Viavi Solutions Inc (VIAV) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 JDSU earnings conference call. At this time, all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of the call. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Michelle Levine. Please proceed.

Thank you, Operator, and welcome to JDSU's fiscal 2010 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'd like to remind you that this call will 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 on report Form 10K filed August 24, 2009, and 10-Q filed February 5, 2010.

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.

In addition, our current and historical financial tables are posted in the Investor portion of our website at www.JDSU.com\investors under the Financial Information section.

Finally, and as a reminder, this call is being recorded and will be available for replay from the Investor section of our website. I would now like to turn the call over to Tom.

Thank you, Michelle, and good afternoon, everyone.

I would like to begin by providing a summary and some highlights of our fiscal third quarter results. JDSU reported revenue of $332.9 million, gross margins of 44.1%, operating profit of 6.6%, and we continued to be free cash flow positive. We had very strong quarterly bookings at $400 million. This is the highest level the Company has achieved in the past two years as demand for our products continues to be robust across all of our business segments.

For the fourth quarter in a row, book to bill was above 1 for the Company and each of the segments had a book to bill greater than 1. From a revenue perspective, growth was very strong in our CCOP and AOT segments. On a sequential basis, Optical Communications grew 15%, our Lasers business grew 12%, and AOT grew 7%. Test and measurement revenue declined on a sequential basis, due to seasonality and material shortages although bookings remained strong. Year-over-year revenue for Test and Measurement grew 14%.

This past weekend, we closed the acquisition of the Network Solutions division or NSD business from Agilent. The acquired business complements and strengthens our leading communications Test and Measurement business, creates an end-to-end wireless network test portfolio, and expands our addressable market by nearly $800 million.

We are particularly well-positioned to provide testing equipment -- test equipment and services for the LTE market through this acquisition.

Another highlight of the quarter is the continued improvement in our Optical Communications and Lasers gross margins. Lasers gross margins exceeded 40% and Optical Communications gross margins were 26%, hitting our target range of 25 to 30% one quarter sooner than originally forecasted. And in Q3, AOT reported record bookings, revenues, gross profit, and operating profits.

Currency was especially strong. AOT is providing color shifting pigment on the new $100 bill announced last month, specifically on the Liberty Bell and the number 100 on the bill.

Now let me provide more details on the performance of our individual business segments. First, the Communications Test and Measurement segment. Fiscal Q3 revenues declined 17.6% compared to last quarter were up 14.1% year-over-year. The sequential decline in revenue was the result of the March quarter seasonality and increased supply constraints that affect their ability to achieve revenue targets. The supply constraints resulted in approximately $13 million of revenue rolling into the fourth fiscal quarter, the majority of which has now been delivered. Demand remains strong as book to bill was greater than 1 for the fourth quarter in a row.

As I mentioned earlier, this past weekend we closed the acquisition of the Network Solutions Division from Agilent which complements and strengthens our Test and Measurement business and creates an end-to-end wireless network test portfolio, including LTE tests. This expanded portfolio now provides access testing with NSD drive tests and JDSU active service testing. Ethernet backhaul transport tests with portables and systems and LTE signaling tests with NSD protocol analyzers and systems.

According to Infonetics worldwide, there are over 50 operators in more than 25 countries committed to LTE trials and deployments. Ethernet backhaul continues to be a large and growing business opportunity worldwide.

According to a recent industry report, mobile backhaul equipment revenues are up 21% in 2009 to $7.2 billion. Worldwide and mobile backhaul equipment is forecasted to grow 8% in 2010 to $7.8 billion and to have a CAGR of 7.6% from 2010 to 2014, reaching revenues of $10.4 billion in 2014. The estimated cumulative spending over the five-year period of 2010 to 2014 is over $45 billion.

There are over 25 operators around the world deploying IP Ethernet backhaul to carry all voice and data traffic. The investment is fueled by increasing mobile subscribers, especially in India, China, Africa, Latin America, as well as increased user bandwidth demand.

Consumer adoption of bandwidth-intensive mobile applications continues to strain the backhaul portion of the network, driving carrier Ethernet deployment to address quality and reliability issues.

JDSU is a leader in this field, offering instruments, services and integrated systems that support the cost effect of rapid deployment of Ethernet. JDSU's products and systems that capitalize on the Ethernet backhaul business opportunity include our T-BERD MTS 6000A and our HST Ethernet portable test devices and our net complete Ethernet solution, a software-based tool that receives inputs from remote probes in a network to help troubleshoot problems with Ethernet services.

Bookings and revenue continue to grow rapidly in the Ethernet backhaul arena across an expanding number of customers, with bookings to date from one customer alone exceeding $25 million. We believe we have the leadership position in our served available market for Ethernet backhaul tests.

Another growth driver for Test and Measurement segment is DOCSIS 3.0. By working directly with chipset manufacturers, JDSU has emerged as the only second-generation chipset for testing DOCSIS 3.0.

Simply put, JDSU products and tests customer solutions that carry traffic at speeds of 300 MB in the US and 400 MB for EMEA and most of Asia. This provides a significant competitive advantage as we believe alternative solutions cannot currently test beyond 200 MB solutions. Our investment today in a second-generation chipset secures a strong and long-term position for JDSU, not only for new sales of DSAMs, but also provides an upgrade path for our customers who collectively have purchased over 70,000 DSAMs over the last eight years.

Today we have over 30 customers in North America, Europe, and Asia over 1,000 units ship of our DOCSIS 3.0 offering in fiscal Q3. In another example that demonstrates JDSU technology leadership, we continued to lead the market in 100 gig lab and production testing.

Last quarter, we shipped 100 gig systems to six customers across all geographic regions. And in Q3 we have continued to trend with four additional customers in Japan, the UK, Germany and the US. And JDSU continues to lead the market in field service including fiber optic tests, storage area network tests, and we have the leading market share for our addressable market in 40 and 100 gig test systems.

And finally, in April, we announced that JDSU won the 2010 Best in Test Award from Test and Measurement World in the Communications Network Test category with the T-BERD/MTS-4000 multiservices test platform. The product was chosen for its exceptional ability to support technicians installing and maintaining access in fiber networks, while ensuring quality delivery of voice, video, and Internet services.

Moving onto our Communications and Commercial Optical Product segment, first, our optical communications business. In fiscal Q3 revenue grew by 15% from the prior quarter and 23.4% year on year. Book to bill was again over 1, reflecting the attraction of several new products including our gesture recognition technology with 50 GHz WSS or Super Transport Blade in the tunable XFP.

We continue to gain market share and believe we are growing faster than the market as nine of our 11 product lines grew sequentially with the highest growth in ROADM's pluggables, modulators, and 980 pumps.

Other notable product performance for the quarter includes the following. Our 980 pump unit shipments were at their highest levels since its peak in the year 2000. We have shipped the tunable XFP to over 30 customers, significantly increasing our [sales]. As we increase capacity for the tunable XFP in the current quarter, we expect to gain share in the tunable market.

ROADM revenue in Q3 grew by over 22% compared to last quarter and is over 25% of total Optical Communications revenue. ROADM bookings continued to be very strong with record bookings and a book to bill significantly greater than 1.

Our next generation 50 GHz ROADM, which began production volume shift in its last quarter, continues to ramp. Our recently introduced Super Transport Blades have gained very positive traction in the market. Based on the strong customer interest, growing order intake rates, and unique positioning in the market we expect these advanced products to provide profitable growth for Optical Communications business into the foreseeable future.

All geographic regions grew quarter-over-quarter. Asia had strong sequential growth and, once again, we reported record revenues in China.

The revenue breakdown between transport and transmission was 63% and 37%, respectively. Trends we are seeing in transmission include the disruption in the 10 gig market with our tunable XFP and more demand for 10 gig transceivers and VCSEL for wireless backhaul and data center applications. For transporter, we continue to work closely and collaborate with our customers on 40 gig and 100 gig components and modules.

We continue to innovate to maintain our technology leadership, most recently with several new announcements at OFC, including a demonstration of the industry's first 1X23 WSS platform which will enable colorless and directionless architecture essentially enabling any add drop port to be switched to any degree in the ROADM node.

We also announced new low court count WSS is for 150 GHz applications. We introduced a suite of tunable XFP variants with performance enhancements that we believe will continue the adoption of pluggables and 300 pin applications. We also announced plans to develop a range of new 40 gig and 100 gig optical products including transponders, modulators, coherent optical mixers, and new ITLA products.

Bandwidth capacity requirements continue (technical difficulties).

We have also completed the major lean initiatives and lasers as evidenced by an 8 percentage point improvement as lasers gross margins increased at 41.3%.

Next, our Advanced Optical Technology segment. In Q3, the AOT segment reported record revenues, growing 7.3% sequentially to $58.6 million, record gross profits of $30.1 million and record operating profits of $22.5 million. Also bookings were at a historical high and book to bill was greater than 1.

We saw strength in our currency business, where we had record revenues in our custom optics business which includes our 3-D products and filters for gesture recognition applications. Additionally, our custom color solutions sales were strong, in part due to Cadillac, who chose JDSU PermaFlare pigments in order to create sophisticated color options on its cars. The pigments add depth to automobiles by changing color when viewed from different angles.

The collaboration with Cadillac as a color resource helps keep Cadillac products at the forefront as a premier brand.

And as I mentioned earlier, AOC is also providing color shifting pigments on the new $100 bill announced in April, specifically on the Liberty Bell and on the number 100 on the bill. We saw a continued softness in our transactions card business as new credit card issuances remained depressed. Despite this softness, the AOC segment produced record revenues.

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

First is our focus on profitable market-based innovation. We continue to collaborate with our customers and invest in profitable market-based innovations to drive market share gains and profitable revenue growth. It is our goal to increase the percentage of revenues from products that are less than two years old to greater than 50% over the next three years.

We have made significant progress with new product introductions, especially Optical Communications. Additionally, the AOT segment and Optical Communications business developed the filter and dial-in laser technology for use in gesture recognition, a new market for JDSU. We began shipments to a major home gaming provider this quarter and expect the revenue to ramp over the next few quarters.

We are also exploring other opportunities as new applications develop, such as automotive controls, lighting control, and home security.

Our second corporate 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. We have continued to see this emphasis paying off.

For example, growth in Asia year-over-year has exceeded 25%. In Asia, revenue in Q3 was 26% of overall JDSU revenue.

Our third priority is lean. 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 top line improves. This is especially evident in our Optical Communications and Laser businesses, where gross margins increased to 26% and 41%, respectively, which are significant improvements for both business units.

And finally, maximizing the utilization of our assets. We are focusing on the utilization of our assets in order to maximize shareholder value. Our priorities for cash remain generating cash and strategic accretive acquisitions in our core or adjacent markets.

JDSU has continued to generate positive cash from operations for 14 consecutive quarters. The Storage Network Tools acquisition that took place a little less than a year ago has been accretive. We expect the NSC acquisition to produce similar results after it has been fully integrated into JDSU.

As I conclude my formal remarks, I would like to thank our employees for their continued efforts and dedication. We are seeing a clear path to recovery and long-term success after implementing our strategic initiatives during a difficult recessionary period. I would also like to thank our customers, partners, vendors and our 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 revenues of $332.9 million were down 3.2% from the previous quarter and up 19.2% when compared to the third quarter of fiscal 2009. Revenues increased sequentially in our CCOP and AOT segments and declined in our Test and Measurement segment due to March quarter seasonality and supply constraints of approximately $13 million.

For fiscal Q3, our Test and Measurement segment contributed 44% of total revenue, compared to 51% in fiscal Q2. Our CCOP segment contributed 39% of total revenue and our AOT segment contributed 17% of total revenue compared to 33% and 16%, respectively, in fiscal Q2.

Third quarter gross margin of 44.1% was down from the previous quarter's gross margin of 44.6% and up from the third quarter fiscal 2009's gross margin of 41.8%. The sequential decline in gross margin is due primarily to segment mix. The year-over-year improvement is due to improved margins in the CCOP segment.

Operating expenses for the fiscal third quarter of $124.6 million were down from the previous quarter's $125.3 million and were up slightly from the prior year's third quarter operating expenses of $123.2 million. The sequential decline reflects how the Company's variable pay plan adjusts with the operating profit of the Company. Our operating income for the quarter was $22.1 million, or 6.6% of revenue, which compares to an operating income of $28.1 million or 8.2% of revenue for the previous quarter and an operating loss of $6.4 million or negative 2.3% of revenue for the prior year.

Net income for the third quarter of $23.2 million or $0.10 per share compares to the previous quarter's net income of $26.6 million or $0.12 per share in the prior year's net loss of $5.4 million or a loss of $0.03 per share. A detailed reconciliation of our non-GAAP results to our GAAP result is available in today's press release.

Our third quarter non-GAAP results exclude, among other items, $18.6 million of amortization of acquired technology, a $10 million charge related to stock-based compensation, and a $3 million charge for restructuring and nonrecurring expenses. Including the noted items, in the third quarter fiscal 2010, GAAP net loss narrowed to $11.9 million or a loss of $0.05 per share which compares to the previous quarter's GAAP net loss of $19.5 million or a loss of $0.09 per share.

Now looking at revenue by region. America's revenue of $151.7 million was 45% of total revenue, down $21.9 million from the prior quarter. The decrease was in Test and Measurement and was primarily due to approximately $10 million of service provider budget flush that was realized in the December quarter and seasonally lower service provider demand in North America and Latin America.

EMEA revenue of $95.8 million was 29% of total revenue, up $1 million from the prior quarter, as we expanded our product penetration into countries such as Morocco, Croatia and South Africa. Asia-Pacific revenue was $85.4 million, up $10 million from the previous quarter, and represented 26% of total revenue. The increase was due primarily to demand from Optical Communications customers in China and Laser customers in Japan.

Moving to the segments, in the Test and Measurement segment, third quarter revenue of $145.7 million was down 17.6% from the previous quarter's $176.9 million and up 14.1% from the prior year's $127.7 million. As previously noted, the March quarter is typically seasonally soft as budgets are released during the quarter.

In addition, we experienced material supply constraints of approximately $13 million, the majority of which has been delivered in the fourth fiscal quarter. From a product standpoint, our field test revenue declined by 20%, Lab and Production revenue declined by 13% and Service Assurance revenue declined by 18%.

That said, we continued to see strong demand for wireless backhaul solution as growth in this market remains strong in both North America and Europe. Book to bill for the quarter was greater than 1.

Fiscal Q3 gross margin for Test and Measurement of 54.9% was down compared to the previous quarter. The decrease in gross margin percentage was primarily due to product mix and lower ASPs.

Operating expenses in our Test and Measurement segment grew sequentially primarily due to employer payroll taxes and increased R&D spending. Due to the lower revenue, increased ASP pressures and resulting impact on gross margin, along with the increase in operating expenses, the Test and Measurement operating profit of $11.5 million or 7.9% of revenue decreased when compared to the prior quarter's operating profit of $31.5 million or 17.8% of revenue.

We believe that the test and measurement market is experiencing a higher than normal level of ASP pressure. As a result, we are implementing a number of actions designed to reduce our Test and Measurement cost structure by approximately $3 million per quarter. These actions will impact both the manufacturing overhead and the operating expenses of the business.

Additionally, as Tom noted earlier, we completed the acquisition of the NSC business from Agilent. The NSC business's historical fiscal quarter ran from April through July, was up to 50% of the quarterly revenue being recognized in the third month of the fiscal quarter. The NSC operating model also historically has higher gross margins and operating expenses as a percentage of revenue when compared to the historical test and measurement operating model. The targeted operating margin model for NSC upon full integration into JDSU is 20 to 23%, which is aligned with the Test and Measurement operating model.

For our fiscal fourth quarter, the NSC business would only contribute two months of revenue forecasted to be between $15 million and $20, million subject to potential post-closing adjustments based on the terms of the acquisition.

Operating expenses of $15 million to $16 million which include temporary costs to integrate the business into JDSU, therefore we expect that the NSC business will have an estimated operating loss of $4 million to $6 million for the June quarter. In the September quarter, we expect the NSC business will continue to incur temporary transition costs but will generate an operating profit.

Now to the Test and Measurement operating model. With the temporary incremental costs associated with the acquisition of the NSC business, and the current Test and Measurement ASP pressure, the Test and Measurement operating profit for the June and September quarters is expected to be below the targeted long-term operating margin model of 20 to 23% when revenues are $175 million.

We expect that for the June quarter, which will only have two months of NSC revenue, the Test and Measurement operating margin will range between 11 and 14% of revenue. For the September quarter, the Test and Measurement operating margin is expected to be between 14 and 17% of revenue. We expect the Test and Measurement segment to be at the target operating margin model of 20 to 23%, on revenues of $175 million by the end of the calendar year.

Now moving on to our CCOP segment, the breakout of the key metrics for Optical Communications and Lasers is as follows. Optical Communications revenue for fiscal Q3 was $109.9 million, up 14.9% when compared to the previous quarter's revenue of $95.6 million, up 23.4% when compared to the prior year's $89 million. Revenue that we were unable to ship due to supply constraints totaled more than $5 million.

Gross margin for the quarter was 26%, up from the previous quarter's gross margin of 22.5% despite a nearly 6% decline in ASP. The ASP decline, as expected, was above our historical quarterly range of 2 to 4%. The improvement in gross margin was attributable to reduced manufacturing costs, our utilization of our fabs, and more favorable product mix.

Our target for sustainable gross margin remains in the 25 to 30% range. Book to bill was greater than 1 with the highest quarterly bookings in over five years.

In our Lasers business, third-quarter revenue of $18.7 million was up 11.9% when compared to the previous quarter and gross margins for the quarter improved to 41.3%. Book to bill was also greater than 1.

By total segment level due to higher revenue and improved gross margin, operating income for CCOP was $12.5 million or 9.7% of revenue. We believe the CCOP operating model supports sustainable operating margins of 10 to 15% at revenue levels of $150 million or greater per quarter.

For the Advanced Optical Technologies or AOT segment, fiscal Q3 revenue of $58.6 million was up 7.3% compared to the previous quarter and up 14.9% compared to the prior year. AOT book to bill was greater than 1 for the quarter. Fiscal Q3 gross margin for AOT segment was 51.5%, up from the previous quarter. AOT's operating profit for the quarter was $22.5 million or 38.4% of revenue, up from the previous quarter's $19.6 million or 35.9% of revenue.

The increase is primarily due to increased volumes in our currency business. Our sustainable operating model is for operating margins of 34 to 37%.

Moving to the balance sheet, the Company's total cash was $713.1 million. The Company's accounts receivable balance grew as supply constraints resulted in a higher than normal level of shipments at quarter end. Days sales outstanding increased to 65 days. The Company was free cash flow positive $7.9 million for the quarter. The headcount as of May 2 was 4,670, which includes nearly 700 employees from the NSD acquisition.

Now to JDSU's operating model. Prior to the addition of the NSD business, the Company's operating model supported 10% operating margin when quarterly revenues were between $375 million and $385 million and gross margins were 46%. This revenue range assumes a segment mix of $175 million from Test and Measurement, $150 million from CCOP and $50 million from AOT.

The NSD business's longer term operating model was for operating margins of 20 to 23% when quarterly revenues are over $40 million a quarter. Therefore, the combined operating model is for sustainable operating margins of 11% when revenues are between $415 million and $425 million per quarter.

Now to our Q4 guidance. First, some points to consider as you think about our financial performance over the coming quarters. Lead times from our component suppliers may impact revenues in the quarter. In Q3, due to supply constraints, we were unable to ship more than $18 million of customer demand.

Test and Measurement revenue is historically seasonally stronger in the June quarter as compared to the March quarter. NSD revenue, the fiscal fourth quarter, will be for only two months and is expected to be between $15 million and $20 million and will incur operating expenses of $15 million to $16 million which includes temporary transition costs resulting in an operating loss for NSD of $4 million to $6 million.

Total operating expenses, including the $15 million to $16 million for the NSD business, are expected to be $22 million to $25 million higher than Q3 level. The increase includes incremental selling costs associated with higher revenues, increased R&D investments, and higher variable compensation associated with higher operating margins.

FX will be approximately 4 to 5% of fourth quarter revenue as we make investments in Optical Communications, Optical Coatings and NSD to meet growing demand.

Finally, we expect our quarterly tax provision to range between $2 million and $3 million. Taking into consideration the factors above and based on our current visibility, we expect fourth quarter revenues to be between $385 million and $410 million and non-GAAP operating margins to be between 7.5% and 10%.

Operator, we will now take questions.

(Operator instructions). Kevin Dennean with Citi.

Good evening. Just wondering if we could hone in on CommTest and Measurement for a bit. I understand the seasonal declines that drag -- the sequential drag from the budget flush in the fourth quarter.

On the operating margin front it looks to me like you printed about 8% operating margin at revenue levels that are comparable to September's. Just wondering if there's any puts or takes in there that you can help us understand why maybe the margin performance was a little bit -- wasn't a little bit stronger in the quarter.

Yes. I think a couple of items that we noted is primarily the ASP pressure that we talked about that we saw in the quarter. So that had an impact. The declines that we talked about in the revenue were primarily in North America which typically has a higher margin mix than what we see in the previous quarter.

So those are two of the factors. Also as we noted, we've increased our R&D investment in the Test and Measurement area. So those are the main drivers behind it.

And then, Dave, just a quick follow-up. Can you talk a little bit about what is driving the ASP pressure? What's changed in the marketplace that's creating this higher level of ASP pressures?

Well one -- couple of things. First of all, with the revenue more in the Asia-Pacific and European markets as a percentage and, as I noted some of those countries that we penetrated in recently, those tend to have lower ASP prices.

Secondly, we are seeing a more competitive environment for some of these opportunities out there. And so we are seeing some more competitive bidding, quite frankly, on some of the opportunities.

Yes, Kevin, I would say probably on the larger deals we are starting to see more competitive bidding, especially as the markets start to rebound. And I think everybody is trying to grab some market share during that period of time.

Great. Thanks very much.

Mark Sue from RBC Capital Markets.

Thank you. In your guidance of $385 million to $410 million, have you factored in some ongoing components' tightness and also regular deals that slip? And just if I look back, I don't think you guys have actually [deed] your revenue guidance in over two years. When you give the targets for the next quarter, is that something that we can actually start bidding or is that kind of like midpoint of the guidance that we should kind of think about?

So first on the constraints. We have taken all the constraints that we are aware of in the lead times and communications we have had with our suppliers into consideration when we provided the guidance.

Secondly, you know, we go through a design process every quarter, come up with the range of the guidance. And so the intent is always to fall within that guidance range. You know, in the last few quarters I think we were above the midpoint and I think the majority of the time at mid quarter or above, and this quarter we happen to be below the midpoint. And again as we noted we had about $18 million worth of products that our customers wanted that we were unable to get to them during the quarter because of these constraints, which -- those constraints had -- lead times had increased during the quarter from our suppliers.

So that was an event that did happen during the quarter and impacted our ability to meet customer demand in the quarter.

And I'll also say, Mark, for the especially for CommTest with the network operators releasing their budgets towards the middle of the quarter and with component lead times going out during the quarter, it made it a real stretch at the end to get the shipments out and to get those revenues.

So I don't -- there still will be material shortages into this quarter. But we have more of a backlog and the order release will be earlier from the customers this quarter.

Okay. And just on separately in Test and Measurement, it is usually a very high software content, high margin business. And for us to kind of see this pricing pressure, is that just because the growth concentration from a regional basis or is it wireline versus wireless? Is it JDSU versus the Agilent component? And can we see that subside over the next few quarters?

Yes, I think one of our competitors has announced prior to us on this announcement and they talked about pricing pressures and they had some degradation in their gross margins. So we are seeing it in the areas such as fiber optics tests in the field. We are seeing it again in some -- as I mentioned earlier, some of the larger orders that are being let.

I suspect it will continue to be pressure out there. But as the volumes continue to increase, we would hope that that would subside to some degree.

Next question, please.

Thank you.

Michael Genovese from Soleil Securities.

Great. Thanks a lot. Do you have any view into when these supply constraints -- sounds like you are seeing multiples of supply constraints across multiple business lines -- but any sense on when they might let up?

We believe they are going to be with us for a couple more quarters. One of the -- it's mostly in the more concentrated in the semiconductor area. We have one supplier in some of the connector area that we buy about 600 different parts from across CommTest and Optical Comms.

They have improved, I would say over the last 30, 60 days. But we would expect there will be continuing to be shortages and it's primarily concentrated in that area. There are other areas of shortages, but that is in the prime one. And that is where the lead times have gone out the furthest.

Well, intuitively, to me it would seem like where you are supply constrained and your customers' lead times are stretching out, you know, that ASP pressures should actually be lessened in that kind of environment with the potential to pick up, once you are less supply constrained, if that makes sense.

So is that something -- ? You know, but it seems like there's ASP pressures pretty good right now. I mean, pretty heavy right now. So do you think ASP basically will continue at about the same rate of decline? Do you think that they will ease or do you think that they could potentially get worse once the supply constraint

I think it will help as the mix gets back to a larger mix in North American revenue in the quarter we are in and beyond. So I think that for one will help as we go forward. It is, I think, what your logic behind it is, I think what we would all think but it's not exactly what we saw this last quarter.

So we do hope that normalizes as we go forward. But we are taking the necessary actions to deal with it over the next quarters.

Next question, please.

Greg Mesniaeff from Needham & Company.

Yes. Thank you. I was wondering if you can give us some more granularity on the geographic mix of the pricing environment? In other words, are you seeing the greatest issues in the US market vis-a-vis Asia? And also you mentioned DOCSIS 3.0 is an early-stage opportunity. Is that an area where perhaps you have a more of an early mover advantage and the pricing pressures are less severe?

I would say in the DOCSIS, as we mentioned, we think by going with the second generation chip we do have an advantage performance-wise over our competitors. So we do see less pricing pressure in that area. I would say, again, on the pricing pressure as we see it in geographic regions, it is always typically greater in Asia especially with kind of lower configurations on a lot of the products.

We did see it in Europe as well with some of the larger orders. But it seems that to be more following the large orders that a number of competitors are going after.

Next question, please.

Jeff Evenson from Sanford Bernstein.

Thanks. Looking back to your conference call on acquiring the Agilent Network Solutions business. I recall hearing a number of $162 million for the full year that ended on October 31, 2009, suggesting about an average quarter of $15 million to $20 million or of about $40 million.

Now for the quarter you guided about $15 million to $20 million in revenue which would be about half that. And I understand how you get there from linearity, but given that I would expect some growth given the strong environment over last year, how come you guys aren't seeing that right now? Or did I do something wrong in the math?

I don't think you did anything wrong in the math. It's -- you were correct on what they did historically. And as a rollout, some of these LTE solutions we hope to see some improvement in that run rate.

But right now based on the forecast we have on an asset we just closed, right, our visibility from the most recent forecast is as we stated for the two months and we noted that the third month of their fiscal quarter, July, was typically their strongest where we see them do as much as 50% of the revenue in the quarter in that month. So I just wanted to make that, point (technical difficulty) that their strongest month of the quarter is going to be my first month of the next fiscal quarter.

So they are at that run rate right now. They are doing some LTE activities, as we said. And we expect to see that they get an opportunity to grow that topline with those LTE opportunities.

We also see a complementary with what we are doing in the Ethernet backhaul to get really a full end to end solution for wireless. So we see a lot of those opportunities in front of us. We believe over time we will be able to grow that revenue. I think this is really the starting point as we just bring them inside of our business.

The strength that you saw in 980 pumps suggests that there are a number of long-haul fibers being lit. What opportunities does that present for you guys?

I think we are just seeing strength and demand basically through broadband applications across all the networks. So we are really seeing a strength across all of our, as I mentioned, four or five product groupings as we go forward.

It is really strength across all the product line groups. I would say one of the things that is emerging, though, is the higher usage of ROADMs in the cable network. So we are starting to see some real uptick. As we mentioned ROADMs were 25% of our total revenue for the Op Comms business and we had very strong bookings in that area. So we are seeing that starting to ramp very strongly.

Next question, please.

Ajit Pai from Thomas Weisel.

Good afternoon. Could you give us some color on 40 gig and 100 gig? You talked about we are having industry-leading market share and field tests are there, but give us some color as to how material it is right now in field tests? Is it like more than 5% of the overall Test and Measurement revenue as yet? Or it's not even close to that? And interest from carriers there? Also on the Optical Component side whether 40 gig is what percentage of 40 gig and higher, what percentage of revenues it is?

Yes. For Test and Measurement 40 gig is a good performer for us. 100 gig is mostly in the lab environment still. And those are higher unit price and higher margin products, but not significant revenue for that business unit at this point.

But I would say 40 gig is a good contributor and continues to grow for us in the field applications for Test and Measurement. As far as Optical Communications, 40 gig is still a low percentage of our total volumes but we do see a path for that growing and we are seeing more interest in the 100 gig. But that is not really a major driver for revenue that we can see in the real near future.

And at what point do you expect 40 gig spending for the Test and Measurement side as well as in the optical communications component side to actually become quite material to levels that are double current levels? Is it two to four quarters out? Is it further out than that?

I think for CommTest, it is probably within that range and optical comms is less predictable from our viewpoint.

Got it. Thank you.

Todd Koffman from Raymond James.

Thank you very much. In the Test and Measurement segment, my recollection was when you reported your December quarter results, you called out a book to bill for that segment of greater than 1. I might be wrong on that, but that was my recollection. And when you look at the material shortage amount of revenue [missed], I think you called out $13 million, you are still pretty down significantly. And now you are calling out that segment again book to bill greater than 1.

It seems like there may be more execution issues going on in that business, relative to the demand you are actually capturing. Can you give me any more color on that?

As I mentioned, I think the March quarter particularly was complicated because of the timing. Most of the business comes from network operators, the timing of the release of those budgets for the network operators, particularly in North America, mostly got inside of the window of some of our longer lead time products.

So then it comes down to the accuracy of forecasting down to some of these configuration levels. And I think that is where the execution became complex and we did not get the level of revenue or shipments out there that we anticipated in the March quarter.

I see that being a more straightforward situation in the quarter we're in because the budgets are already out and in front of us. And we actually have a larger backlog going into the quarter.

What -- was there orders bookings you received in the December quarter when you had that Test and Measurement book to bill greater than 1 that had been lost in the quarter due to an inability to meet demand?

No. We don't believe -- we said in the December quarter we felt that we probably lost a couple million dollars' worth of orders in that December quarter. We don't believe in the March quarter that we've lost any. We don't have visibility to having lost any orders from our customers, realizing that most if not all of our competitors have very similar situations with the components and are having similar types of issues.

One last unrelated question. You call out these four priorities and the fourth one, I think we said was accretive acquisition and in that sheet you update on your recent acquisitions going back to the last three years or so, it is notable that all of them were in the Test and Measurement area although there was one Advanced Optical, nothing in the Optical Comm area and was wondering if you view that area as a core business.

The Optical Comms business as a core business?

Yes.

Yes. Today we have three core businesses as you know so we look at them as all core businesses. I think that market itself has been in a much different situation than either the AOT or CommTest market over the last two or three years and with consolidation and some of the complexities in that market. So it is probably the prime reason why we haven't had any acquisitions in that area.

Thank you.

Paul Bonenfant from Morgan Keegan.

Good afternoon. First, a housekeeping question. I may have missed it, but did you give the gross margin for the AOT segment?

Yes. 51.5%.

51.5. Thank you. Now coming back to pricing and again if you may have talked about this. We talked a lot about ASPs for CommTest. You saw pretty severe pricing pressure higher than normal in the March quarter, 6%. Are you seeing relief in the June quarter?

The pricing --. We noted on our last call that for the -- when the December quarter ends, we were negotiating a number of contracts with our customers in the Optical Comms area where you have the annual, the quarterly and the semi-annual contracts all being negotiated. So we noted that we expected the ASP decline in Optics to be greater than the 2 to 4% range. And so we used this opportunity to clarify exactly what that was.

Yes and I appreciate that. I'm just wondering if you are seeing some relief on that pricing in the June quarter? If it is coming back to a more normalized range?

Yes. We expect it to be in the more normalized range, right? Because now you have established this new level of pricing, right? So if it is a quarter -- if we look at it as a quarter-to-quarter sequential impact so now prices for the annual customers have been set and semi-annual customers. So we expect to be in that 2 to 4% range again.

And a quick one on China. There have been some concerns about CapEx declines from Chinese carrier carriers potentially. Some Chinese vendors seeing softness in demand in 2010 versus year-over-year.

Doesn't sound like you are experiencing any softness in either your Op Comms or your CommTest. Are you expecting any downtick in your exposure to China or Chinese vendors as the calendar year progresses?

We are not forecasting out. As you noted, we are seeing significant growth in Asia in total, and China has been a role strong point for us particularly in Op Comms, but also starting to improve with CommTest. We believe the operators will continue to make strategic investments in that.

That really is where we best line up with those customers in Asia as well. So we have not forecasted that at this point.

Subu Subrahmanyan from Sanders Morris.

Thank you. I had two quick clarifications and then a question. The clarifications are first on the $400 million in orders. Did that include NSD or was that JDSU pre-NSD? And Dave did you provide a gross margin guidance number?

And the question was around the 11% operating margin you talked about on the $415 million to $425 million range. It looks like if you took a full quarter of NSD and added it to at least the higher -- towards the higher end of the range, we're there kind of already? So can you just talk about the breakup of that?

And getting into early 2011, if you expect to hit that on a sustained basis, given where revenue run rate is right now?

Okay. First of all, (technical difficulty) million was without any NSD because that closed in the current fiscal quarter. So it was only bookings related to what I will call JDSU classic business. We did not give gross margin guidance.

And as far as the operating model, basically you're right. You could just take the model we had before. And I was basically showing that at it, we could just add on to that what the operating model is supposed to be for the NSD group.

And this is about having a sustainable operating margin. It doesn't mean that we couldn't go above that based on mix and other opportunities, but the point is that we can be sustainably there. And the goal is to be sustainably there as we finish the calendar year. As I noted what would be happening to the Test and Measurement, the challenges Test and Measurement area with NSD would have over the June and September quarters in the call.

Understood, but on a run rate basis going into 2011, for the full quarter, if you took out some of the September effects, that is the run rate basis you are expecting given where your revenues are? [Property].

It's more of a sustainable level and the idea as we give guidance on each call what the current quarter looks like, we will talk about where we think the operating margins will fall. But the real point is is how we are modeling the Company to sustainably be, because the mix will change, right, in any quarter. To (technical difficulty) be able to do at 11% operating profit at that revenue level.

Ladies and gentlemen, this concludes the question-and-answer portion of the call. I will now turn the call back over to Tom Waechter for closing remarks.

Thank you, Operator. As our call concludes I would like to reiterate some key points. First, demand for our products across all of our business segments are improving with the economic recovery. Very strong bookings of $400 million in Q3 were the highest we have seen since fiscal 2008.

Our CCOP and AOT segments have performed exceptionally well, growing volumes, gross profits and operating income. Although we did not achieve the same high level of performance in our Test and Measurement business, during fiscal Q3, we are confident that the operational performance will rebound at the end of the calendar year, based on actions that are already underway and the strong commitment in the dedication of the Test and Measurement team.

We continue to focus on innovation to achieve long-term sustainable growth. We are seeing momentum with our recent product introductions across all three businesses and see new opportunities in markets such as gesture recognition, 3-D and wireless tests.

In closing, I would like to welcome our new NSD employees. The technology leadership and innovative capabilities they bring to JDSU will significantly add to our efforts in providing leading communications, Test and Measurement solutions to our customers as well as enhancing our profitable growth initiatives.

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

Ladies and gentlemen, this concludes the presentation. Thank you for your participation in today's conference. You may now disconnect. Have a great day.