieces -- a gas laser business and a solid-state laser business. The majority of the gas pieces, we have moved to a contract manufacturer. The majority of the solid state, we have coalesced down here in San Jose. Pieces of all of those were formally up in Santa Rosa so that physical movement was largely completed as we entered the last quarter. However, the process use per yields and making things work are continuing.

So I would say certainly our gross margins are better on the solid state than they are in gas. The entire footprint of manufacturing has been in flux until about the last quarter. And this is certainly one of the areas that we're going to be focused on and believe we will continue to improve the gross margin structure. I missed your -- you had another half of a question. If you want to repeat it, I will try to answer it for you.

Right. Which were the products in communications test that brought the unfavorable mix and brought margins down?

We don't break it out, but I would give you sort of a sense. There's a newer level of products, things like service assurance and cable products and Voice over IP testing that are probably at the high end of our margin mix. And there are things like complementary products where we resell other peoples' products and services that are probably at the low end. So you can take it from there that that mix probably changed over the quarter.

Cobb Sadler.

Guidance looks like it's about flat quarter over quarter, maybe a little bit up if you take the midpoint. And you are talking about test and measurement being relatively weak versus the overall guidance. Bagging out, the optical business looks like it's relatively strong. Things are going -- at least growing quarter over quarter. Could you tell us what is particularly weak within optical? Is it your components in the legacy SONET? Is it your components into SONET overall? How is metro WDM doing versus WDM, or can you break it out like that?

Yes, I'm probably going to rephrase your question into the following. You are sort of asking me a general sense of how are the various pieces of the businesses doing and I will try to give you more color. I would say our optical components business is strong. Obviously, our book-to-bill is greater than 1; we did grow. The fact that we moved the guidance window from what was around 302 or 304 to 322 to 312 on the low side to 328 says that we believe that the market is favorable. So I mean that is a good message. The most favorable right now is the optical components piece. So you should not mistake our guidance range with the sense that we think business is strong.

Within that, metro has been strong for many quarters. We've called that a long time ago. Long haul had a very sound strength this quarter. I would say metro and long haul became comparable in terms of fortifying our optical components growth. And as I mentioned in the prepared comments, our agile optical products in general have very good growth too. You are right, things like metro SONET obviously less energy in that market. So, DWDM in general is strong.

The book-to-bill corporate-wide is greater than 1. What about -- is it materially above 1 in optical components?

Yes, I've tried to say several times, our optical components is the strongest piece of it. I think our test and measurement piece is the piece that we have the least visibility into and is the piece that would the soonest be impacted by carrier consolidations, deployments that are slowed down, that kind of thing.

Michael Genovese.

So you talked about recently-weakening forecasts and it sounds like due to certain carrier consolidations and some other issues. We've heard that from other companies exposed primarily to the access business to fiber-to-the-x type access equipment. So first of all, I just want to confirm, is it these same kind of trends -- the consolidation, inventory build, regulatory uncertainty -- these kind of things which are hitting the access vendors that are also hitting your test and measurement guidance? Specifically, does your outlook for test and measurement next quarter -- I mean is it different than the seasonality you would have typically expected? I mean are we looking for a worse than seasonally normal September quarter out of test and measurement for those reasons?

And then finally on the optical business, on the optical components business, are you worried about the outlook there? Do you think that these same issues could start to affect the optical business? What's the outlook there?

So obviously, we have taken all that -- all those pluses and minuses and tried to take account for them as we provided you guidance. And again, the guidance is up. Now, let me try to break it down by the pieces. You are -- you named a number of causal factors. I'm probably not as skilled in naming all of them. What I can tell you is that any place where there is a delay in an IPTV or access layer service, there are certain pieces of our portfolio - and most obviously some of the test and measurement gear that one would use to calibrate the successful installation of those products - would be the first ones to see it.

So we have seen softening uncertainty. I would call it -- I think I've mentioned before the test and measurement business tends to have a fair number of small deals or a lot of small deals. And every now and then, you get a couple of larger deals. The small deal flows continue to see about the same unchanged trajectory. We probably have -- though small number of larger deals, we probably are seeing fewer of those. So that's how I would characterize the nature of test and measurement.

But bottom line is we think that if you look out over the year, the 5 to 10% year-over-year growth that is associated with that market, continues to be reasonable. I still think that the notion that there is a high seasonal quarter and that seasonality will be pegged by the -- it's a fairly broad range, whether it's 1.1 or 1.2 or 1.3 times the nadir, I think that algorithm probably is still in the cards. Are we a little bit more cautious on fiscal Q1? Probably.

So relative to optical components, I don't think we've seen a significant -- even though the same factors could impact them. For example, the speed of ROADM architecture deployments might change. But I wouldn't say that that is necessarily -- it's not necessarily the same level of energy right now. So I think there's talk but -- so it depends. If we're talking one month or one quarter or two quarter, only time will tell.

You did mention constraints in optical components in your prepared remarks. But in previous quarters, I think last quarter specifically, you specifically called out a revenue number perhaps associated with revenue that you could have booked if you were able to make the product last quarter. I mean did you find that this quarter? Was there more upside to revenue if not for capacity constraints?

There's always been that since I've been here. It's never been more than 10 and it's always more than 0. So that's probably as good an outlook or framing of that question as I can give you. I hope that helps.

Brantley Thompson.

I was wondering if we could spend a little bit more time on two topics. One, just an idea of how we should think about gross margins into this next quarter and profitability overall into the next quarter. And second, when we look at the optical comms business, clearly the top-line outlook and stuff is still looking relatively robust for that business. But how should we think about pricing trends in the quarter in terms of what you saw with gross margins in this quarter? And has there really been any kind of change in terms of what you're seeing with regards to component pricing trends, cost, some of the transitional costs, these types of things?

Yes, let me take a stab at it and then I will have Dave perhaps give you more insight. But I would say there is a reason that we do not guide on either gross margin or profit, and that is because of the amount of asset jettisoning, shutting down and movement. The noise is bigger than the signal. And so, at such a point in time where that's not the case, we will reconsider that. And so, I realize that makes your job hard as you try to anticipate.

But that being said, I would say as we look forward from where we are today, segment mix is a big weather vane for our gross margin. Product mix within the segment is still very strong calibration point. The amount of transition costs as Dave has talked to you in any particular quarter, we may have write-offs on the order of single-digit millions of dollars. We may be paying program management transfer fees to contract manufacturers that continue to help us close down buildings and so forth. So, that amount of transition is probably in the double-digit millions of dollars' worth of costs that at some point should not be there once we have a stable footprint.

So, the levers that we have, which is sort of what you're poking at is segment mix, product mix, the actual growth, our transition and transition falloffs and then eventually getting to better process improvements so more linear shipments and so forth. And so, we are pretty cognizant of all those. We closed down two factories this quarter. Hence, not a surprise when you close the doors, you end up writing things off. We still have a couple more factories to close down -- Ottawa being one of them -- and a number of pieces in Santa Rosa yet that will occur in the second half of the calendar year. So, those are sort of the big items in the way that we look at it. And Dave, any other comments relative to this coming quarter?

You asked about ASP decline in the optical comms. We've typically seen it in the 2 to 4% range quarter to quarter. And we're still in that range but closer to the high end of that range in the quarter we just finished.

And is that a change in the environment that we think will get -- continue to be at the high end or could potentially get worse? Or is this just kind of a function of how your mix came out? I mean, how would you -- what kind of what went on in terms of what you're seeing?

I would say it's more in the mix. It was -- it also happened as the June quarter ended. We were going through a number of -- during that period -- through a number of contract discussions with customers. That always offers a fresh opportunity for the customers to look at the pricing but more of a mix related.

And clearly, the highlight there is that the newer products tend to have less pressure than the older products, so we are highly incented to continue to get our newer portfolio elements absorbed. And that's true by the way both on components as well as test and measurement products.

So when we are looking at how the segment mix or -- I'm sorry -- how the product mix is going to fall out for optical components, next quarter versus this one, should we see an improving mix or should it be about the same or how should we think about it?

That's an extraordinarily hard question to answer on the test and measurement piece because it is such a high turns business you never know. On the optical components business, it really depends upon what we have in backlog, what we're able to ship by a certain date. We still have the majority of our products that actually come out in the last month. So I don't have -- we're not in the practice and I'm certainly not prepared to give you some sort of second derivative on what that will look like right now.

Ajit Pai.

Two quick questions. The first one would be more about the operational side of things. You've talked about the 2000 announced headcount reduction. You are done with more than 1800 of them. Could you give us some color as to how much more is left of the current program and whether there is any further sort of opportunities that you have identified -- any additional transitions that have to happen operationally? And then on the same note, the transitions you have talked about in terms of ERP, by when do you expect to get all of that over and done? Is there a timeline for that and could you provide us with that?

Let me take a qualitative stab at it and Dave may have more detail. The first is the -- as I mentioned in our prepared remarks, this is a year of reconstruction and integration. So, we will during this calendar year complete the North American integration on Oracle of our comm. test team. However, we still have a number of sites outside the US that we will still have to do in calendar year '07. I expect by the end of calendar year '07, we should be in pretty good shape across that entire asset. But I'm trying to give you a couple of sense of -- frame the milestones or the current impact.

As you know, you spend a lot of money on consultants and work to get that done. So we are pleased with the progress thus far. This is a very important quarter for the success of our ability to do these kinds of things. If this is a success, we will feel very comfortable with the timing that I have laid out beyond that. But, it's expensive as you note.

Once you do that, it allows us to come back and look at legal entities, where things are -- whether they are direct shipped or not, some of the G&A that we have remotely. So, that is, to your point, a trigger for G&A in the Company. We also did a number of things this quarter -- the -- two of our product groups in comms were combined. Two product groups in the CCP segment were combined. A number of other E staff functions were combined, so probably on the order of four combinations of functions at an executive staff level. And all those I think will over time bring some OpEx or SG&A efficiencies as well. So, you should plan that while we're trying to improve the level of detail and the way that we operate, we view that there is a significant amount of discipline benefit to extract. I view that as ongoing work. It's not something that you talk about a major program and it doesn't necessarily mean a significant reduction of heads. It's just doing things better as you grow.

And then if you were to sort of provide a sort of rough estimate of your quarterly spending, not necessarily on the operational improvements but on the consultants as well as the software, etc., could you give us a rough estimate of how much it would be on a quarterly basis right now? And at what point, do you expect that to peak and start beginning to decline?

This is Dave. So, the quarterly spend is between 1 million and $3 million per quarter. Again, it depends on -- right now as we're going through and implementing the North American operations, you have a high intensity as far as consultants coming in and making sure that people are getting the system up for the first time. There is a -- people right there next to them for a -- we will call it an on-call basis to help through any difficulties. Then, we move into the European planning stage, which has a number of people taking the ERP as implemented in North America into our German operations and getting those folks up to speed on how Oracle works. So it will range 1 million to 3 million and then will probably -- that it will fluctuate that way quarterly throughout the fiscal '07 I would guess.

And you don't expect any additional -- you're past the 50% sort of switch rate. So you wouldn't expect any major hiccups in the ERP from this point onwards?

Well, we have -- we just turned the switch this last weekend and that's what we're doing right now is getting it fully implemented in the North America in the next couple of weeks. So we're not expecting -- we did a tremendous amount of testing, incurred a tremendous amount of cost. So everything is a green light right now.

I think Dave is giving you a pragmatic view of daily life, but I won't rest easy until I close my quarter.

Then, the second question would be just on the ASP side. I know that you didn't single that out as the single largest contributor to the margins. You talked about many factors. But from a broad perspective, just looking at your gross margins expanding so steadily for about six quarters -- about five quarters prior, can you give us some color as to in a rebounding demand environment, giving us some color there, as to whether there's been a change in the pricing trend? Is it that everyone is transitioning to a low-cost region, so the whole pricing environment is going to begin to fall -- find another floor? Or do you think that there is room for the pricing to stabilize at some point over the next two to six quarters?

I don't think that -- I think what Dave communicated was that we haven't seen a dramatic change in the slope of the curve for pricing. I furthermore do not think that there will be a significant change anytime soon in that. I would say that in terms of gross margin improvement, frankly, there is a lot of upside. As we introduce newer product portfolios, we make them better. So, we are still in a world on tunables where people are seeking better yields than they are today, some of the very sophisticated wavelength switches. So I still think that in the industry, while there is less ASP decline, there is still much more margin benefit by doing better or introducing with higher yields the products that are new and very sophisticated. I hope that helps.

Jeff Evenson.

In earlier calls, you talked a bit about moving up the stack in terms of testing equipment to tests that are more software intensive. Could you give us a progress update on that?

I think the comment in earlier calls was if we wanted to expand our gross margins dramatically, what direction would we go in? And so one is certainly into services testing, and we have introduced a whole series of probes, which are both very favorable gross margins and are more software centric. There's a second, which is to go up the stack even further, and I think that's a strategic direction that we are mindful of but I don't think we have any significant inroads there. It's not something that -- it's a question whether we will even do that organically or not.

So, within the box of probes, service assurance and things like Voice over IP, IPTV testing, we've introduced a number of products. They do have very fine gross margins. There is a strategic possibility beyond that, but I don't think we've made any significant progress in recent quarters.

Ladies and gentlemen, this does conclude the question-and-answer session as well as the presentation. Thank you for your participation. You may now disconnect. Good day.