Viavi Solutions Inc (VIAV) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the JDSU fiscal 2010 quarter-one earnings conference call. My name is Jennifer and I will be your operator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Michelle Levine, Director of Investor Relations.

Thank you, operator, and welcome to JDSU's fiscal 2010 first-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-K filed August 24, 2009.

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, which is available on our website at www.JDSU.com.

Also, please note that during the quarter JDSU sold certain non-core assets of the Communications Test and Measurement segment. JDSU has retrospectively adjusted its consolidated statements of operations and the Communications Test and Measurement segment financials. These adjusted results are reflected as discontinued operations for the periods reported. You can find our adjusted historical financial statements on our Investor Relations home page under the link marked, Historical Financials.

Finally, and as a reminder, this call is being recorded and will be available for replay on 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 fiscal first-quarter results. JDSU's revenue and operating income were at the high end of the guidance we provided, with revenues of $298.6 million and operating profit of 3.4%, reflecting an increase in customer demand and consequently improved profitability.

The leverage in our improved financial model will become increasingly evident as the top line continues to grow. Revenue grew 9% compared to last quarter, as we saw growth in each of our business segments in all three of our geographic regions. Our book to bill for the quarter was greater than 1. Book to bill was greater than 1 for each business segment.

JDSU's first-quarter gross margins of 44% improved by almost 2 percentage points compared to last quarter. Each segment's gross margins improved from last quarter due to product mix and the benefits of our lean initiatives.

Operating expenses of $121 million increased $2.3 million from last quarter, as we maintained tight controls on our spending. The increase in operating expenses as a result of our Storage Network Tools, or SNT acquisition, were partially offset by the reclassification of the expenses associated with the sale of non-core Test and Measurement assets and additional expense reductions. Fiscal Q1 expenses were down nearly $21 million compared to the fiscal quarter -- first fiscal quarter of last year.

This quarter we continued to strengthen our balance sheet. We generated over $11 million of free cash flow, and we decreased our inventory by an additional $11 million since last quarter.

Now let's move on to our individual business segments. First, the Communications Test and Measurement segment. Fiscal Q1 revenues grew 8% compared to last quarter, including our newly acquired SNT business. This was the second consecutive quarter of growth as we continue to see signs of recovery. Our North America business was particularly strong, especially for Tier 1 customers and for wireless backhaul applications. I will talk more about our success and opportunities in wireless backhaul later in the call.

Book to bill was greater than 1, with bookings momentum across all geographies. We are starting to see an improvement in demand in Europe as bookings were particularly strong in September. We have maintained market leadership in our served addressable markets with an estimated 32% marketshare in fiscal Q1.

Our Test and Measurement business maintains the number-one market position in optical transport and storage network tests for the lab and production market. We also hold the number one field test position in Ethernet, fiber field, DSL and cable networking markets. Demand for our fiber-optic test products has grown for the third quarter in a row. We believe we continue to gain share in fiber test, building on our leadership position.

We continued to invest in, develop and launch new market-based innovative products. Last quarter we announced a full set of test solutions that are critical for the development, production and deployment of new 100 G networks. We extended our customer wins from 2 to 6 this quarter, as these products gained momentum.

Leadership in the lab for 100 G network development positions JDSU well for the deployment of these networks, as we have demonstrated with 40 G. JDSU continues to lead in 40 G testing in lab and field applications globally. In EMEA in particular we had several 40 G wins this quarter. In addition, our new 40 G transport module for the T-BERD 8000 further extends our technical leadership as the only field service test tool that supports 40 G OTN multiplexing for carrier traffic interconnects.

Our leadership in the 40 G test market will help position JDSU as the incumbent for 100 G tests as our customers begin to develop these solutions.

JDSU continues to support our customers as market trends emerge. The rapid proliferation of mobile data traffic continues to stress wireless backhaul networks, creating end-user quality issues for service providers in an intensely competitive environment. Backhaul network maintenance is also one of the most significant costs for network operators, a particular challenge as average revenue per subscriber is on the decline, according to industry reports.

Ethernet deployment in the backhaul network is a more cost effective and reliable way to support the rise of mobile services traffic. JDSU has deep expertise in Ethernet test, and our customers are increasingly employing it as they transition from the legacy protocols to Ethernet.

Reduced operating expenses or higher quality service is a value we deliver to our customers. And we expect the transition to Ethernet to continue to drive revenue opportunities for JDSU. For example, this quarter JDSU's NetComplete Ethernet system was selected by a major North American mobile carrier to support its transition from TDM to Ethernet backhaul, covering more than 10,000 cell sites.

JDSU is also well-positioned to support our cable customers with the DOCSIS 3.0 technology rollout with hardware and software upgrades to support our market leading installed base of DSAM and PathTrak customers, as well as new stand-alone product.

Our long-term markets remain strong. Subscriber growth for broadband services, mobile or fixed, is expected to continue unabated on a worldwide basis. According to third-party research, it has been estimated that network traffic will grow 79% in 2009, up from 61% growth in 2008.

Worldwide Infonetics expects over 600 million fixed broadband subscribers by 2013. Much of this growth is coming from emerging markets. JDSU is focused on penetrating global markets with infrastructure already in place. In this quarter a number of deals give evidence of the traction we are making. We penetrated a major Chinese customer with our optical network management system for monitoring a fiber-optic network in Angola. We booked a number of deals of $500,000 or greater in Vietnam, Ecuador and Brazil.

Moving on to our Communications and Commercial Optical Products segment. First, our Optical Communications business. In fiscal Q1 revenue grew 9% quarter-over-quarter. For the first time in the last five quarters book to bill was greater than 1. Eight out of eleven of our product lines grew sequentially.

ROADM revenue continued to decline, as one customer continued to burn off excess inventory. We believe ROADM revenue has bottomed this quarter as orders have grown significantly by over 30% compared to last quarter. At the same time we are currently beta sampling our next generation 50 gigahertz ROADMs at eight customers. Production volumes are expected in fiscal Q3, at which time we expect to increase our ROADM marketshare.

The breakdown between transport and transmission revenue was 64% and 36%, respectively. We saw particular strength in transmission this quarter, including tunables, modulators and pluggables.

We believe that our focused strategy of technology leadership, cost leadership and functional integration will enable us to differentiate ourselves in a very competitive market and enable topline growth.

As you know, we have introduced a number of platforms that possess high functional integration, which have been very well received by our customers. The tunable XFP, the first tunable made available in an XFP form factor, is a new and disruptive technology to the fixed wavelength XFP and 300 pin 10 G tunable transponder markets.

To date we have engaged with 20 customers, up from 12 customers last quarter. In September the product was released into production, and we expect production quantities to ramp this month.

In September we also announced advancement of our tunables strategy. JDSU has created a next-generation ITLA that we plan to incorporate into our 300 pin transponders, and also offer as a standalone product to the open market.

As consumer use of online video, voice and data applications puts additional demand on network capacity, NEMs and service providers are under pressure to add optical solutions that can manage increased bandwidth in a flexible and cost effective way.

Tunable optical transceivers and transponders act as a key interface between the electrical and optical domains as data enters and exits WDM networks. Our Super Transport Blade's unique architecture provides a substantial footprint savings to our customers, and we are generating significant traction with our NEM customers. We have already received significant production orders to date from one customer. We are currently working with the majority of our remaining customers who are excited about the Super Transport Blade, as it allows them the opportunity to take full advantage of the smaller footprint and open up valuable real estate in their chassis.

Current revenue from new products less than two years old is approximately 30%, up from last quarter. Given the new products I just mentioned and our product roadmap, we expect to continue to increase this percentage over time.

The development of innovative, functionally integrated products, like the tunable XFP and the Super Transport Blade, are achievable in part due to our vertical integration capabilities. We have outsourced our final test and assembly, but we have kept our core intellectual property, and our ability to innovate at the photonic level, utilizing our three fabs located in California and Connecticut.

Sumitomo Electric has awarded JDSU its Global Contribution Award. JDSU will serve as a prime supplier of VCSEL, TOSA and ROSA products to Sumitomo Electric that are used for datacom, LAN switching and storage applications. The key reason we won the award was because of our ability to leverage our VCSEL technology and vertically integrated manufacturing model to create cost-effective TOSA and ROSA products.

Another competitive advantage of vertical integration is the control of the supply chain. We are better able to react rapidly to declining or increasing demand, which in turn provides for better factory utilization.

Finally, just this week we were presented with a Core Partner Award from Huawei, which recognizes JDSU for our close collaboration and many contributions to Huawei in 2009, including technology leadership and quality. This is the third year in a row that JDSU has received the award.

Our lasers business experienced over 32% sequential growth. Recovery is taking place mostly in North America and Japan as our customers are seeing an increase in demand. We saw strength in our solid-state lasers, mainly in the semiconductor and micro machining industries.

This quarter we announced that we have shipped more than 100 Q series UV solid-state lasers for the scribing of wafers used in the manufacture of light emitting diodes, or LEDs. LEDs produced with a Q series UV laser are used in products such as backlit LCD televisions, automotive lighting, as a more energy-efficient alternative to conventional lightbulbs.

According to third-party research, iSuppli, shipments of backlit LCD TVs that use LEDs are expected to rise to 98.1 million by 2013, accounting for about 43% of the global LCD TV market.

Another milestone this quarter was a shipment of more than 1,000 Xcyte ultraviolet solid-state lasers to the biotech industry. The Xcyte cell sorting lasers are optimized for use by bioanalytical companies in molecular biology, pathology, immunology, plant and marine biology applications. Our pipeline for new laser products is robust as we continue to invest in R&D.

Our product development will continue to be focused on advanced solid-state and fiber laser platforms. These new products as they are being introduced are expected to increase our served available market by more than threefold by the end of the fiscal year.

Finally, on to our Advanced Optical Technologies 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 color solutions for helping manufacturers differentiate their products.

Q1 revenue grew over 6% compared to the previous quarter, as a result of strength in our currency business, sales of 3-D glasses and various other products in our custom optics group. Book to bill was greater than 1 for the fourth quarter in a row. Our transaction card business continues to be weak, as new credit card issuances remain depressed due to current economic conditions.

Positive trends for this segment include continued expansion of 3-D cinema, customers seeking more complex integrated design features utilizing multiple JDSU technologies to combat counterfeiting, currency protection technology combining multiple overt features, and growth in aerospace. AOT once again has maintained a healthy operating margins above 37%. OpEx remained relatively flat and gross margins improved sequentially, mainly due to mix.

On to our corporate priorities. We continue to capitalize on the positive long-term growth opportunity in our markets. In fiscal 2010 JDSU will focus on four priorities. These priorities will enable us to further differentiate ourselves, increase our leadership position in markets we serve, and further improve our financial model.

First is our focus on profitable market-based innovation. In 2009 we continued to invest in R&D during the economic downturn, which we believe gives JDSU an advantage now that demand is resuming. We will continue to collaborate with our customers and invest in profitable market-based innovation to drive marketshare gains and revenue growth and to take full advantage of our financial model. It is our goal to increase the percentage of revenue from products that are less than two years old to greater than 50% over the next three years.

The second priority is increasing our global market presence. We are placing more emphasis on expanding our market penetration and receiving our fair share of business outside of our traditionally strong North American and Western European markets. Most of our infrastructure with respect to building an international presence is already in place and will not require significant incremental investment.

We continue to see this emphasis paying off. As I mentioned earlier, we penetrated a new Asian customer by placing more focus on this region. Our bookings in Asia have grown sequentially for the second quarter in a row.

Our third priority is lean. Much of the heavy lifting to reduce our costs and improve our financial model is complete, and we are seeing evidence of the model working as the topline improves. Lean is a part of the JDSU culture. And we will continue to strive to reduce costs across the business with an immediate focus on business process optimization.

Finally, maximizing utilization of our assets. We are focusing on the utilization of our assets in order to maximize shareholder value. Last quarter we announced the acquisition of our Storage Network Tools business. The integration of SNT is going very well. The business performed as planned with revenues of $7.5 million for the partial quarter, and it was accretive to our overall business in its first quarter.

Our priorities for cash in the fiscal 2010 remain generating more cash, maintaining a solid cash balance, completing our lean initiatives, and strategic, accretive acquisitions.

As I conclude my formal remarks, I would like to thank our employees, whose focused commitment and tremendous efforts continue 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 Q1 and will discuss our Q2 outlook.

Before I start, please note that all numbers are non-GAAP, unless I state otherwise.

First-quarter revenue of $298.6 million was up 9% from the previous quarter and down 20.9% when compared to the first quarter of fiscal 2009. Revenue increased sequentially in all of our business segments and in all three of our geographic regions.

For fiscal Q1 our Test and Measurement segment contributed 48% of total revenue, flat compared to the prior quarter. Our CCOP segment contributed 34% of total revenue as compared to 33% in the prior quarter. And our AOT segment revenue was 18% of total revenue, down from 19% in the prior quarter.

First-quarter gross margin of 44% was up from the previous quarter's gross margin of 42.2%, and up from the first-quarter fiscal 2009 gross margin of 43.2%. Gross margin improved for each of our business segments. This improvement was the result of favorable product mix, continued realization of the benefits from our lean initiatives, and our transition to a variable cost manufacturing model in the CommTest and CCOP segments.

Operating expenses for the fiscal first quarter of $121.2 million were up from the previous quarter's $118.9 million, and were lower by nearly $21 million from the prior year's first-quarter operating expenses of $142.1 million. The sequential increase resulted primarily from the acquisition of the System Network Tools business.

Due to our higher revenue and improved gross margin, our operating profit for the quarter was $10.2 million, which compares to an operating loss of $3.2 million in the previous quarter. Net income for the first quarter was $9 million or $0.04 per share, which compares to previous quarter's net loss of $1.6 million or a loss of $0.01 per share.

A detailed reconciliation of our non-GAAP results to our GAAP results is available in today's press release. Our first-quarter non-GAAP results exclude, among other items, $23.5 million of amortization of acquired technology, intangibles and imputed non-cash interest on convertible debt, an $11.1 million charge related to stock-based compensation, a $6 million charge for restructuring and nonrecurring expenses.

Including the noted items, the first-quarter fiscal 2009 GAAP net loss was $31.9 million or a loss of $0.15 per share, which compares to the previous quarter's GAAP net loss of $63.6 million or a loss of $0.29 per share, and to the prior year's first-quarter GAAP net loss of $21.3 million or a loss of $0.10 per share.

Now looking at revenue by region. America's revenue of $151.6 million was 51% of total revenue, up $12.5 million from the prior quarter. The increase was primarily driven by demand from North American service providers and network equipment manufacturers.

EMEA revenue of $80 million was 27% of total revenue. Revenue was up slightly from the previous quarter's level. CommTest and CCOP products saw a seasonal decline in revenue, which were offset by an increase in revenue from the AOT segment. At the same time, EMEA bookings for CommTest and CCOP products increased in the quarter as compared to the previous quarter.

Asia-Pac revenue was $66.9 million, up $11.2 million from the previous quarter, and represented 22% of total revenue. The increase in Asia-Pac revenue was driven by our CCOP segment, as revenue increased for both the laser and optical product lines.

Moving to the segments. As a reminder, the Test and Measurement segment benefited from the System Network Tools acquisition, which was completed in July. Also during the quarter we sold non-core assets from the Test and Measurement segment, and therefore reclassified these results for the current quarter and for the historical quarters as discontinued operations on the income statement.

In the Test and Measurement segment first-quarter revenue of $143.4 million was up 8.1% from the previous quarter's $132.6 million, and down 11.4% from the prior year's $161.8 million. The sequential increase in the revenue was primarily due to the acquisition of the Storage Network Tools business.

Field service equipment represented 60% of total Test and Measurement revenue, while lab and production and service assurance revenues were each over 10% of total Test and Measurement revenue. Revenue from the Americas and Asia increased, while we saw seasonal softness in EMEA.

Book to bill for the quarter was greater than 1. Fiscal Q1 gross margin for Test and Measurement of 56.8% was up compared to the previous quarter. The increase in the gross margin was primarily due to the SNT revenue. At the same time margins for the remainder of the portfolio were up slightly from the previous quarter.

The Test and Measurement operating profit of $18 million, or 12.6% of revenue, increased when compared to the operating profit of $12 million, or 9% of revenue, in the prior quarter due to higher revenue and improved gross margin.

In Test and Measurement we continue to make progress with our transition to contract manufacturing. We have completed the transition of our Indianapolis product line, and are now focused in our Germantown, Maryland product lines. This transition is expected to be completed by the end of fiscal 2010. Once we have completed this transition, over 70% of our CommTest product revenue will be manufactured by contract manufacturers.

We maintain that the above initiatives provide a structure to support gross margins in the 57% to 61% range, and 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 Q1 was $86 million, up 8.6% when compared to the previous quarter's revenue of $79.2 million, and down 38.8% when compared to the prior year's $140.6 million.

Gross margin for the quarter was 19.7%, up from the previous quarter's gross margin of 17%. The improvement in gross margin is primarily attributable to the consolidation of our Colorado and San Jose fabs, as well as favorable product mix led by our pluggables, tunables and amplifier product lines.

Book to bill was greater than 1 for the quarter. ASP decline was slightly above the high end of our historical quarterly range of 2% to 4%.

Looking at the product lines, eight out of eleven of our product lines grew sequentially. The growth was especially strong with our datacom and telecom transmission products, such as pluggable transceivers and tunables. ROADM revenue declined in the quarter, however, we expect sequential ROADM revenue growth in Q2 as bookings grew 30% in Q1 compared to the previous quarter.

With the completion of the consolidation of our optical fabs, our gross margin improvement initiatives are focused on improved factory utilization and executing against other lean initiatives. Our near-term Optical Communications gross margin goal is for sustainable margins in the 25% to 30% range. We believe we can operate in this range by the end of fiscal 2010.

In our lasers business first-quarter revenue of $15.1 million was up 32.4% when compared to the previous quarter. Gross margin for the quarter improved to 26.5%. Book to bill was also greater than 1.

On a total segment level the operating loss for CCOP was $1.5 million, which compares to an operating loss of $7.8 million in the prior quarter. The reduction in the operating loss is primarily due to improved gross margin. The gross margin improvements were due to product mix and the benefits from our manufacturing lean initiatives. We believe the CCOP operating model supports operating margin of 10% to 15% at revenue levels of $150 million or greater per quarter.

For the Advanced Optical Technologies, or AOT segment, fiscal Q1 revenue was $54.1 million, up 6.5% compared to the previous quarter, and up 1.1% compared to the prior year. Currency, 3-D and various custom optics products demonstrated solid sequential growth. Partially offsetting this growth was a decline in transaction card sales, as manufacturers rebalanced their inventory levels.

As we have noted before, we expect the revenue of this segment to have some level of surges and ebbs, which tend to correlate with a country's GDP. AOT book to bill was greater than 1 for the quarter. Fiscal Q1 gross margin for our AOT business was 53.6%, up slightly from the previous quarter. AOT operating profit for the quarter was $20.6 million, up from the previous quarter's $19.8 million.

The operating margin of 38.1% exceeded our targeted sustainable operating margin range of 34% to 37%. Given the operating margin of this segment, we will continue to grow our investments in these products, therefore we expect to incrementally increase our R&D and sales and marketing expenses in the current quarter.

Moving to the balance sheet. For fiscal Q1 2010 the Company was free cash flow positive, $11.2 million. Total cash balance was $673.1 million. The headcount as of October 24 was 3,982, which includes approximately 100 new employees from the Storage Network Tools acquisition.

Moving on to our operating model. We have been able to improve our operating model with the reduction of manufacturing overhead and operating expenses. Our sustainable cost structure is such that we can now realize 10% operating margins when quarterly revenues are between $375 million and $385 million and gross margins are 46%.

Now to our Q2 guidance. First, some points to consider as you think about our financial performance over the coming quarters. More than 50% of revenue is booked in the quarter it is shipped. Lead times from our material suppliers have increased and could impact revenues in the quarter. We expect that our December quarter revenues will benefit from North America carrier end of calendar year spending. Our guidance contemplates a $10 million to $25 million impact.

Total operating expenses are expected to increase as we increase our investment in the AOT segment, incur higher sales commissions due to higher revenues, and reinstate certain employee benefits, such as 401(k) match and our variable pay program. The operating expense increase for the second quarter is estimated to be between $4 million and $7 million.

We expect our quarterly tax provision to range between $2 million and $4 million. Taking into consideration the factors above, and based on our current visibility, we expect second-quarter revenues to be between $320 million and $345 million and non-GAAP operating margins to be between 5% and 8%.

Operator, we will now take questions.

(Operator Instructions). Mark Sue, JDSU.

Hi. I am still not an employee -- but RBC Capital Markets. Tom, just a high-level question on the return in demand and your view of sustainability of your sequential growth guidance. Even if I net out the $10 million to $25 million year-end flush you will still have healthy sequential growth. And it seems from your regional and segment commentary that the strength is broad-based.

Should we start thinking about seasonality going forward, or should we just think about $10 million to $25 million, net that out, and just continue to grow the business, because there might actually be some catch-up spend as well?

I think the latter part is that, you know, net out the year end spend, and then we suspect to see additional growth, because primarily the broadband demand is very strong -- things like video, etc. So we expect the demand to continue. Although again, we don't have tremendous visibility out into -- beyond the December quarter, but we do expect that at this point.

Another way to look at that is we just had a quarter with about $298 million of revenue, but we didn't have the SNT group for the full quarter. So that -- a full quarter's worth of the SNT revenue probably would have added somewhere between $1.5 million and $2 million. And then as you take -- if you took that budget flush incremental off then you would see that the range implies a little over 3% to a little over 6% sequential growth.

Okay, got it. Then, Dave, maybe for you, with the higher volumes and all the work that you're doing with your contact manufacturers, does the 46% gross margin seem very reasonable in terms of a near-term goal, particularly with better demand, better mix, better volumes, all those things?

It will depend on the mix of the revenues. We didn't give guidance on how that mix would come out exactly, except the majority of the $10 million to $25 million budget flush is typically in the Test and Measurement area. At the same time we will see some of that in Optical Comms, as NEMs get demand on them, they will be putting demand on us.

So we think the margin's a reasonable number to hit. It will depend on mix. And we will just keep executing against improving the margins for the Optic segment and for the Test and Measurement segment.

Okay, that's helpful. Thank you, gentlemen, and good luck.

Michael Genovese, Soleil Securities.

Thanks a lot and congratulations on the good quarter guys. Following up on Mark's question on seasonality, maybe we could talk more about seasonality in the March quarter -- so for your third quarter. Can you help us think about that? The Test and Measurement business is usually down in that quarter. But how would you think about that versus an economic recovery that could be happening early in the year?

We expect we could still see that seasonality in that down quarter in March. One of the things we saw last year in that quarter was things really starting to soften, and budgets for the network operators got pushed out pretty far into the beginning of the year. In some cases, beyond March.

So we expect that won't repeat itself in the March quarter, but it still could be seasonally down based on what we expect to see in the flush at the end of December and a strong December quarter.

Would you think -- is there any way to quantify what normal seasonality is? Last year it was a big 20% plus drop. But is there a way to quantify what you would think -- if you look (inaudible) historically what that drop could be? And also do you think you'll see seasonality in the optical components business as well, where March might be down.

This is Dave. What we have typically seen is in the Test and Measurement it could be a 10% to 15%, 20% even decline from December to March in the Test and Measurement. The optical business hasn't typically had that same impact in the -- from a December to March quarter effect.

In fact, if you look at our December '07 to March '08, thinking that's more of a normal range, the absolute revenue for the Company went down about $16 million. So that was about 4%.

But the Test and Measurement business went down almost $30 million from that period, while CCOP went up $8 million and AOT went up. So I think where we really see seasonality is in the Test and Measurement.

My last question is, over the next three quarters you're guiding for at least a 5 point improvement in the Optical Components Communication Components gross margin. Could you just give us any more detail on -- I guess, volume should go up, but how else will you -- could you just give us detail on how you're driving that gross margin improvement (multiple speakers)?

It comes in a couple of flavors. One, we just exited one of the facilities, so the full benefit of not having that extra San Jose facility won't be realized until the March quarter, quite frankly, because we just got out of it. So that will help.

Also, we are working with our suppliers to continually work on pricing and our costs. And also we are continuing looking at our engineering design structure and taking costs out of our product design.

I think to add to Dave's comments, also as we talked, we will be starting to move into volumes for our tunable XMP and Super Transport Blades in the December quarter that we are in, and then we expect those volumes to continue, so that mix will help us as well.

And we believe that ROADM revenues will start to recover. And that has a better gross margin than the current gross margins.

Ajit Pai, Thomas Weisel Partners.

A couple of quick questions. And the first is on the Optical Component side. Could you just give us some color? You talked about some capacity constraints from components. So how much will that constrain your revenue? How much can your revenues grow if those constraints weren't there? And would that suggest that in the March quarter, outside of the two factors you already mentioned about the ramp on ROADMs and your Super Transport Blade, whether some of those capacity constraints also would go away in March, which could lead to a pretty strong quarter in March relative to December?

The guidance contemplates that there will be some impact from constraints. Basically when I look at all the segments taken as a whole, we are somewhere in the middle single-digit millions of dollars that it could have impacted. It will depend obviously on the mix of the orders that come in.

Like I noted, more than 50% of our revenue is booked and shipped in the quarter. We are just looking at how our component suppliers are talking about lead times. But we have contemplated it in the guidance we gave. And just stepping back, I would say it is in the mid-single digit millions.

Got it. Then just looking at the -- you talked about the Sumitomo Electric being awarded one of their first (inaudible). On the datacom, LAN and storage side, what percentage of your optical component business is from these applications?

We broke down the mix between transport, which was 64% last quarter, and transmission, which was 36%. We put those datacom products into that transmission percentage in that 36%. As we mentioned, that percentage did grow last quarter from the previous quarter, and the datacom products definitely helped that.

Does this award mean anything meaningful in terms of future revenues? Is there a greater allocation you get?

Yes, we believe we are getting closer to the customer. And that, as we mentioned, collaborative innovation and working earlier on with our customer base we think that really helped. And it gets us much closer to their roadmap -- technology roadmap and where they're headed and better capability to support them.

Then the last question would be just looking at the M&A environment, you talked about one of the uses of cash is finding synergistic acquisitions. Just given the recent rebound in the broader economy, is it making it more difficult for you to find acquisitions or is it becoming easier? And how rich is the pipeline?

I think the pipeline remains pretty rich out there. I think things have gotten healthier, but I think there are still opportunities. Again, we will be very selective in those, making sure they fit close to our core, at least a close adjacent market, and that they are accretive for us. But there are still opportunities out there.

And is it across your businesses or are you more focused on a couple of your business lines?

We continue to look across our portfolios. We see opportunities really across all of our business units.

Got it. Thank you.

Paul Bonenfant, Morgan Keegan.

The first question is a housekeeping question, if I may. Did you have any 10% customers in the quarter?

Yes, we did have one 10% customer.

Can you describe what the geography was or do you --?

No, we don't name it.

For the substantive questions then, I am wondering if you're seeing any changes in the pricing environment, given that you had -- I believe you said that your declines in optical were above the typical 2% to 4% range in the first quarter.

Yes, so as we went through the quarter there were opportunities for us to gain share. And we also -- as we have taken cost out of our structure, we were able to look at where we were -- where our pricing fit compared to market prices, and to make sure that we are more in the market. We didn't -- so we may have lowered our premiums on some products we had to get more market share.

So we feel we are still priced at or slightly above market, but that helped. And obviously the reductions we have taken, you can see even though the ASPs were higher that the margins came in also higher.

Last question, if I may. You talked a lot about mobility and wireless, and I'm wondering if you can quantify for us to what extent those projects are contributing to sales, and if you expect any appreciable impact from broadband stimulus?

I think on the mobility, we are participating very heavily in the Ethernet backhaul with the NetComplete solution. We mentioned a major North American customer where we were able to sell into product for 10,000 cell sites. We think that is really -- just really the tip of it. So we think we are very well positioned there. And that is a pinch point for the service providers today with the growth in the mobile traffic.

As far as the stimulus money, we think we are very well-positioned to help support that whole effort. We haven't seen a lot of that flow through actual to the end-user at this point. We expect it is going to be a couple -- a few more months before we see that happen.

Thank you for taking my questions.

Jeff Evenson, Sanford Bernstein.

A couple of questions on growth drivers. First, you talked about DOCSIS 3.0 hardware and software upgrades. I am wondering if you could give us some thoughts on where the cable operators are in terms of upgrading the equipment they have.

I think they are still in a very initial stage of that. We have not seen large volumes from DOCSIS 3.0 yet. We expect that it's going to be out a few months. We are well-positioned for it, but not seeing any significant volume increase from it at this point.

Second, on the etching for the LED wafers that go into LED TV and lighting, could you tell us a little bit about the market for that? Are you very concentrated in terms of number of people who pursue that opportunity, how often they have to replace the LEDs -- the lasers that they buy from you, etc.?

I can't right now give you a lot of detail on that. I can -- we can get the information and provide it to you, but I don't know the answer to that specific question at this time.

Last question. You sold off some non-core businesses in Test and Measurement. I'm wondering if you could tell us a little bit about what you were thinking that led you to decide to sell those. And maybe also on an ongoing basis, how often and the magnitude of discontinued businesses we should think about in our models over the next couple of years?

The business that we sold off this past quarter was really not in our core business at all. It was more geared towards the motion picture industry and colorization, and didn't fit into our core or any adjacent markets. So it really was an outlier. And part of our strategy is to continue to strengthen our core and grow off of our core.

So we saw actually some opportunity costs as a result of having that business inside of our portfolio, and we decided to divest of it. I don't see a lot of other businesses inside of our portfolio that would fit into that particular category.

Todd Koffman, Raymond James.

You made some comment that the ROADM business declined, but you saw -- I thought you said 30% uptick sequentially in orders in ROADMs, and you expect to get a ramp going, I think one or two quarters from now.

My question is in the current quarter that you just finished up, approximately how big is the ROADM business within your Optical Communications segment?

On a percentage basis it was under 20% this past quarter. As we mentioned, you are correct, it is -- our bookings did grow over 30% -- by over 30% quarter on quarter. So we do now expect that to come off a bottom, as one of our major customers is burning through their inventory that they had stocked.

We also have the 50 gigahertz ROADM, as I mentioned, in qualification stage. And as that gets through qualification into volume, we also expect that that will add to our marketshare in the ROADM market.

Just a quick follow-up on that. Did I hear you correctly in your prepared remarks say that you expect the ROADM shipments against those sizable new orders to be in the March quarter?

No, we expect them to start happening in the December quarter, and will continue in the March. And then layering on top of that in our third quarter will be the 50 gigahertz ROADMs -- the new 50 gigahertz ROADMs that we are bringing out.

Thank you very much. Good luck.

There are no more further questions at this time. I would now turn the call over to Tom Waechter for closing remarks.

Thank you, operator. As our call concludes, I would like to reiterate some key points. First, we are seeing clear evidence of improvements in demand from our customers, as each of our business segments reported quarterly revenue growth and a book to bill of greater than 1. As our topline grows, the leverage in our improved financial model will become increasingly evident.

We continue to focus on innovation, and we are seeing momentum with the recent product introductions. Lean is a part of the JDSU culture. We have had tremendous progress in simplifying our business and improving our financial model in fiscal 2009. This quarter we lowered our revenue range further to $375 million to $385 million to realize 10% operating margins. I expect through our continued focus on lean and optimizing our processes that we can further reduce our costs.

Finally, on our last call I said that fiscal 2010 would be a new chapter for the Company, positioned for growth as the economy rebounds. So far, we are off to a great start with our Q1 results and positive outlook. I look forward to updating you on our advancements as the year progresses.

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

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great weekend.