Viavi Solutions Inc (VIAV) 2009 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to JDSU's third quarter of fiscal year 2009 earnings conference call. My name is (inaudible) and I will be your operator for today.

At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Miss Michelle Levine, Director of Investor Relations.

Thank you operator and welcome to JDSU's fiscal 2009 third-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 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 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 turn the call over to Tom.

Thank you Michelle and good afternoon everyone. Let me begin by summarizing our third fiscal quarter results.

Despite the tough economic conditions, we continued to improve a number of our key financial metrics. We grew net cash by over $34 million and were over $15 million free cash flow positive.

We decreased our inventory levels by $40 million. DSOs were down by three days and our long-term debt declined by $50 million.

In effect, our balance sheet improved in Q3. Our revenue and operating income results were consistent with the guidance we provided three months ago, reporting revenues of $280.7 million and an operating loss of nearly 3%.

As expected, demand from our NEM and service provider customers slowed due to the economic downturn as our customers are depleting their inventories and delaying the release of their 2009 capital budgets. We did see an increase in demand over the last two months across our businesses.

JDSU third quarter gross margins were slightly below 42% due to lower factory absorption and product mix in the test and measurement segment and transition cost associated with the transfer to contract manufacturers. We remain committed to our sustainable model of gross margins in the range of 43% to 47%.

Operating expenses of $125.2 million were down for the third quarter in a row and reduced over $22 million or 15% from the fiscal 2008 third quarter, reflecting the company-wide effort to continue to lower our cost structure. Although we find ourselves in a challenging economic climate, I believe our long-term market opportunities remain strong.

Since January, I have spent time meeting with customers across our business segments. In my meetings with our telecom and cable customers who drive revenue for 80% of our product portfolio, I noted that while these customers remain cautious with their current investment level, they clearly expect broadband expansion to continue.

Let me share a few data points with you. According to Cisco's Visual Networking Index forecast, global IP traffic is expected to increase by a factor of 6 from 2007 to 2012.

Video on demand, IP television and Internet TV will account for nearly 90% of all consumer IP traffic in 2012. Mobile broadband handsets, like iPhones and BlackBerrys and laptop air cards are expected to drive over 80% of all global mobile traffic by 2013.

Local governments and those abroad are making investments to support broadband growth. Congress allocated $7.2 billion of the economic stimulus package to increase broadband penetration and coverage and the Australian government announced a new plan to spend roughly $31 billion to build a new fiber optic communications network.

To capitalize on the long-term growth opportunity in our markets, we will continue to focus on our priorities which I introduced on our last call. These priorities will enable us to further differentiate ourselves, increase our leadership position in the markets we serve and improve our financial results as economic conditions improve.

Let me take a few minutes to discuss a few milestones achieved this quarter as part of these priorities. First, simplifying and scaling the business model.

A key component to this initiative is moving more of our manufacturing cost structure from a fixed to a variable model. Early in the fiscal Q4, we transferred our Shenzhen Optical Communications final assembly and test manufacturing facility to San Mina.

By transitioning the facility to a contract manufacturer, we're able to maintain the skilled workforce and expertise in manufacturing our products, lower our fixed cost structure and leverage San Mina's strengths and operational expertise in raw material sourcing, all without requalifying our products.

Also in April we decided to transfer our chip manufacturing capability, including the manufacture of VCSELs from Louisville, Colorado to our Rose Orchard facility in California. We are consolidating this activity under one roof instead of maintaining two gallium arsenide fabs. We expect the fab closure to be completed before the end of the first fiscal quarter of 2010.

The Communication Test and Measurement segment signed an agreement with contract manufacturer, Benchmark, in order to enable the largest JDSU business to move primarily to a variable manufacturing cost model and improve overall scalability. Benchmark has assumed our manufacturing activity in Indianapolis and will complete the transfer of production activities to their facilities by August of 2009.

At the same time, Benchmark is also transitioning various products from our Germantown, Maryland facility to their facilities. This transition is expected to be completed by May 2010.

Finally, our Lasers group is on track to complete the consolidation of the production of solid state and gas laser products to Fabrinet. These activities in total are expected to reduce our manufacturing overhead cost by more than $35 million per year. We are pleased with the progress we have made to date and we will continue to look for opportunities to lower costs and improve efficiencies.

Second is our continued focus on innovation. We see a unique opportunity for JDSU to further strengthen its leadership position through innovation during these uncertain economic times.

We believe our strong and improving balance sheet uniquely gives us the working capital needed to continue to invest in innovation. This is a clear competitive advantage.

To maximize our R&D investments, we are utilizing resources in low-cost environments. For example, we are outsourcing R&D in Eastern Europe and India and expanding our internal efforts in China.

Additionally we are improving our product development processes to enable faster delivery of products to the marketplace. Highlights of recent innovation and success with customers include the following.

Our Optical Communications group launched the industry's first monolithically integrated and tunable optical transceiver or tunable XFP. The product is being very well received by our customers who have been sampling the product since December of 2008. We expect to be shipping the product this summer and will ramp up volume thereafter.

JDSU test solutions are playing a major role in the US telecom industry's highest profile IPTV service deployment initiatives. A Tier 1 North American operator selected the T-BERD 6000, compact multi-service field test instrument, to support metro network expansion and the efficient reliable deployment of video and other broadband services.

We expect the T-BERD 6000 to be widely deployed in the carrier's central offices. For this customer, JDSU's new fiber inspection video microscope is shipping with the 6000 as an accessory to further improve field technician productivity, another competitive differentiation we achieved through last year's Westover acquisition.

It is critical that today's field technicians have inspection tools to detect contaminated fiber, the number one cause of network impairment. Our custom optics coding group within AOT has developed new lower cost 3-D digital cinema glasses for a major entertainment company in response to the stream of 3-D films planned for release during the year.

The third priority is increasing our global market presence. We're placing more emphasis on expanding our market penetration outside of our traditionally strong North American and Western European markets.

We believe that most of our infrastructure with respect to building an international presence is already in place and will not require any significant incremental investments. As you may recall, over the last six to 12 months, we rebuilt our sales leadership team in Asia-Pacific and Latin America and we streamlined the field sales team which has increased their productivity at a lower cost to the Company.

We are seeing success in China driven by 3G and in Latin America through a cable deployment. Our Optical Communications group has gained a leading position in China, including customers such as Huawei and Acelink for specific products.

Many companies in China have selected JDSU as their primary supplier of certain optical components due to our technological innovation, quality and overall operational excellence highlighted by the core partner award recently granted by Huawei to JDSU for the second year in a row.

And finally, maximizing the utilization of our assets. We are focusing on the utilization of our assets in order to maximize shareholder value. In Q3 we were over $15 million free cash flow positive.

Benefits from the transition to CMs are already showing up in our results as we decreased inventory levels by over $40 million and we expect further inventory reductions as more products are transitioned. Our priorities for cash remain generating more cash, maintaining a solid cash position, completing and advancing our lean initiatives and making profitable acquisitions.

Now let's move on to our individual business segments for fiscal Q3. First, the Communications Test and Measurement segment.

Revenues saw a sharp decline due to the softness in demand by network operators and equipment manufacturers as a result of global economic downturn and a delay in the release of 2009 capital budgets. January and February spending was substantially down from historical levels but we have seen increased momentum in bookings since then.

We remain positive about the fundamental trends driving the test and measurement industry as I discussed earlier and are confident of our long-term market position. One example of a market driver that represents a great opportunity for JDSU is a growth of ethernet for transporting services.

Infonetics Research estimates that shipments of 10G and 40G ethernet ports jumped 86% in 2008 with a compounded annual growth rate of 18% between 2008 and 2013. Today, JDSU is the market leader for field test of 10G networks. We have been able to gain share in the marketplace with advanced solutions such as the T-BERD/MTS-6000A, a test platform that has been widely adopted by service providers.

Although the majority of service provider port shipments remain 10G, 40G ports grew 196% in 2008 and are forecasted for healthy growth for the foreseeable future according to Infonetics. Through our technological leadership, JDSU is a dominant player in 40G test equipment.

Therefore we are well positioned to be the market leading supplier of field test gear as 40G migrates throughout the network. A number of our deals over $1 million that booked in the third quarter reflect how JDSU's technology and innovation leadership are being well received by our customers.

A Tier 1 US operator selected JDSU's PathTrak remote video monitoring system. PathTrak probes will be widely deployed in the central offices of this network operator, supporting remote troubleshooting, periodic quality checks and trouble isolation for its IPTV services.

In another PathTrak win during the quarter, Brazil's largest cable operator expanded its investment in JDSU's remote test system. One of Europe's largest network operators purchased nearly 300 HST-3000 field test instruments to support its wholesale operation.

The carrier's wholesale unit supports 400 service providers and selected the HST to support cost-effective, reliable ethernet expansion and broadband service delivery. We continue to build our presence in the US government aerospace and defense market.

JDSU's FIREBERD platform was selected by a prime contractor for a US military branch to support the deployment of satellite communications systems. And JDSU's ONT 40G platform was selected by one of the world's largest NEMs for system verification and test.

Finally in Q3, we announced the appointment of Dave Holly as President of the Test and Measurement segment. Dave most recently ran our field services business and held various other management roles during his 15 year tenure with the Company. Dave's deep industry knowledge, customer focus and strong management skills will be leveraged to continue the segment's focus towards growing its market leadership.

Moving on to our Communications and Commercial Optical Products segment. First our optical communications business. In fiscal Q3, revenue declined as expected as our customers experienced declining demand from their service provider customers and also reduced inventory levels.

At the same time, we executed against a number of cost reductions during the quarter including reducing our product portfolio of unprofitable products. As a result, we realized an improvement in gross margins despite the $20 million reduction in revenue from the prior quarter.

We expected demand in optical communications to remain soft in the near term as a slowdown of CapEx spending by service providers and owners of data networks cascades to network equipment manufacturers. We believe that our focused strategy of technology leadership, cost leadership and functional integration is aligned with our customers' requirements and enables us to differentiate ourselves in a very competitive market.

There are three customer trends that JDSU is addressing with this technology leadership and innovation. First, agile optical networks.

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 in reconfigurable solutions are ROADMs, tunable transponders and photonically integrated amplifiers.

Next, higher transmission speeds. Our customers are focused on 40G followed by 100G in the future. For transmission, we have a partnership with Mintera and internal component level developments.

In March of this year, Mintera announced the general availability of the jointly developed 40G 300-pin line-side transponder and that they have shipped the 1000th module. The jointly developed module has shipped to 11 customers to date.

For transport, our products are already designed to work in 40G and future 100G networks. Finally, functional integration.

Over the past year we introduced a number of platforms that possess high functional integration. The most recent is a tunable XFP.

We're very pleased with our accomplishments in creating a tunable solution and with all the functionality in an XFP form factor. The product was designed to provide a wide range of benefits to system vendors including increased density, lower cost and more flexible deployment options.

Our design uniquely enables us to serve two markets -- the 300-pin market and the fixed XFP. JDSU began sampling the tunable XFP transceiver with customers in 2008.

We are engaged in 12 designs with nine customers and have received very positive feedback. Many of our top customers are already designing the JDSU tunable XFP transceiver into their next-generation systems.

We added one new design win for our mini WSS platform in addition to two design wins each in Q1 and Q2. We expect to record revenue on this new platform before the end of the fiscal year.

Finally, we have received positive feedback and interest from customers for our photonic integrated amplifier or PIA platform. As noted last quarter, we shipped a super transport blade.

In relation to cost leadership, 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 Lasers business experienced a decline in revenue as customers worldwide have slowed their demand due to both excess inventory and preservation of cash.

We are seeing this mainly from our semiconductor equipment manufacturing customers and to a lesser extent in the biomedical market. This is an industrywide occurrence and we believe we are maintaining market share and are tracking with the slowdown of our customers that our customers are experiencing.

Our pipeline for new products over the fiscal year is robust as we continue to invest in R&D in this segment. Our product development will continue to be focused on advanced solid-state and fiber laser platforms.

These new products, when introduced, are expected to increase our served available market by more than threefold. And 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 custom collar solutions for helping manufacturers differentiate their products. Q3 revenue was down just under 4% quarter over quarter.

The diversity of this group of products in AOT contributes to some resiliency despite economic market conditions. Innovation and custom designs are the hallmark of the AOT segment. I would like to spend a few minutes discussing some new customer wins and the innovative products we are supplying to them.

In Q3 we were selected by a major Japanese cell phone provider for our ChromaFlair pigment technology, a multi-layer pigment that give paints, coatings, plastics, textiles and packaging the ability to change color when viewed from different angles. We have two notable wins for our SpectraFlair pigment technology. We were selected by a German automaker for a new 2011 car launch and we are providing the Jacksonville Jaguars of the NFL with our SpectraFlair bright silver pigment for the team's new helmets.

Finally, our next-generation optically variable pigment currency solution was launched on two international circulating notes and an Asian country expansion to a new domination of banknotes. As I conclude my formal remarks, I would like to thank our employees whose focus, commitment and tremendous efforts continued 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 who will take you through the details of our financial performance in Q3 and discuss our Q4 outlook.

Thank you Tom. Before I start, please note that all numbers are non-GAAP unless I state otherwise. Third-quarter revenue of $280.7 million, down 21.4% from the prior quarter and down 26.9% when compared to the third quarter of fiscal 2008.

As expected, the third-quarter revenue decline was mainly in the CCOP and Test and Measurement segments, as demand continued to soften. For fiscal Q3, Test and Measurement represented 46% of total revenue as compared to 49% in the prior quarter. The CCOP segment represented 36% of total revenue, unchanged compared to the prior quarter, and AOT represented 18% of total revenue compared to 15% in the prior quarter.

Third-quarter gross margin of 41.8% of revenue was down from the previous quarter's gross margin of 43.5% and down from the third quarter fiscal 2008 gross margin of 42.6%. The third-quarter gross margin reflects the impact from lower factory absorption, unfavorable product mix in the Test and Measurement segment, as well as transition costs associated with the move to contract manufacturers.

Operating expenses for the third fiscal quarter of $125.2 million were down nearly $12 million from the prior quarter's $137 million and down over $22 million from the prior year's $147.6 million. The lower operating expenses reflect reductions in discretionary spending, office consolidation, work week shutdowns and reductions in headcount.

Our operating loss for the quarter of $7.8 million or a negative 2.8% of revenue was down from the prior quarter's operating profit of $18.4 million or 5.2% of revenue. Our operating loss was due to lower revenue and gross margins.

We reported a net loss for the third quarter of $6.9 million or a loss of $0.03 per share. This compares to second quarter fiscal 2009 net income of $24.8 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 third-quarter non-GAAP results exclude among other items impairment of goodwill of $45 million, loss on long-lived assets of $7 million, amortization of acquired technology and intangibles of $19.7 million, a $13 million charge related to stock-based compensation and an $11 million charge for restructuring and a $20 million gain from the repurchase of our 1% convertible debt. The goodwill impairment charge resulted from the completion of our mid-year analysis for impairment of goodwill and log-lived assets.

As a reminder, last quarter we noted that due to 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, we commenced this analysis in fiscal Q2 and recorded an estimated impairment charge. Including the noted items, the third-quarter fiscal 2009 GAAP net loss was $85.2 million or a loss of $0.40 per share which compares to a prior year third quarter GAAP net loss of $6.2 million or a loss of $0.09 per share.

Now looking at revenue by region. Americas revenue of $117.1 million, 42% of total revenue, was down $48.6 million from the prior quarter driven by the revenue decline in our Test and Measurement segment as North American service providers delayed the release of their CapEx budgets and reduced revenue in our CCOP segment as North American network equipment manufacturers continued to reduce their inventory levels and therefore their demand.

EMEA revenue of $95.1 million, 34% of total revenue, down approximately 13% from fiscal Q2. The decline is primarily driven by the CCOP segment due to a slowdown in demand for network equipment manufacturers.

Asia revenue was $68.4 million, 24% of total revenue, down $15 million from the prior quarter. The decline was also mainly due to reduced demand from service providers and network equipment manufacturers.

Moving to the segments. In the Test and Measurement segment, third quarter revenue of $129.2 million was down 26.7% from the previous quarter's $176.2 million and down 23.7% from the previous year's $169.3 million.

Looking at the product portfolio, we saw the decline in revenue primarily in our field services products and to a lesser extent, in lab and production and service assurance. Book to bill for the quarter was less than one.

Fiscal Q3 gross margins for Test and Measurement of 54.2% was down compared to the prior quarter and below our targeted range of 57% to 61%, reflecting an unfavorable product mix, lower factory absorption and incremental costs associated with the transfer to our contract manufacturer. As a result of the lower revenue and gross margin, the Test and Measurement operating profit of $9.2 million or 7.1% of revenue decreased when compared to the operating profit of $36.7 million or 20.8% of revenue in the prior quarter.

Now moving on to the Test and Measurement business model and the initiatives within the segment to achieve this model. We began implementing lean initiative programs one year ago with a focus on reducing structural complexity and therefore improving productivity.

We expect to complete the current set of initiatives over the next six months as follows. First, consolidating R&D sites from 19 down to 12. To date 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 product lines to contract manufacturers which will reduce our manufacturing overhead. Finally, we will continue to focus on operating expense reductions through improved operating leverage, discretionary spend reductions, fewer development sites and headcount reductions.

We maintain that these initiatives provide the structure to support sustainable operating margins between 20% and 23% at a quarterly revenue level of $175 million or greater. Now moving on to our CCOP segment.

The breakout of the key metrics for Optical Communications and Lasers is as follows. Optical Communications revenue in fiscal Q3 was $89 million, down 18.7% when compared to the prior quarter's revenue of $109.5 million and down 34.5% when compared to the prior year's $136.1 million.

The revenue decline reflects network equipment operators lowering their inventory levels due to the lower demand they are seeing from service providers. Revenue also included a $3.4 million recovery for the Nortel bankruptcy.

Gross margin for the quarter was 20.7% up from the prior quarter's gross margin. Gross margin was favorably impacted by the Nortel revenue recovery.

Book to bill was less than one for the quarter. ASP decline was approximately 3% at the midpoint of our historical quarterly range of 2% to 4%.

Looking at the product lines, as anticipated, demand for ROADMs declined in Q3. ROADM product revenues continue to represent approximately 30% of our optical communications total revenue.

To date, we have shipped nearly 35,000 units and we believe we are maintaining our number one market share for ROADMs. The decline in ROADM demand was driven by our network equipment manufacturers reducing their inventory levels and having lower demand from the service providers.

Moving to the business model. We continued to improve the Optical Communications gross margin structure. Our near-term gross margin goal is for a sustainable margin in the 25% to 30% range and longer-term gross margins in excess of 30%.

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. Already in fiscal Q4, we have made further progress against these initiatives with the transfer of our Shenzhen Optical Communications facility to San Mina and our plan to transfer our chip manufacturing capability, including our VCSELs, from Louisville, Colorado to our San Jose facility. The Colorado fab is scheduled to close before the end of September.

Once completed, we will have consolidated our Optical Communications manufacturing facilities into three fabs, a lithium niobate fab in Bloomfield, Connecticut; a silicon oxide fab in San Jose and a gallium arsenide indium phosphide fab in San Jose. In our Lasers business, second quarter revenue, $11.5 million, declined 37.5% from the prior quarter.

The decline in revenue is due to declining demand from our semiconductor equipment manufacturing and biomedical customers. Operating loss for CCOP was $6.4 million. The improvements realized through manufacturing reductions and operating expense reductions were partially offset by the decline in revenue and lower factory absorption.

Now moving on to the CCOP business model. Moving forward, we believe that the CCOP cost-saving initiatives provide a structure that supports operating margins of 10% to 15% at revenue levels of $150 million or greater.

For the Advanced Optical Technologies or AOT segment, fiscal Q3 revenue of $51 million, down just under 4% compared to the prior quarter's revenue. Revenue in the currency market was strong. 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 country's GDP.

Transaction card revenue remains stable. We expect to see this business trend upwards once credit is freed up. AOT book to bill was greater than one for the quarter.

Fiscal Q3 gross margins for our AOT business were 52.4%, up compared to fiscal Q2's gross margin of 51.3% and up compared to a year ago period's gross margin of 50.2%. The improved gross margin was due to a favorable product mix and our lean initiative efforts. This is the sixth consecutive quarter in which our gross margins exceeded 50%.

AOT operating profit for the quarter was $19.3 million or 37.9% of revenue, up from the prior quarter's 36.7% of revenue. The improvement in operating margin is due primarily to improved gross margins.

Our targeted sustainable operating profit range for this segment is 34% to 37%. Moving to the balance sheet.

For fiscal Q3, the Company was free cash flow positive $15.3 million. Total cash balance was $673.5 million.

Net cash for the quarter increased by $34.5 million as we reduced our total inventory by $40.4 million, reduced our days sales outstanding by three days and reduced our outstanding debt balance by $50 million. Headcount as of April 25, 2009 was 4244, down from 6714 at the end of the second quarter. The reductions in headcount include 2272 for manufacturing and 198 from operating departments.

Moving on to our operating model. Our sustainable cost structure is such that we can realize 10% operating margins when revenues are $400 million and gross margins are 46%. We continue to focus on executing against our initiatives to achieve our operating model.

Taken as a whole, the initiatives we have identified since the beginning of the fiscal year are designed to increase our ability to scale our manufacturing while lowering the cost structure associated with manufacturing overhead by more than $35 million per year and lowering our operating expenses by more than $120 million per year. These savings are compared against our spending levels in the fourth quarter fiscal 2008.

In our fiscal third quarter, we successfully lowered both our manufacturing costs and our operating expenses. Our operating income and free cash flow breakeven point absent one-time transition costs has now been reduced to $275 million to $285 million of revenue per quarter.

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 the unique opportunity to increase our leadership position in the markets we serve. Now for our Q4 guidance.

First some points to consider as you think about our financial performance over the coming quarters. As noted, there is economic uncertainty in the markets we serve.

Book to bill was less than one for the third quarter in a row and in all segments except for AOT. Bookings for the months of March and April have trended up across all segments when compared to the first two months of the calendar year.

At the same time, visibility remains limited. We also expect a further decline in our operating expenses in Q4 relative to Q3. Finally, we expect our quarterly tax provision to range between $1 million and $3 million.

Taking into consideration the factors above and based on our current visibility, we expect fourth-quarter revenue to be between $265 million and $285 million and non-GAAP operating margins to be 1% to negative 3%. Thank you operator. We will now take questions.

(Operator Instructions) John Harmon, Needham & Company.

First of all, I would like to just say thank you for giving us the margins and your targets and business models. It makes things a lot easier. And on to my questions. If you looked at your book to bill ratios for the two divisions that are less than one, which one is the smallest? How would you rank them?

How would we rank the delta of less than one?

In other words, which book to bill ratio is lower, Optical Communications or Test and Measurement for the June quarter?

You know, they're both relatively close to each other, just slightly under, John.

Okay, thank you. And in the transfer of your Shenzhen factory to San Mina, you probably have to pay them some kind of transition fee in the meantime. You talked about the total $35 million annual savings for everything you are doing. How much are you going to have to pay them in the short term or how does that agreement work?

John, with the agreement we negotiate a certain rate that we will pay them for product. Since it's already in Shenzhen and really it's them taking over the labor, what I would say the typical transition costs of let's say moving from the US to some other part of the world isn't there.

So it's actually pretty straightforward as far as that goes. There wasn't any incremental charges that we had to pay them. We will keep some people there to help with the transition, so that is a small incremental cost that we will incur temporarily as we bring people up to speed and we have some of our own employees there for that period.

Just to follow up, if I may then. You talked about some transition costs in moving to CMs that hurt your margins in the quarter. How big would those have been?

Those are less than 1% of the total revenue and primarily we had Benchmark come in and take over our factory in Indiana. So they are going through the transition of learning the product and now moving the product in Indiana from there to their facilities.

Kim Watkins, JPMorgan.

I wanted to ask a little bit about I guess confining to the comments about bookings improving over the last two months combined with some earlier comments about customers both in -- what sticks out in my mind is the Test and Measurement and the Optical Communications. Can those be tied together? I guess and the real question I'm trying to get at is have you seen an improvement related to the fact that inventories are kind of reaching bottom at this point or where you think we are in that process?

We definitely have seen improvement in the last two months of order intake rate across both Test and Measurement and Optical Comms business. So I don't know that that in itself is a trend at this point. We are still cautious but it has definitely improved significantly in these last two months.

I guess in the mix in your revenue guidance which is down at the midpoint sequentially again, are you expecting weakness in both of these businesses or do you expect any seasonality in the TNN given it's the fiscal year-end for the Company?

For the forecast that we have shown for the fiscal Q4, we see Test and Measurement rebounding a little bit better than the Optical Comms business at this time.

Mark Sue, RBC Capital Markets.

This is [Jahanara] for Mark Sue. Can you help us understand the moving parts in your revenue guidance? Clearly taking the midpoint, it seems like the rate of sequential decline is beginning to moderate. Looking further out, can we start seeing a sequential bounce in revenues?

We feel the market is still a bit hazy as we look out farther over the next quarters beyond the June quarter. So we are not providing any specific guidance on those quarters at this time.

Also, if you look at the revenue we just did, understanding that $3.4 million of it relates to the Nortel bankruptcy, so that we don't expect to get a benefit from any recovery there in the quarter ended June. And as Tom mentioned, the Test and Measurement business is usually more stable relative to the Optical Comms in the June quarter because the budgets have rolled out and so we feel that the softness that we are seeing in the June quarter is primarily around the Optical Communications business.

Looking out into the third quarter, can we expect any more in terms of revenue from the pre-petition claim?

Right now we're going through the process on the Nortel situation. So as we get better visibility there, we will share that with you. But right now we're not expecting anything for the June quarter.

Todd Koffman, Raymond James.

Over the last nine months or so, you have had in the Optical Communications segment some of the wounded players combined -- I guess all the wounded -- well anyway. Do you think that the combination of the now players -- smaller number of players will be helpful to the market or everyone is still struggling losing money with -- it's a comfortable cash position, so the dynamics of that business might not change?

I think first of all, consolidation is a good thing because it's a very fragmented market with lots of players. So consolidation is a positive for the market.

I think it's still yet to be seen how it plays out. I think some of the players in the market in that particular business don't have healthy cash positions. So I think it's also -- depends on how long we remain in these strong headwinds from the macroeconomy to see how they fare in the marketplace.

Just a quick follow-up. JDSU over many years has been reorganizing, restructuring lean initiatives, global realignment.

Now you're going through an outsourcing program. When might you think -- but you have a fresh start here with yourself. When -- how long might it be until you think the organization can settle into some steady-state organization?

I think we are settling in. The lean initiatives to me are really cultural. They're ongoing. So it's a culture you build inside and I think we have very good foundation for that and good traction.

I think the other area is innovation where we're focusing very heavily and I think our employees are very engaged in that. So I think if you look at the four focus areas that we identified, we have strength and we have a strong foundation now that we can move forward off of. We will always adjust to extreme market conditions like we have right now, but I think on an ongoing basis you'll have the right vision and culture set and we are moving forward.

Paul Bonenfant, Morgan Keegan.

The first question is more of a housekeeping one. You talked about the $3.4 million benefit from the Nortel revenue that came in this quarter relative to the $10 million deferred last quarter. I'm assuming that you had booked the COGS last quarter so excluding that revenue, where would have margins have been in the quarter for Optical Communications or am I not thinking about this correctly?

You've got it pretty close. Almost all that revenue had -- was 100% margin, not quite all of it but the majority of it. So the margins would have still been up quarter to quarter. They would have been over 18%.

Okay but that $3.4 million flowed down all the way through to EBITDA?

The majority of it did.

Next question I guess along the lines of housekeeping. You talked about your cost savings in the model being up to $35 million in the manufacturing line, $120 million on the OpEx line. I just want to make sure I understand. This is up relative to your last forecast for $28 million and $110 million. Is that correct for those two items effectively?

That's correct. That's correct.

This is relative to the fourth quarter of fiscal year '08 and what quarter do you expect to realize these --

We will be at that run rate in our fiscal fourth quarter.

And last question. It would seem that if your revenues were to increase sequentially, do you have a sense for how much of that is as a result of improving end market demand versus an inventory or channel restocking?

That will be contingent on which products are seeing the demand increase etc. So as those events happen and we report our next quarter results, we will certainly give comment of where we saw the variations and we will help with understanding what was inventory restocking and so forth. So as we get that visibility, we will share that with you on our next call.

Jeff Evenson, Stanford Bernstein.

I was wondering if you could go over some of the details of your significant inventory decline and specifically how much of that is from transferring inventory from your factories over to the contract manufacturers.

Sure, roughly $13 million to $14 million of it is a reduction of total inventories for us and the remainder was primarily a transfer of inventories to the contract manufacturers.

In your contracts with the manufacturers, what happens if that inventory becomes obsolete in terms of financials for you guys?

Typically they even have a shorter window where we look at E&O as something that doesn't have demand in a 12-month period. They usually look at something where they are holding it, and it was supposed to ship within a 60 or 90 day period. If it hasn't gone, then they have the right to what I'll call put back that inventory on us. So it really will drive us to have tight coordination with our CMs on the MRP or the demand that we provide them to make sure that we are moving that inventory with them in an expeditious fashion.

(Operator Instructions) Ajit Pai, Thomas Weisel Partners.

A couple of quick questions. The first one is just looking at your business model, you've talked about on a $400 million quarterly revenue run rate, you'll have a gross margin of 46% and an operating margin of 10%.

But just looking back at the December quarter of 2007 at under $400 million in that quarter, you had a 46% plus gross margin and you had an 11.4% operating margin. Since then you have restructured quite materially. You've cut costs. You've done a lot of work, hard work. Why would your business model not be more optimistic than what you are projecting right now at $400 million?

So in that $400 million, it has a lot to do with what we call about the sustainable model that we're putting in place. So if you look back in that December period, you had quite a leap in the revenues from the Comm Test business with no change in our R&D investment.

So we're looking at it as a more sustainable model, not to say that at periods of time if revenue hit certain levels could it be better, that could happen. But we're trying to talk about the model that we're driving the Company towards so that we have the R&D investment we want to have, we have the compensation models that we want have for the employees. And we have got to assume that there will be a more balanced revenue versus the -- in that quarter, I think 50% of the revenue was from Comm Test.

Okay but from an overall profitability perspective, you'd expect every business that you had other than Comm Test to be more profitable relative to the levels of profitability in that particular quarter?

Sure.

Just looking at the Comm Test business, you did provide some commentary on overall weakness on that side. Could you give us some color as to how much of that was cable and how much of that was telecom, the weakness?

You know, we really haven't been splitting it out in the past. But I would say that the cable market over the last two quarters has been pretty depressed compared to the telecom market.

We saw some recovery in the December quarter as we noted in the call in Latin America and Europe. But generally speaking, it's been in a more depressed mode.

Got it. Then just shifting over to the M&A environment, one of the uses of cash that you've talked about in the past is using it for acquisitions. So your balance sheet has been shoring up and you're cash flow positive.

So could you give us like sort of some color on the kind of acquisition that you're looking at and whether you're closer to making additional acquisitions or further away than you were a couple of quarters ago? And also for next quarter and the next few quarters, do you expect to stay cash flow positive?

First of all, I will talk about the M&A part and I will turn it over to Dave on the cash flow. But we are looking strategically across all of our business segments for opportunities. I think it's fair to say that in this environment, there are more opportunities today than there were six, 12 months ago and we are evaluating that.

But we are making sure that in that vein that we are looking at it strategically and not just grabbing on to opportunities because they are out there. But it needs to fit into our overall strategy and to be profitable overall for the Company.

From a free cash flow standpoint, we have now lowered the level to the 275 to 285 level. Our goal is to make sure we can be breakeven or generate cash every quarter. So as we go through every quarter, if we make further adjustments to our cost structure, we will comment about how we have moved that free cash flow breakeven point.

But for the next quarter, you do expect to be free cash flow positive?

For the next quarter, I expect the free cash flow breakeven to be 275 to 285 and that the revenue range to be 265 to 285.

Ladies and gentlemen, this concludes the question-and-answer session of today's conference. I would now like to turn the call over to Mr. Tom Waechter for closing remarks.

Thank you operator. As our call concludes, I would like to follow up with a few summarizing points.

There is no doubt we continue to face challenges among the current economic backdrop. However, at the same time, we are successfully improving our financial model with our lean initiatives and cost-cutting programs.

We were able to produce positive free cash flow and further strengthen our balance sheet during this challenging quarter. It is our goal to continue this trend.

Clear evidence of the leverage in our operating model is expected to be more apparent once the topline improves, which brings me to my last point. Our long-term market opportunities remain strong.

We are participating in markets that have healthy growth potential. Our continued focus on innovation will enable us to grow our market position as the economy improves.

Thank you again for joining us today. We appreciate you taking the time and your interest in JDSU. Have a good evening.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.