Viavi Solutions Inc (VIAV) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the JDSU fiscal 2009 second quarter earnings conference call. I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions). As a reminder ladies and gentlemen this conference call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Michelle Levine, Director of Investor Relations. Please proceed.

Thank you, operator, and welcome to JDSU's fiscal 2009 second quarter financial results conference call. Joining me on the call today are Tom Waechter, Chief Executive Officer; and Dave Vellequette, Chief Financial Officer.

I would like to remind you that this call is likely to include forward-looking statements about the future financial performance of the Company. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to look at the Company's most recent filings with the SEC particularly the risk factors section of our report on Form 10-Q filed today, February 5, 2009, and in our most recent annual report. The forward-looking statements including guidance provided during this call are valid only as of today's date and JDSU undertakes no obligation to update these statements as we move through the quarter.

Please note that all numbers are non-GAAP unless otherwise stated. A detailed reconciliation of these non-GAAP results to our GAAP results as well as a discussion of their usefulness and limitations 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 reminder this call is being recorded and will be available for a replay from the investor portion of our website at www.jdsu.com\investors. I would now like to turn the call over to Tom.

Thank you, Michelle. And good afternoon. I am pleased to be here today leading JDSU and discussing our fiscal Q2 results and future outlook. In the coming weeks and months I look forward to meeting many of you on the call today. As you may know I joined JDSU 15 months ago to lead our communications test and measurement business. I joined JDSU because of our strong employee talent pool, the breath and depth of our products and technologies and the significant opportunity to increase the value of the Company. During the first 15 months my conviction has grown even stronger. I see the great potential of this Company through our people, the ability to innovate and the power of our global reach. Our strong balance sheet, aggressive cost saving programs and strategic focus will allow to us weather the current global economic head wind as we build a foundation for long-term success.

Before I talk more about our business, I'd like to take a few minutes to describe the format of the call. Many of you have provided us with suggestions pertaining to the content we share with you on earnings calls and we have taken note. Moving forward we intend to provide more insight into each of our businesses and their respective trends. I will spend most of my time on this and future calls addressing these trends and how they are shaping our strategy and our priorities. My formal remarks today will be more extensive than I plan on future calls as I'd like to spend time at the outset to help you understand my perspective of the business. Following my discussion, Dave will provide a detailed review of the current quarters financial results and our outlook.

Let me start by providing a high level review of JDSU's second quarter results followed by what I see as the priorities for the Company. I will then provide results and outlook for our business segment.

Revenues for the second quarter were $357.2 million, the decline was driven primarily by the communications and commercial optical products segment as demand weakened with the economic downturn. In addition our revenue and gross profit were negatively affected by $10 million due to Nortel's announced bankruptcy. Dave will provide more details regarding Nortel later on the call. Second quarter gross profit of $155.4 million or 43.5% of revenue was up primarily due to favorable segment mix and successful execution against our lean initiative. Operating expense for the second fiscal quarter of $137 million or 38.4% of revenue was down reflecting our efforts across the Company to lower expenses through the economic downturn. Operating income for the quarter was -- $18.4 million, or 5.2% of revenue, relatively flat as a percentage with the prior quarter but on a much lower revenue base. This is a result of our improved gross margins and lower operating expenses as we focus on lean initiatives and cost cutting across the Company. Overall I'm pleased with the progress we have made improving the cost structure and operating model of the Company but there is more work ahead of us.

We continue to see advancements in high-speed, broadband services and network build outs. We believe broadband capacity will continue to expand, higher data rates are being delivered to the access edge, accompanied by video applications and high-definition network requirements. Although we believe that broadband demand and network traffic will continue to increase, the environment is such that we are experiencing slow down in spending from these customers. I see this challenging economic time as a time of both challenge and opportunity. I strongly believe that by focusing on four priorities we will remain healthy during this difficult period, further differentiate ourselves and increase our leadership position in the markets we serve when economic conditions improve.

First priority is to continue to simplify and scale the business model. A little over 12 months ago we began productivity improvement programs in the form of lean initiatives across the Company. They are designed to reduce the overall complexity of JDSU and to move the Company from a fixed to variable cost manufacturing model. As a result of these actions more than 20% of presently occupied real estate will be vacated. JDSU started these initiatives in advance of the downturn which I believe puts us at an advantage compared to our peers. I will now cover a few of the major milestones recently achieved as part of these initiatives.

An agreement with Sanmina which transfers our Shenzhen manufacturing facility to Sanmina for the manufacture of JDSU's optical communications transport and transmission product line. The communication test and measurement segment has signed an agreement with contract manufacturer Benchmark. This will enable the largest JDSU business to move primarily to a variable manufacturing cost model and improve overall scalability. And finally, agreements are already in place with Fabrinet for the production of select laser products.

Second, is continued focus on innovation. Advanced product offerings across a diverse technology portfolio is a hallmark of JDSU. During these uncertain economic times, we see a unique opportunity for JDSU to further strengthen its leadership position through innovation. We will invest in high growth profitable areas where we can add value to our customers. We believe we are uniquely positioned to sustain our investment levels during the economic downturn. JDSU is also looking for improved design efficiency by consolidating design sites and outsourcing noncore development activity.

The third priority is expanding our global presence. We will place more emphasis on expanding outside of our traditionally strong North American and Western European markets. High opportunity markets cross Asia Pacific, Eastern Europe, Latin America, the Middle East and Africa offer incremental growth for our business. We have built strong leadership teams in these areas and will emphasize both direct sales and channel development. A higher level of diversification will provide for better balance as we see fluctuations in various economies around the globe.

Over the last year both Asia Pacific and Latin America sales have grown by 12% and 86% respectively. And finally, maximizing utilization of our assets. We will focus on utilization of our assets in order to maximize shareholder value. Our priorities for our cash are maintaining a solid cash balance, completing and advancing our lean initiatives, and making profitable acquisitions. With regard to M&A our focus will be to strengthen our core businesses and to expand into adjacent high growth markets that are accretive.

Now let's move on to our individual business segments for fiscal Q2. The communications test and measurement segment performed well against our business model. I am pleased with the execution of the segments lean initiative and cost cutting activities which resulted in improved gross margins and operating margins. Revenue grew sequentially but not at the typical seasonal level. This reflects reduced spending by network operators and equipment manufacturers hampered by the global economic downturn. We expect the quarters ahead to be challenging from a topline perspective but we remain positive about the fundamental trends driving the test and measurement industry and our long-term position.

Let me go into more detail. First we believe that our telecom and cable customers financial fundamentals are relatively sound and while cautious our customers are not signaling CapEx reductions as with the previous industry downturn. Telecom and cable operators are engaged in intense competition with the focus on increasing ARPU and quality of consumer experience while reducing churn. They are also focused on reducing network expenses and increasing productivity. These trends have positive implications for test and measurement solutions.

Second, consumer demand continues to grow for broadband Internet access and application. More than ever consumers depend on broadband for entertainment, daily work and personal activities. For example, Americans increased online video viewing by 34% in November 2008 versus the prior year and in Asia more than half of all Internet users visited online gaming sites in August of 2008. JDSU is well established as the leader in wireline communications test and measurement equipment for both network operators and equipment manufacturers, and JDSU holds the number one market share position in broadband field tests and in remote fiber test system. We earned this position through innovation driven by customer collaboration. Our ability to collaborate on multiple levels with field technicians, network managers and executives gives a competitive advantage.

A number of deals in the second quarter reflect the trust our customers continue to place in our test solutions. For example, one of Europe's largest service providers booked a 3 million order for the HST 3000, one of the most widely adopted all in one hand-held for installation and maintenance of IT based broadband networks and services. A tier one operator booked a major deal for the T-Bird 8000 to support reliable, fiber network expansion in Latin America. One of India's largest service provides picked our fiber test probes for remote testing to reduce truck dispatches. Two tier one North American network operators chose JDSU complete software solutions for efficient broadband service delivery and consumer quality of experience. Deutsche Telekom selected the T-Bird 6000 10-gig-e field test solution, the smallest in the industry for Metro network capacity expansion to support IPTV deployment. And LG Dacom selected our net complete test system for IPTV service deployment in Korea.

Through collaborative innovation we earn the trust and business of our customers and we are very proud to say that the industry continues to take notice. We were pleased to receive two 2008 product of the year awards from telephony magazine for test system solutions addressing home network solutions management and wireless backhaul.

Moving on to our communications and commercial optical products segment. As a reminder last quarter our optical communication and laser sessions were combined into one segment called communications and commercial optical products, or CC-OP First our optical communications business.

In fiscal Q2 revenue declined primarily due to a slow down in market demand and deferred Nortel revenue. We were making progress in improving our gross margin in optical communications by pruning less profitable products and realizing the benefits of our lean initiatives and workforce reductions. We expect the demand in optical communications to be soft in the quarters ahead as the slow down of CapEx spending by service providers and only the data networks cast days through network equipment manufacturers. As we look ahead we believe that our focused strategy of technology leadership, cost leadership and functional integration which enables JDSU to differentiate ourselves in a very competitive market is aligned with our customers requirements.

There are three customer trends that JDSU is addressing with the technology leadership and innovation. First, agile optical network. The industry continues to ask for solutions that are highly reconfigurable giving network equipment manufacturers and service providers the ability to reduce inventory and help reduce OpEx and CapEx. Examples of our leadership and reconfigurable solutions are ROADM, integral transponders and the protonically integrated amplifiers. Next, higher transmission speed.

Our customers are focused on 40g followed by 10 gigs in the near future. For transmission, we have a partnership with Nantera and internal component level development underway. For transport, we are already there as our products are designed to work in 40 gig and future 100 gig networks. Finally, functional integration. Over the past year we introduced a number of platforms that possess highly functional integration. Customers have demonstrated enthusiasm for these new product platforms. For example, we've had significant super transport blade design wins with four programs for three customers. We have started revenue shipments with our first customer in Q2, FY '09. The single slot blade solution dramatically reduces size, cost, and power requirements for our customers, enabling deployment of optics closer to the network edge. Going forward the highly modular framework of the super transport blade enabled JDSU to more easily add functionality to simplify optical network infrastructure. JDSU is one of the only vendors taking this approach to product development.

During the quarter we received 12 design wins at a total of nine customers for our tunable XFD transceivers. WIth these designs we bring the world's smallest widely tunable transmitter optical sub-assembly for DWDM applications. And we added two new design wins for our mini WSS platform including two new design wins in Q2. We expect to record revenue on this new platform before the ends of the fiscal year. The mini WSS is designed to provide a compact and low cost solution for traffic management in the metro and access areas at DWDM networks. Finally, we have received positive feedback and interest from customers for our protonic integrated amplifier or PIA platform.

In relation to cost leadership last year JDSU began implementing lean manufacturing initiatives. We continue to make progress on lean programs and continue to interact tightly with customers. One example is facilitating reduced lead times to help our customers meet their goals of holding less inventory. And as mentioned earlier we announced our contract manufacturing agreement with Sanmina as we move to a more variable cost manufacturing model. Our lean manufacturing strategy is to go to the outside market for the products and services that we can while retaining manufacturing processes unique to JDSU and the industry.

Our commercial lasers business experienced a decline in revenue due to lower demand from our semiconductor equipment manufacturing customers as well as with the bio-medical field. Therefore this quarter signaled a deeper market slow down as our customers pushed purchases out to future quarters and deplete inventory. While this is an industry-wide occurrence we believe we are not losing market share and are tracking what the slow down of our customers our experiencing. Our pipeline for new products over the fiscal year is robust. Our product development will continue to be focused on advanced solid state and fiber laser platforms. These new products we'll introduce will increase their served available market by more than threefold.

Finally, on to our advanced optical technology segment. This segment provides optical security solutions including brand protection, anti-counterfeiting for currency, transaction card authentication, custom optics for aerospace and defense, and innovative decorative solutions for helping manufacture differentiate their products.

Q2 revenue is relatively flat quarter over quarter and for the fifth quarter in a row gross margins were above 50%. The diversity of this group of products contributes to some resiliency and has shown during periods of economic contraction but we do expect a slow down in the consumer facing market. We believe the breadth of our product portfolio places JDSU in a unique position to go to market with integrated solutions for our customers. This quarter we expanded the scope of our business relationship from authentication labels only to adding optical effects to labels. This helps our customers differentiate the brand and drive increased sales. We expect to continue our emphasis moving forward towards solutions in the form of integrated products, market strategies and product road maps.

As I conclude my formal remarks, I'd like to reiterate I am pleased to be here leading JDSU and am excited about the opportunities that exist for the Company. There is no doubt we are facing challenges amid a current economic backdrop but I believe we can weather this economic downturn and come out stronger as we continue to focus on simplifying and scaling our business model through our lean initiative, continued innovation, expanding our global reach and maximizing our assets. I would like to thank JDSU employees who's focused commitment and tremendous efforts continues to advance JDSU towards long-term success. I would also like to thank our customers, partners, vendors and long-term shareholders for their continued support of JDSU. With that I will hand the call over to Dave.

Thank you, Tom. Before I start please note that all numbers are non-GAAP unless I state otherwise. Second quarter revenue of $357.2 million was down 6.2% from the prior quarter and down 10.5% when compared to the second quarter of fiscal 2008. The second quarter revenue decline was mainly in the CCOP segment as demand softened with the economic downturn and we deferred $10 million of Nortel revenue. Given the Nortel bankruptcy filing last month, we not only deferred $10 million of revenue, we also deferred $10 million of gross profit and operating profit; lowering the margins by approximately 150, and 260 basis points respectively. Earnings per share were reduced by $0.04.

For fiscal Q2, test and measurement represented 49% of total revenue as compared to 43% in the prior quarter. The CCOP segment represented 36% of total revenue as compared to 43% in the prior quarter, and AOT represented 15% of total revenue which is relatively unchanged from the prior quarter.

Second quarter gross margin of 43.5% of revenue was up from the previous quarters gross margin of 43.3% of revenue and down from the second quarter of fiscal 2008 gross margin of 46.3% of revenue. The second quarter gross margin reflects a favorable segment mix as the test and measurement segment increased its percentage of total revenue and the execution against our lean initiatives. Operating expense for the second fiscal quarter of $137 million, or 38.3% of revenue was down from the prior quarters $144.6 million, and down from the prior year's $139.4 million. The low operating expenses reflect reductions in discretionary spending, office consolidation, workweek shutdowns, reductions in head counsel and the favorable impact from foreign exchange rates.

Operating income for the quarter was $18.4 million or 5.2% of revenue; down slightly from the prior quarters $20.4 million or 5.4% of revenue. The improved gross margins along with the lower operating expenses resulted in our operating margins continuing to be over 5% despite the decline in revenue. Second quarter net income was $24.8 million or $0.11 per share. This compares to first quarter fiscal 2009 net income of $23.4 million or $0.11 per share.

A detailed reconciliation of our non-GAAP results to our GAAP results is available in today's press release. Our second quarter non-GAAP results exclude among other items impairment of goodwill and long lived assets of $699.6 million, amortization of acquired technology and intangibles of $18.8 million, a $13 million impairment of long-term investments, a $12.5 million charge related to stock based compensation, $6.6 million for restructuring and other non-recurring charges, and a $22.3 million gain from the repurchase of our 1% convertible debt. As we announced last month the impairment of our goodwill and long lived assets is a result of the adverse impact of the current macroeconomic business environment on the Company's financial outlook and the overall decline in equity values resulting in a decline in our own market capitalization. The impairment charges and estimate, the final analysis will be completed in the third fiscal quarter. Including these items the second quarter fiscal 2009 GAAP net operating loss was $705.3 million or a loss of $3.28 per share, which compares to a prior year second quarter GAAP net income of $21.2 million, or $0.09 per share.

Now looking at revenue by region. Americas revenue of $165.7 million, 47% of total revenue, was down approximately $4 million from the prior quarter primarily driven by the impact of the deferred revenue adjustment. We also noted that the typical end of year carrier procurement activity was significantly lower than historical levels. EMEA revenue was $108.2 million, 30% of total revenue, down approximately $10 million from fiscal Q1. The decline was split evenly between the test and measurement segment, primarily due to the impact of foreign exchange, and the CCOP segment, which was also impacted by the deferred revenue adjustment. Asia revenue was $83.1 million, 23% of total revenue, down approximately $9 million from the prior quarter. The decline was due to lower revenue from commercial lasers and AOT products.

Moving to the segments. In the test and measurement segment, second quarter revenue of $176.2 million was up 6.6% from the previous quarters $165.3 million, and down 10.8% from the previous years $197.5 million. The increase was due to demand in the Americas which included higher demand for cable products in Latin America.

Looking at the product portfolio, we saw growth in our field services products and declines in our Latin production and service assurances products. Book to bill for the quarter was less than 1 as we experience a number of large deal delays from our customers. Fiscal Q2 gross margins for test and measurement of 59.6% was up slightly compared to the prior quarter and above the midpoint of our targeted range of 57 to 61% reflecting the benefits from our lean initiatives as well as favorable product mix. The test and measurement operating profit of $36.7 million or 20.8% of revenue increased when compared to the operating profit of $26 million or 15.7% of revenue in the prior quarter. This increase was due to higher gross margins and lower operating expenses. The test and measurement segments operating profit was negatively impacted by approximately $3 million from currency fluctuations.

Now moving on to the test and measurement business model and the initiatives within this segment to achieve this model. We began implementing lean initiative programs during the prior fiscal year with a focus on reducing structural complexity and therefore improving productivity. We expect to complete the current set of initiatives over the next nine months as follows.

First, consolidating R&D sites from 19 down to 12. Today we have closed five R&D sites and expect the remaining two to be completed by the end of the fiscal year. Second we are transitioning more product lines to contract manufacturers which will reduce our manufacturing overhead. This quarter we signed an agreement with Benchmark Electronics for the manufacturing of select T&M products. We expect temporary gross margin pressure in Q3 due to costs associated with the transition to Benchmark.

Last, we continue to focus on operating expense reductions through discretionary spend reductions, cost benefits from fewer development sites, workweek shutdowns and headcount reductions. These initiatives have yielded financial benefits in the first and second quarter's of this fiscal year as operating margins increased in each of the last two quarters from 11.3% for Q4, fiscal 2008, to 20.8% for Q2, fiscal 2009. We believe that these initiatives provide the structure to support sustainable operating margins between 20 and 23% at quarterly revenue levels of $175 million or greater.

Now moving on to our CCOP segment. The break out of the key metrics for optical communications and lasers is as follows. For optical communications revenue in fiscal Q2 was $109.5 million, down 22.2% when compared to the prior quarters revenue of $140.6 million, and down 15.6% when compared to the prior year's $129.7 million. The $31 million quarter to quarter revenue decline includes $10 million of deferred revenue, $5 million due to product portfolio printing and $16 million due to a slow down in market demand. Book-to-bill was less than 1 for the quarter as our customers are seeing a slowing of demand from their customers and are also reducing their inventory positions. ASP decline was approximately 2% at the lower end of our expected range of 2 to 4% quarterly, Q3 ASO decline is expected to be above our historical range as we have just completed a set of competitive pricing negotiations.

Looking at the product lines, our ROADM product revenues grew 30% and now represent approximately 30% of our optical revenues. To date we have shipped over 30,000 units and we believe we are maintaining our number one market share for ROADMs. At the same time we saw a softening of bookings across the product portfolio including ROADMs as our customers are being impacted by the current economic climate.

Moving to the business model. We continued our progress of improving the gross margin structure in optical communication. Excluding the impact from the revenue deferral, fiscal Q2 gross margin was 24.6%, up compared to the prior quarter which had significantly higher revenue. Reported gross margin was 17.4%. Our gross margin improvement initiatives include moving to a more variable cost model, pruning products that don't meet our profitability targets and executing against our lean initiatives. Our near term gross margin goal is for sustainable margins in the 25 to 30% range and longer term gross margins in excess of 30%.

As we discussed last quarter it is our intention to reduce the fixed cost structure of this business by transitioning more manufacturing to contract manufacturers. Additionally today we announced an agreement with Sanmina which in effect transferred our Shenzhen manufacturing facility to Sanmina. JDSU benefits from a lower fixed cost model and Sanmina increases it's capacity in the Shenzhen area and immediately adds to its expertise in optical assembly and test. The agreement will include the transition of approximately 2000 JDSU employees as well as the sale of JDSU's Shenzhen manufacturing assets and inventory. Sanmina will fulfill orders immediately following the close of the agreement which is expected to be at or near the beginning of our fiscal Q4.

In addition, we are in the process of doing last time product builds at our submarine assembly facility in San Jose, California. Our future submarine products will be assembled in Shenzhen. We expect to complete this manufacturing transition before the end of the calendar year.

In our commercial laser business second quarter revenue of $18.4 million declined 13.7% from the prior quarter. The decline in revenue is due to declining demand for our semiconductor, equipment manufacturing and bio-medical customers. Operating loss for CCOP was $3.5 million. The improvements realized in manufacturing and operational cost reduction initiatives were offset by the impact of the deferred revenue.

Now moving on to the CCOP business model. Moving forward we believe that the CCOP cost savings initiatives provide a structure that supports operating margins of 10 to 15% at revenue levels of $150 million or greater. With the advanced optical technologies or AOT segment fiscal Q2 revenue was $53.1 million, down less than 1% compared to fiscal Q1 revenue. Revenue in the currency market remained healthy as we have noted before we expect the trending of this business to have some level of surges and ebbs which tend to correlate with a countries GDP. Fiscal Q2 gross margins for our AOT business were 51.2%, down from the previous quarter due to lower factory utilization. This is the fifth consecutive quarter in which our gross margins exceeded 50%. AOT operating profit for the quarter was $19.5 million, or 36.7% of revenue. Down from $21.7 million or 40.6% of revenue in the prior quarter. Our targeted sustainable operating profit range for this segment is 34 to 37%.

Moving to the balance sheet. For fiscal Q2, the Company's operating cash flow was positive but the free cash flow, cash flow was negative $4.6 million. Total cash balance was $689 million. The Company had been free cash flow positive for the past seven quarters. This quarter we are slightly negative as we invested $14 million in inventory for products transitioning to contract manufacturers and $3.7 million was consumed for restructuring activity. Net cash increased this quarter as we reduced our outstanding debt balance by approximately $125 million. We retired substantially all the remaining zero coupon senior convertible notes and we repurchased $50 million of the 1% senior convertible notes resulting in a gain of $22.3 million. In January, we repurchased an additional $50 million of the 1% senior convertible notes which will result in a gain of $20 million in our fiscal Q3 results. Headcount as of December 27, 2008, was 6,645, down slightly from the prior quarter. With the transition of the Shenzhen factory and the other headcount reductions previously communicated we expect the total Company headcount to decline by more than 2,200 by the end of the fiscal year.

Moving on to our operating model. We continue to focus on executing against our initiatives to achieve our sustainable segment business models and reduce our corporate costs. In the last quarter each of the segments successfully executed against their initiatives and we lowered our corporate costs. We now have a sustainable cost structure from which we can realize 10% operating margins when revenues are $400 million and gross margins are 46%. That being said, over the last several quarters we've taken steps to reduce our fixed cost structure in manufacturing and to lower our operating expenses. We have now lowered our operating income and free cash flow breakeven point absent one time transition costs to 300 million to $310 million of revenue per quarter.

Given the current macroeconomic conditions we are taking additional steps to further lower these breakeven points. By the end of the fiscal year we expect that our operating income breakeven point would be 15 million to $20 million per quarter lower. Taken as a whole, the initiatives we have identified since beginning of the fiscal year are designed to increase our ability to scale our manufacturing while lowering the cost structure associated with manufacturing by more than $28 million per quarter -- per year, and lower our operating expenses by approximately $110 million per year. These savings are compared against our fiscal 2008 fourth quarter results.

Finally, given the strength of our balance sheet, the breadth of our product portfolio and the geographic diversity of our customer base, we believe that the current market conditions provide us with unique opportunities to increase our leadership position in the markets we serve.

Now to our Q3 guidance. First some points to consider as you think about our financial performance over the coming quarters. As noted, there is a significant level of economic uncertainty in the markets that we serve. Book-to-bill was less than 1 in all segments except for AOT. Our CCOP customers have signaled that they are seeing softness in demand from their customers and would be lowering their inventories. Visibility in test and measurement is seasonally lower in the March quarter, operator CapEx budgets are expected to be released late in the fiscal quarter. We expect Q3 gross margins will be adversely impacted primarily by the lower customer demand and by the transition costs associated with the transfer to contract manufacturers. We expect a further decline in operating expenses in Q3. Finally, we expect our quarterly tax provision to range between 2 million and $4 million.

Taking into consideration factors above and based on our current visibility we expect third quarter revenue to be in the range of 275 million to $300 million, and non-GAAP operating margins to be breakeven to negative 4%. We expect the CCOP and test and measurement segments sequential revenues to decline by the same percentage. Thank you and, operator, we will now take questions.

(Operator Instructions). The first question comes from the line of [Geniah Misa] from RBC Capital.

Hi, it's actually Mark Sue from RBC Capital Markets. Can you help us understand the moving parts in your revenue guidance? If I take the low end it implies an almost 23% sequential decline, recognizing it's tough out there, it can't all be the macro and you should be able to recover some of the deals which got delayed. Maybe if you could quantify some of the inventories that your customers and maybe the impact of portfolio pruning, any further granular details you can provide would be helpful?

Mark, this is Dave Vellequette. As far as the deferred revenue we do have -- we are going through the normal legal processes there to try to recover some of that $10 million. From what we've identified we think there's $4.4 million roughly to $5 million that gets, it's called a prepetition claim and, but as far as when we will actually be able to realize that, it could be in Q3 or Q4. As far as the reduction in the revenues, as I stated right at the end there we are basically seeing that percentage decline to be even between the test and measurement and the CCOP Group. In the CCOP reduction we think there's about another $5 million impact from product pruning.

Okay.

Included in the number.

Mark, what Dave was talking about also on the CommTest side I think you know that the March quarter is when budgets are typically released for network operators and due to economic conditions today and when those possibly would be released if they are released later into the quarter further into March then (inaudible).

Okay.

Revenue ranges.

That's helpful. With that being said, will you start seeing at least a sequential bounce in the June quarter, at least we have some confidence there from your initial discussions with your customers? And then lastly, Dave, as you consider the response, maybe just your overall gross margins as we exit fiscal 2009, that might be helpful?

Yes, Mark, we are just right now with our visibility and as has been our habit we talk about one quarter at a time and so right now it's best that we just focus on our Q3. And the gross margins are, try to give some insight of what can impact the gross margins and then basically we only give guidance on the revenue and the operating margins.

Then with the impact of--?

Go to the next question, please?

The next question comes from the line of Ehud Gelblum from JPMorgan. Please proceed.

Hi, guys, how are you? A couple questions. One of the margins you said you now have a sustainable business model for [10%] operating margin but you need a $400 million run rate. With the downturn in the markets what makes you confident that you can get anywhere near $400 million going forward now that you are down to the $300 million range, how do you know that we are now are not, as inventory levels come down we are not permanently down in the low 300, at what point would you make that decision and cut costs? And the flip side of that, on the other side of that coin, it sounded like you were spending more on going more international. Is this really the wisest time for you to be spending on international and spending on R&D rather than cutting back in costs and trying to save some of the margin?

Let me take the second part of that question. Regarding the R&D and the international scope. Most of our infrastructure is already there from an international standpoint. We had over the last six to 12 months rebuilt quite a bit of our leadership team especially in the Asia market. So we don't believe there's any significant additional incremental investments we need to make to really expand our presence in the global market. I think it's really more of a focus from the top down through the organization. More of an emphasis of focusing on those areas and being, gaining market share there. As far as R&D as I mentioned that's one of our four key priorities is to continues to invest in innovation and we believe that during these uncertain times and while maybe some of our competitors out there in the market are having difficulty investing into innovation in R&D that's a good time for us to look at ratings and technological gaps. I think we found enough areas through our lean initiative and other cost reductions that we don't really need to cut into our R&D or see the need to do that.

On the first part of your question, Ehud, one, we have got ourselves structured as we had talked on a number of calls for 10% 400, second part if -- as you see where we've guided for the revenues, we are taking steps to continue to lower our break-even point for the Company to, the 300 to 310 range which is where we are at right now and we want to bring it down even further as we exit the fiscal year. So we are continuing to work on lowering our costs. If as -- as we go through the quarters and our visibility improves, we will take the appropriate steps to, with regard to our expenses.

If I can ask one last question on the topline if I could, the test and measurement business was obviously very strong this quarter and yet it's going to fall off pretty precipitously along with optical components next quarter. Was there ever a sense in this particular quarter that these were either last time buys or something going on that was keeping it while your optical components business was falling off, your test and measurement business was continuing to do well right before a cliff? Was there any sense that maybe there was some extra buying last quarter just before calendar 2008 reasons that may not return?

No, there wasn't any indication of that. As a matter of fact last fiscal, December of last calendar December quarter we did see quite a bit of year end buying consuming our budget. We did not see that to any great extent this year. We do see some pretty strong business out there from communications CommTest business,didn't get any indication that was (inaudible).

Okay. Thank you.

Next question, please.

Our next question comes from the line of Ajit Pai from Thomas Weisel Partners. Please proceed.

Yes, good afternoon.

Good afternoon.

A couple of quick questions. The first one is just looking at the sort of market segments for your test and measurement and optical communications group, was there a pattern that you observed that the slow down in push outs were they more on the MSO side, were they more on the large US carriers or were they centered in any one particular geography?

We saw some strength in the Latin America market around the cable product, cable test product so that was definitely a strength for us last quarter. So that was probably the first quarter in three or four quarters where we actually saw pick-up in the cable test products. That was a definite improvement. We did see softness in our service assurance business and lab and production which you would expect to see in this kind of a soft kind of market.

Right. And then just looking at the M&A environment right now there's been a lot of consolidation on the optical communications industry, the component industry, could you give some color as to uses of your cash right now, you've been quite aggressive in buying back your own debt so does that mean that you are not looking at further business development activity? And also how do you think that some of the recent announcements over the past three to six months positions JDSU in terms of market share?

Why don't I take the first part of that and then I will turn it over to Dave. From an M&A standpoint we continue to look at the market. We have been a strong player in that area in the past. As I mentioned we would be, make sure that it fits into our strategy as we go forward and that it's accretive to the business if we do decide to make any moves from the M&A standpoint.

And as far as what we've always said is our first goal is to grow the net cash which we have done, the next is obviously we took advantage, we believe of an opportunity to buy back some of the 1% notes and we will be using our cash also for our restructuring purposes as needed and then as Tom said if the right opportunity is out there we will be looking at those actions as appropriate.

Right, and then the breakeven level that you just indicated of having reached the $310 million sort of level already could you give us some color as to that's after Shenzhen is out or for this quarter your breakeven level for the March quarter or breakeven level $310 million? And then also I think you mentioned you have another 15 million to $20 million that you are planning to drop to breakeven so that would be 290 million to $295 million exiting the year. Does that mean for the full quarter, the June quarter, that you will be a breakeven level that's at 290 million to $295 million?

Yes, so as you can tell from the guidance where we gave the guidance 275 million to $300 million, and I gave operating margin guidance of 0 to minus 4, that should be obvious that we think that we are at that breakeven point at the $300 million, $310 million mix always can have an impact on it. And then as we exit the June quarter with the changes we are making not only the Shenzhen but other activities we have going on we think we will exit it with the opportunity of having that breakeven lower by 15 million to $20 million.

Got it. Thank you.

You're welcome.

Next question, please.

The next question comes from the line of Paul Bonenfant from Morgan Keegan.

Hi, thank you. You talked about OpEx reductions sequentially. I was wondering if you could talk about in the context of percent of sales, would it be similar to what we saw this quarter?

I don't think I talked about it other than it will be coming down. We are taking out the equivalent of $110 million a year run rate as -- when we exit the fiscal year. So we just, we didn't talk specifically about what the OpEx will be. It will be coming down quarter to quarter. To get the $128 million I have to go to a run rate of about 124 million, $125 million for the fourth quarter. So I just finished a $137 million, so I will be heading towards the 124 million, $125 million range from here to the fourth quarter. So it will be somewhere in between those two.

Okay. And just a quick question of clarification on your $110 million a year in savings exiting the year, that's relative to which quarter?

To the fourth quarter last year where we did $151 million of OpEx.

Okay. And last question if the downturn is prolonged have you considered next steps for cost reduction or aligning costs with a lower revenue base, maybe additional product pruning or considering shedding business units?

As I stated on a previous question, with our visibility as we go through we will constantly be looking at opportunities as I noted in the script that we had a set of actions and we've added to those actions in the quarter and that's what we were constantly doing. As our visibility comes through we will continually evaluate the business because we are looking at where the profitable business are and we will make adjustments appropriately.

To add to what Dave is saying I think on a lot of our lean initiatives we are just starting to see some of those benefits. A lot of of the manufacturing outsourcing we will really start seeing larger benefits over the next quarter.

Thank you for taking my questions.

You're welcome.

(Operator Instructions). The next question comes from the line of Natarajan Subrahmanyan from SMH Group. Please proceed.

Thank you, I have two questions. First if you can talk about your OpEx again, you are reducing headcount by almost a third, going from 6600 to 2200 people going off the payroll. Can you talk about how this will offset gross margin versus operating expense, and I imagine a significant decline to OpEx because you are outsourcing these components versus making them internally, will it hit gross margin OpEx? Or are most of these employees already in cost of goods sold on the manufacturing side?

Yes, of the 2200, the majority of them being from the Shenzhen facility, right , where we had and I stated that more than 2000 employees will transfer, so the remaining 200, the majority of the remaining 200 will be in the

Got it. So we won't see the impact of that on the OpEx, the other 2,000 on the OpEx side because they were in cost of goods sold? And can you talk about what kind of deals you've struck with Sanmina for the Shenzhen facility, what kind of pricing you guys will get in kind of broad strokes?

It's -- basically we haven't actually revealed the specific terms of it. It's contemplated in the number when I said that as we complete these initiatives we should be able to reduce our manufacturing cost structure by $28 million on an annual basis.

Understood. And then can you repeat what you said in terms of the negative gross margin impact of the Nortel deferred revenue, what kind of impact it had on the December quarter and what kind of recovery you think it could have over the next couple of quarters?

When we deferred the revenue, obviously since they have the inventory we deferred 100% of the revenue obviously hit the gross profit. And that hit obviously went all the way down to operating margins. So that's why I said it's a $10 million impact on gross profit and operating margins. As I said previously we have some, that we are going through the normal legal process here and there's a 4 million to $5 million that's identified, it's what's called prepetition claims and we hope that we will be able to get those paid for because of how the bankruptcy laws work and then the rest of it will be handled how the bankruptcy proceedings typically go. As far as when we get any of that money, we don't know at this time.

And final question, if I could get one in, your're taking a breakeven point down, it seems like kind of the 280 million to $290 million kind of range, which is where the midpoint of the guidance for the March quarter is. Should we read into that that you are expecting things to flatten out versus March levels? Should we expect to see some sort of bottoming in March in recovery from there on to June? If you could talk in general about the outlook? I know you are not giving specific guidance but anything would be helpful.

I think that the, what we are trying to communicate is how we normally go about our process of our visibility and the guidance associated with that visibility and then we are letting folks know that given that that we are going to continue to adjust our cost structure. So -- and take our breakeven point down further.

Got it. Thank you.

We have no more further questions at this time. I would like to turn the call back over to Ms. Michelle Levine Schwartz. Please proceed.

Thank you, operator. We would like to thank you again for joining us today and we appreciate your interest in JDSU. Thank you.

This concludes the presentation for today ladies and gentlemen. You may now disconnect. Have a wonderful day.