Viavi Solutions Inc (VIAV) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fiscal fourth-quarter 2010 JDSU earnings conference call. My name is Melanie and I will be your coordinator today. At this time, all participants are in a listen-only mode. (Operator Instructions). And as a reminder, today's call is being recorded.

I would now like to turn the call over to Cherryl Valenzuela, Senior Manager of Investor Relations. Please proceed.

Thank you, Melanie, and welcome to JDSU's fiscal 2010 fourth-quarter and year-end 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 would cause or that could cause actual results to differ materially from management's current expectations. We encourage you to look at the Company's most recent filings with the SEC, particularly the Risk Factor section of our Report on Form 10-Q filed May 7, 2010 in our most recent Annual Report.

The forward-looking statements, including guidance, provided during this call are valid only as of today's date, and JDSU undertakes no obligation to update these statements as we move through the quarter. Please note that all numbers are non-GAAP unless otherwise stated. A detailed reconciliation of these non-GAAP results to our GAAP results, as well as a discussion of their usefulness and limitation, is included in today's news release announcing our results, which is available on our website at www.JDSU.com.

Also, please note that beginning this quarter, JDSU will provide slides with detailed earnings data concurrently with the earnings press release. The slides for fiscal Q4, along with historical financial tables and corporate fact sheets, have all been posted in the Investor portion of our website at www.JDSU.com/investors under the Financial Information section. These slides are supplementary in nature and will not accompany this earnings call.

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, Cherryl, and good afternoon, everyone. We'd like to begin by providing an overview of our Q4 financial results, followed by highlights of our business achievements in the quarter.

JDSU reported revenue of $398.1 million as we continued to see robust demand across all of our segments. For the fifth quarter in a row, overall book-to-bill for the Company was above one. Each of our three segments also had a book-to-bill greater than one, with particular strength in our CCOP segment. Overall gross margin for the Company improved to 45.5% from 44.1% last quarter, and 42.2% last year, as each segment improved its gross margin on a sequential basis. This quarter we saw a return to more typical pricing environments in our CommTest and Optical Communications businesses.

JDSU reported operating income of $37 million or 9.3% of revenue. In percentage terms, this is at the high end of the guidance we provided during our previous earnings call and represents, in both dollar and percentage terms, JDSU's highest level of quarterly operating income since December of 2007.

I would also like to highlight the strength in our balance sheet. In Q4, JDSU generated cash from operations of approximately $47 million. The stronger cash flow was driven by positive trends in working capital, as we reduced DSOs sequentially from 65 to 63 days, and posted an inventory turnover ratio above seven.

Now let me provide more details on the performance of our individual business segments. First, the CommTest segment.

Fiscal Q4 revenue was $186.2 million; gross margin was 56.1%; and operating margin was 11%. In Q4, we completed the transition of our North American high volume product revenue to contract manufacturers. Book-to-bill was greater than one for the fifth consecutive quarter. Growth in both revenue and bookings was driven by strong demand from North America and Asia-Pacific.

The NSD acquisition from Agilent closed at the beginning of May and contributed approximately $16 million of revenue. This acquisition complements and strengthens our industry-leading CommTest product portfolio by creating an end-to-end wireless network test solution, and expands our addressable market by nearly $800 million.

We are now positioned to provide test equipment and services to support the accelerating transition to LTE. In fact, our technology leadership was recognized by wireless industry experts in June, when JDSU's LTE network trial solution won the Best Testing Product for LTE award at the annual LTE World Summit in Amsterdam. Also in June, we announced that our signaling analyzer real-time, or SART, solution quickly and successfully validated results from rapidly-changing test scenarios during a series of intense, two-week-long, major LTE interoperability trials in Dusseldorf and Beijing.

Finally, we expect LTE deployments will be ramping in calendar 2011. We are already engaged with over a dozen network equipment manufacturers and service providers around the world. In Q4, we recognized revenue from LTE customers in the US, Korea, Germany, Sweden, France and Japan.

Emerging technologies such as LTE, the accelerating adoption of smartphones, and the rapid expansion of mobile video, are key drivers for investments in more efficient and cost-effective ethernet backhaul. As such, ethernet backhaul test applications are continuing to expand on a global basis and continue to be a significant driver of bookings and revenue in this segment.

Another growth driver for CommTest is DOCSIS 3.0. We believe JDSU has a unique competitive advantage based on our DSAM DOCSIS 3.0 chipset's ability to test faster speeds than our competitors. While competitors struggle to test 100 megabits downstream, JDSU's DSAM supports 300 megabits downstream for the US and 400 megabits downstream for EMEA and most of Asia.

North America remains our strongest market for DOCSIS 3.0, but we also have good traction in Europe and see growing interest across Asia, particularly in Japan and Korea. Shipments for DOCSIS 3.0 exceeded $9 million in Q4. According to Prime Data in May 2010, JDSU has the number one worldwide market share in cable test.

We also continue to lead the market in high speed optical testing for both lab and field applications. Last quarter, we shipped six 100-gig systems to network equipment manufacturing customers in Japan, Germany, UK and the US. In addition, we shipped twenty-one 40-gig systems to customers in the US, Europe and Asia during the quarter, with notable increase in the number of 40-gig systems shipped for field applications. The continued growth of our 40-gig business indicates that 40-gig is a natural progression in the evolution of Tier 1 carrier networks worldwide.

Last week, Frost & Sullivan recognized JDSU's solution-based and value-added approach in supporting a broad range of communications technology with two awards. Both awards noted our leading-edge product and service portfolio, which, along with our focus on collaborative innovation, help our customers cost-effectively deploy high-quality, next-generation networks and technologies, including 40-gig, 100-gig, IPTV, mobile backhaul, and wireless LTE 4G communications.

As I conclude this section pertaining to CommTest, I would also like to make you aware of an initiative that is underway with the purpose of accelerating improvements in the business model for this segment. This initiative includes a number of process improvements as well as organizational changes.

The process improvements are mainly in the operations area and include demand management as well as contract manufacturer interface. Along with these process improvements, a number of leadership changes have taken place within the operations team, including the recruitment of key skill sets from outside the Company. Significant progress has been made in this area already.

Dave Holly, the President and General Manager of CommTest, will change positions and take on a leadership role for developing emerging markets for this business segment. Dave, who has a deep understanding of our technologies and products, will be responsible for accelerating our growth and positioning these fast-growing markets.

As President and General Manager of CommTest, Dave led the segment through an important phase of its business evolution. Key strategic initiatives, including significantly expanding our addressable markets with the acquisitions of NSD and SNT, and transitioning our North American manufacturing activities to contract manufacturers took place during his tenure. I would like to thank Dave for these significant accomplishments and I look forward to his future contributions in his new role.

An external search for the next President and General Manager of CommTest is underway, and I expect a selection process to be completed in a reasonable period of time. From now until the new leader is in place, the executive staff members of CommTest will report directly to me.

Moving on to our CCOP segment, which is comprised of two businesses, Optical Communications, and lasers. The combined CCOP results are as follows. Fiscal Q4 revenue was $157.3 million, and operating margin was approximately 12%, which is now within our target model range for this segment. Now let me provide more color on each business -- first, Optical Communications.

Fiscal Q4 revenue was $134.7 million, and gross margin was 28.5%. We saw significant demand growth in this business as revenue for 10 of our 11 product lines sequentially, with the highest growth in circuit packs, gesture recognition tunables, and ROADMs. All geographic regions grew quarter-to-quarter and we recorded revenue in China for the fourth quarter in a row. Book-to-bill for Optical Communications was solidly above one.

In order to meet the increased demand, we have initiatives in place to increase our production capacity by 33% during fiscal year '11, particularly in areas where we have significant product differentiation, such as our tunable XFPs, ROADMs, and Super Transport Blades, as well as gesture recognition. This capacity will be the result of a combination of improved utilization and yields, and selective equipment purchases while we maintain our current fabrication process footprint.

Revenue from products introduced within the last two years continued to gain momentum and accounted for more than half of our total Optical Communications revenue in Q4. Tunable XFP revenue almost tripled sequentially as we shipped product to 32 customers and 43 design slots during the quarter.

Another new product, our Super Transport Blade, grew 50% sequentially. Our next-generation 50 gigahertz ROADM continues to ramp and more than doubled in revenue this quarter. In total, ROADM revenue in Q4 grew 24% sequentially and was again over 25% of total Optical Communications revenue. ROADM's bookings continue to be very strong, with a book-to-bill significantly greater than one for the second straight quarter.

Finally, revenue from gesture recognition grew meaningfully as well. Q4 was our second quarter of shipping laser diodes from this segment to a leading home gaming provider. The top-line growth in Optical Communications has been accompanied by sustained improvement in its operating model. Optical Communications' gross margin improved from 26% in fiscal Q3 to 28.5% in fiscal Q4, as we continue to optimize our supply chain and benefited from higher utilization of our fabs.

Turning to our lasers business within the CCOP segment, fiscal Q4 revenue was $22.6 million, a sequential increase of 21%, driven by growth in the semiconductor and micro-electronic materials processing end markets. Gross margin improved to 44.6% compared to 41.3% last quarter. Book-to-bill was greater than one.

Last month, we announced a partnership with Amada to develop a high-power 4-kilowatt fiber laser. This fiber laser has been integrated into a new sheet metal cutting system that Amada reports will provide the fastest linear cutting speed available worldwide. This collaboration has opened the laser market for kilowatt materials processing to JDSU.

According to estimates by analyst firm Strategies Unlimited, this kilowatt materials processing market will grow to more than $1 billion by 2013. We have received very positive feedback on the announcement, as industry insiders recognize the complementary strengths JDSU and Amada bring to this collaboration. This laser cutting system will be unveiled at a trade show in Germany this October, and we expect a global market introduction in June of 2011.

Our laser's group has also been developing concentrated photovoltaic or CPV sales for the solar market aimed at large commercial and utility scale installations. In Q4, we were qualified and received production orders from our first customer for CPV sales. We are engaged with several other customers and we'll continue to update you on our progress in the coming quarters. The growth in gesture recognition and solar are examples of opportunities that leverage our extensive technology in order to expand our non-telecom customer base in the CCOP segment.

Our third and final segment is Advanced Optical Technologies, or AOT. Fiscal Q4 revenue was $54.6 million, a decrease of 7% sequentially, primarily due to lower currency pigments demand. Despite the revenue decline, AOT improved its gross margin sequentially from 51.5% in Q3 to 51.9% in Q4. Operating margin continues to be within the target range at 36.3%. Book-to-bill was greater than one.

Q4 marked the start of production of optical filters targeting gesture recognition systems. We have seen steady demand for specialized filters for gesture recognition and 3D applications. Recently, we opened a new manufacturing site in China to support the demand for the consumer electronics sector for these products.

We also saw demand pick up in office automation, where JDSU supplies front surface mirrors for devices such as printers, scanners, copiers, and multi-function devices, as well as audio-visual equipment and projectors. Bookings and revenue growth in this market is being driven by recovering global demand for these devices.

In summary, fiscal 2010 was a year of solid top-line growth for JDSU, driven by demand recovery in several key markets, revenue growth from innovative products in all of our segments, and our two acquisitions. At the same time, we continue to execute against our stated strategic priorities, resulting in an improved operating model, a strong balance sheet, and sustained positive cash flow.

Looking ahead to fiscal year '11, we expect to build on our strategic priorities to grow the business. JDSU is a global leader in the current markets it serves, aligned with strong growth drivers, such as increasing broadband demand, and the need for leading-edge authentication and commercial laser applications.

At the same time, we will continue to identify and pursue opportunities to diversify into emerging growth opportunities, such as gesture recognition, 3D, and solar. We will support this by continuing to focus on profitable market-driven innovation, collaborating closely with our customers to provide differentiated solutions that address specific needs and deliver immediate value, and by advancing our corporate culture towards lean and continued process improvement.

As I conclude my formal remarks, I would like to thank our employees whose focus, commitment, and tremendous efforts led to a stronger, more profitable JDSU in fiscal '10. I would also like to thank our customers, partners, vendors, and long-term shareholders for their continued support of JDSU.

With that, I'll hand the call over to Dave, who will take you through the details of our financial performance in Q4 and fiscal year-end 2010, and we'll discuss our outlook for Q1.

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

Fourth-quarter revenue of $398.1 million was up 19.6% from the prior quarter and up 45.2% when compared to the fourth quarter of fiscal 2009. The sequential revenue increase was from two segments -- the CCOP segment, as demand for optical products continued to outpace supply, and the CommTest segment, as we recognized two months of revenue from our NSD acquisition and we had our normal seasonal increase in demand from carriers.

Fourth-quarter gross margin was 45.5%, up from the previous quarter's gross margin of 44.1% and up from fourth-quarter fiscal 2009's gross margin of 42.2%. The fourth-quarter gross margin improvement reflects the NSD acquisition and improved factory utilization in both the CCOP and AOT segments.

Operating expenses for the fourth fiscal quarter of $144.1 million included $12.4 million of operating expenses from the NSD acquisition. Operating expenses as a percentage of revenue were 36.2%, down from the prior quarter's 37.4%. As a result of improved gross margins and operating expense leverage, our operating income for the quarter of $37 million was 9.3% of revenue, which compares to a 6.6% operating margin for the prior quarter.

Net income for the fourth quarter of $33.1 million or $0.15 per share compared to a third-quarter fiscal 2010 net income of $23.2 million or $0.10 per share. For the full fiscal year, total revenue was $1.37 billion, up 7% from the prior year's $1.28 billion. Gross margin for the full fiscal year was 44.6%, up from 42.8% for fiscal 2009. Operating income for fiscal 2010 was $97.4 million or 7.1% of revenue, up from 2.4% of revenue for fiscal 2009.

Improved operating income is primarily due to higher revenues and higher gross margins. Our net income for the year was $91.9 million or $0.41 per share, up from $42.6 million or $0.20 per share for fiscal 2009.

A detailed reconciliation of our non-GAAP results to our GAAP results is available in today's press release. Our fourth-quarter non-GAAP results exclude, among other items, amortization of acquired technology and intangibles of $21.5 million; a $10 million charge related to stock-based compensation; an acquisition accounting adjustment to revenue of $7.2 million; and a $13.2 million of investment income from the sale of our investment in Fabrinet.

Including the noted items, the fourth-quarter fiscal 2010 GAAP net income was $1.5 million or earnings of $0.01 per share, which compares to a prior-year fourth quarter GAAP net loss of $63.6 million or a loss of $0.29 per share. For the full fiscal year, GAAP net loss was $61.8 million or a loss of $0.28 per share, which compares to a GAAP net loss of $909.5 million or a loss of $4.22 per share for fiscal year 2009.

Now looking at quarterly revenue by region. America's revenue of $194.5 million or 48.9% of total revenue was up over $40 million from the prior quarter, driven primarily by increased revenue from North American service providers and network equipment manufacturers.

EMEA revenue of $104 million or 26.1% of total revenue was up approximately $8 million from the prior quarter, due primarily to increased revenue from network equipment manufacturers. Asia-Pacific revenue was $99.6 million or 25% of total revenue, up over $14 million from the prior quarter, due to increased carrier demand and increased demand for gesture recognition products.

Moving to the segments. In the CommTest segment, fourth-quarter revenue of $186.2 million was up 27.7% from the previous quarter and up 40.4% from the prior year. The sequential revenue increase includes approximately $15.7 million of revenue from the NSD acquisition and seasonal demand from carriers. From a CommTest product standpoint, our service assurance revenue doubled sequentially in fiscal Q4, due to the NSD acquisition, while field test revenue grew by 27%, and lab and production revenue grew 16%. Revenue from all three geographies grew sequentially as well.

Fiscal Q4 gross margin for CommTest of 56.1% was up compared to the prior quarter but still below our targeted range of 57% to 61%. Gross margin was favorably impacted by the NSD revenue, which was partially offset by charges required to meet our customer needs, such as expedite fees paid to vendors.

CommTest operating profit of $20.5 million or 11% of revenue increased more than three percentage points when compared to the prior quarter's operating margin. The operating margin growth was due to higher revenue and improved profitability in the segment, exclusive of the NSD acquisition. The NSD acquisition had an operating loss of $2.5 million, near the low end of the expected range. CommTest targeted operating margins are between 20% to 23% at a quarterly revenue level of $175 million or greater. Our objective is to attain this targeted range by the end of the calendar year.

Now moving on to our CCOP segment. Breakout of the key metrics for Optical Communications and lasers is as follows -- Optical Communications revenue in fiscal Q4 was $134.7 million, up 22.6% when compared to the prior quarter's revenue and up nearly 70% when compared to the prior year. Due to supply and capacity constraints, we were unable to ship over $10 million of Optical Communications demand in this quarter.

Sequential ASP decline was just over 2% and at the lower end of our historical quarterly range of 2% to 4%. Gross margin for the quarter was 28.5%, up from the prior quarter's gross margin of 26%. The increase was driven by favorable product mix and improved factory utilization. We believe our Optical Communications gross margin can exceed 30% when quarterly revenues are $150 million or more.

In our lasers business, fourth quarter revenue of $22.6 million was up 20.7% when compared to the prior quarter. Gross margins were 44.6%, up from 41.3%, due to improved utilization on higher revenue. Total CCOP revenue was $157.3 million, up 22.3% from the prior quarter. Operating income was $19.1 million or 12.1% of revenue. The CCOP segment is now operating in its targeted operating margin range of 10% to 15%.

For the Advanced Optical Technologies, or AOT, segment, fiscal Q4 revenue was $54.6 million, down 6.8% compared to the prior quarter. We saw strength in our coatings business as well as a modest improvement in our transaction card business relative to the previous quarter. At the same time, we saw lower demand for our currency pigments. As previously noted, the currency products will see demand fluctuate according to the level of bank note printing needs.

Fiscal Q4 gross margin for our AOT business was 51.9%, up from 51.5% in the prior quarter, due to better factory utilization. AOT operating profit for the quarter was $19.8 million or 36.3% of revenue, down $2.7 million from the prior quarter. The decline in operating margin was due primarily to lower revenues and increased investment in R&D and sales and marketing for the segment. The AOT segment continues to operate in its targeted operating margin range of 34% to 37%.

Moving to the balance sheet. For fiscal Q4 2010, the Company generated $46.9 million of cash from operations, reflecting improved inventory turns and lower days sales outstanding. For the full year, the Company generated $119.2 million of cash from operations. As of the end of the fiscal year, the Company held $600.1 million in total cash and investments. Headcount for the Company as of August 14, 2010 was 4,715.

Now moving on to our operating model. Our current operating model is for operating margins of 11% to 14% when revenue is between $415 million and $425 million and gross margin is 46% or greater. Our objective is to achieve this operating model by the end of the calendar year.

Now to our Q1 guidance. First, some points to consider as you think about our financial performance over the coming quarters. Our fiscal Q1 operating expenses will have a full quarter's worth of operating expense in temporary transition costs for our NSD acquisition, and incremental R&D and SG&A investments across all segments. We expect operating expenses to be between $155 million and $158 million.

CommTest operating margin is expected to be between 13% in 16% for the first fiscal quarter. These operating margins reflect the typical revenue seasonality of the segment and the temporary incremental costs resulting from the NSD acquisition. Our capital expenditures are expected to be approximately 5% of revenue for the next several quarters, as we are purchasing capital for the NSD acquisition and strategically investing to expand capacity for our CCOP and AOT segments to meet customer demand.

Taking into consideration the factors above, and based on our current visibility, we expect first-quarter revenue to be between $410 million and $425 million, and non-GAAP operating margin to be between 8.5% and 10.5%.

Thank you. And Operator, we will now take questions.

(Operator Instructions). Mark Sue, RBC Capital Markets.

Within CCOP, are you practicing some extra diligence when it comes to lead-times to ensure that the components are selling through and that no potential inventories may be building at the OEM level?

And maybe if there are -- are there any specific proof points from customers which support the notion that in demand still is healthy and will remain healthy? Are you, in essence, scrubbing the orders, considering the macro headlines?

Yes. I'd say, Mark, we're very aware of what concerns are out there in the market. We watch it closely. We spend a lot of time with our customers, both at a strategic level and down at the operational level. So I think we have a good handle on it.

We do have, as we mentioned previously, a number of products that we are sole-sourced on, so we feel like we have even a more finite handle on those as well. And that limits the risk on the buildup of the components.

Okay. And some OEMs are actually stocking some inventory because there was some component shortages. How are you finding that trend in recent months? And also from a order trend from a month-to-month basis, was July and August pretty normal months for you? Any deviations from a regional point of view, North America, Europe, or Asia? Thank you, gentlemen.

Yes. We've seen -- I mean, from the order intake, we've seen continued strong demand from the customer base. We've seen strength across all the geographic regions worldwide, so I wouldn't say we've seen any significant deviation there from a customer standpoint.

Also, Mark, as we noted, there was over $10 million of demand that we couldn't ship due to shortages in the quarter for the CCOP business.

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

Thanks, Mark. Let's take the next question, please.

Troy Jensen, Piper Jaffray.

Yes, congrats on a nice quarter, gentlemen. A quick question here on Mintera. I believe you guys may have had an investment or a partnership with that company, and I'm curious with Oclaro's acquisition of the business, what that might mean to you guys?

We did have a investment in Mintera and we had done some work previously with Mintera. I would say going forward, for the 40-gig and 100-gig products, we're doing a lot of that development internally. So we don't see really any impact on our development schedules or ability to deliver 40-gig or 100-gig products going forward.

Alright, perfect. And then maybe one for Dave. The last couple of years haven't been normal. So if you could just remind us what a normal seasonality is within the custom measurement and the CCOP business for the September quarter?

Yes, the September quarter is more of a -- as far as seasonality, it's more on the CommTest area, where we tend to see -- first of all, in technology, you do see an impact from Europe typically in the September quarter, a lower demand than the June quarter. But CommTest, it tends to be typically more pronounced in the September quarter. So it can be sometimes as much as 10% lower than the previous quarter.

Got it. Alright, keep up the good work, gentlemen.

Next question, please?

Kevin Dennean, Citi.

I guess, first, just a housekeeping question. Within CommTest, can you tell us how much revenues from the prior quarter that's what you were able to ship and recognize in the current quarter?

Yes, we talked on the prior call of $13 million of revenue. And we said on the call that it had basically all shipped by -- I think by the time we had our call last quarter.

Okay. So all that revenue did -- [didn't need] ship this quarter?

Yes.

Okay. And then turning to CCOP, if I'm doing my math right, it looks like incremental gross margins were a little bit softer quarter-over-quarter. Can you talk about -- even though gross margins themselves improved, can you talk about what's happened there in terms of product mix?

And also, are you starting to run into capacity constraints? I know you're adding capacity here, but should we think about incremental gross margins within those businesses maybe being at a slightly lower rate going forward?

Well, if you look at first the lasers margin at almost 45%, that's pretty much what the leaders of the industry do, roughly around 45%. So we feel that's a good number.

In the optics area, we are adding capacity through capital equipment both at our existing factories and our CMs, but the revenue from the gesture recognition products tends to have a lower gross profit than the higher-end super blades that we sell.

Okay, great. Thanks very much.

Jeff Evensen, Sanford Bernstein.

Could you give us a bit more color on the gesture recognition components you sell, particularly the aspects of the light source that make you differentiated from other players? And also maybe some revenue ranges for what you get per unit that's sold?

I can -- we haven't talked about the revenue per unit sold, so that's not public information today, but we sell two components, one coming out of our optical comms business, which is a laser diode, which is a source of a light. And then we do [a] filter product out of our AOT group, that filters the light back into the unit.

The revenue in the quarter was less than 2% of our total revenue and the application that we sell into typically has seasonality as we get closer to the Christmas holidays.

Great. And given that your building capacity in China in a factory, do you have contracts in place that give you clear visibility on the revenue over at least the first year of the sales?

We have good visibility through the end of the calendar year based on the Christmas season ramp and beyond. And then we have forecasts beyond that period of time.

Also, we're working with a number of companies that are looking to bring out gesture recognition products. So we're -- in anticipation of progress in those areas also, we added this capacity.

The capacity in China is also it's versatile and that we can also use it for some of our 3D products like the lenses, the goggles, so we can mix products through that facility.

I understand why your filter is differentiated. I don't understand why your light source is differentiated. Lots of people make diode lasers of around 800 nanometers, which is I guess where you guys are. What makes this one special?

Yes, I think part of it is the reliability that we're able to achieve at certain ambient and temperature levels. We have a much tighter performance stack. And I think the other advantage is that we're able to manufacture high volumes of these and very high quality, which many of our competitors can't do this type of level of quality and high volumes.

(multiple speakers) The fact also that we're providing both the laser diode and the filter was seen as an advantage.

Paul Bonenfant, Morgan Keegan.

Thank you for taking my questions. I'm wondering -- and I apologize if you commented on this -- if there was any unrecognized revenue from supply constraints in the CommTest division in the quarter?

There was single-digit millions -- more in the -- more of a typical range. At the same time, related to that in the NSD area, we had over $5 million of revenue that we deferred because of an upgrade cycle that we're going through. So we expect to recognize that revenue over the next two quarters.

And as a follow-on to that, actually lead into my next question, can you give us some sense for what your expectations are for the NSD contribution in the quarter? I think it came in a bit lighter, toward the low end of your expectation in the June quarter, I think you had talked about 15 to 20. It came in around 16?

Yes, it did -- it came in at the lower end of the range as we -- that's why we gave that range. And part of it is because of the deferral of over $5 million of revenue due to the upgrade cycle.

Got it. And then one more question -- you, I believe very early on in the call, talked about a return to more typical ASP declines in both your CommTest and your opticals divisions. Last quarter, you had outlined some cost reduction initiatives in response to ASP pressure. Can we assume then that the severe ASP pressure that we saw in the March quarter was more one-time deal-related or having to do with the geographical mix more so than becoming the norm?

Yes, I think specifically to CommTest, it was the geographical mix, where North America was down compared to the norm. And then we had that large strategic deal that we talked about that became very competitive. Since then, I think we feel comfortable that things are settling more down to normal levels of price competitiveness.

Okay. Thanks for taking my questions.

Ajit Pai, Stifel Nicolaus.

A couple of questions. I think the first one is just about your commentary on 40-gig and the confidence that 40-gig is beginning to take off and you're seeing it. I think it was in reference to the CCOP segment.

So could you give us some color as to whether you expect that to result in an upgrade cycle? If you're selling 40-gig components and modules, shouldn't that also result in a pretty strong upgrade for your test and measurement division in the field? And it will be at the beginning of that? Are you already seeing signs of that? And how strong that could be and what the timing of that could be or duration of that? So, yes, that would be the first question.

Okay. The comment specifically was around CommTest in the first part of the discussion. And it was around 40-gig test equipment and where we're seeing higher volumes, both in lab production and now moving into the field. So that would be an indication, an early indication that there's some upgrade cycles happening in the field.

So it would be fair to say that we expect a fairly decent 40-gig cycle and on a leapfrog into 100-gig -- would that be fair?

That's -- from all indications of what we see today, that's what our belief is.

Right. But you also had, I think, while talking about the business, you talked about LTE and 4G and lots of wins. So when you're looking at NST and you're looking at a $40 million revenue run rate as your target, or at least the operating margins target you've talked about at that $40 million revenue run rate, can you expect, just given these changes that are happening in LTE and 4G, for that $40 million revenue -- I'm not sure whether that $40 million is a target -- to actually go up over the next six to eight quarters to something closer to $60 million?

Well, one of the things that's happening at the same time we're bringing on the new products, some of the legacy products are starting to dwindle down in volume. So there's some trade-off happening. So we don't expect a big jump-up in the revenue level, but we would expect the gross margins to improve; because typically, with the newer products during the initial introductions, at least, you would get better gross margins.

Right, but when you watch an upgrade cycle to next-generation technologies, won't the amount of spending by customers on these products actually begin to accelerate as well? So if you already had everything installed previously now when you're going into 4G and LTE, why wouldn't the revenues begin to accelerate as well?

You know, Ajit, I think that right now what we're doing is we're giving you a view of what we can see currently. And as the activity right now is more around drive test and protocol test activity, and that's what Tom was talking about. And then as the deployments really start to take hold and we get better visibility, then we'll share what those ranges could be.

Got it. And then the second question would be just about your balance sheet -- tremendous cash generation and there was lots of one-times right now that are still impacting your cash generation and integration, et cetera. So what does the acquisition pipeline and strategy look like? Is it still very rich and how would you prioritize uses of cash?

Yes. From a prioritization of use of cash, I would say acquisitions would be at the top or towards the top of the list. We do continually evaluate and pursue opportunities. I would say we've got a healthy pipeline. But I think as we have done in the last two acquisitions, we want to make sure they're strategic to the Company, immediately accretive in the first full quarter of integration. And from that perspective, we go through various gates to evaluate. But there is quite a bit in the hopper to evaluate at this point.

Got it. Thank you.

Subu Subrahmanyan.

I have some questions. First, on the guidance, I just wanted to see (technical difficulty) [shipped], are you expecting (technical difficulty) it was at?

Subu, you broke up a little bit. Could you just repeat that, please?

Yes, I was just wondering if for the September quarter, you're expecting the NST business to get to that $40 million run rate. [It seems to have been] before you acquired it or as you talked about this product transition, if that takes a little bit longer.

And that also brings my question on guidance. If you essentially assume a full quarter of [NSD at] about $40 million, it sounds like the rest of the business is relatively flat to down. Is that due to the CommTest seasonality? That's my first question.

Yes, that is true. It is due to the CommTest seasonality in the September quarter. And it is true that we're looking at the NSD revenue to get back to more of the traditional range closer to the model.

Got it. And then I have a margin question, Dave. You mentioned getting to the 11% to 14% operating margin for the full Company in the December quarter. December, obviously, tends to be a seasonally strong quarter benefiting from strong CommTest and tends to be a better margin quarter for the Company. I'm just wondering if you feel like on an ongoing basis, past December, you'll be able to sustain kind of that 11% to 14% margin level that you're thinking about?

That is our objective, is to be there in a sustainable model in that range. And if you look at the AOT and CCOP are now operating in those ranges. And as we bring test and measurement into that range, then you can see how -- and using a factor, I think we said 67% factor for the corporate expenses, you could see how we could execute in that 11% to 14%.

Starting the calendar and year-end quarter and from there out?

Yes, that's the objective.

Alright, thank you very much.

Todd Koffman, Raymond James.

I noticed you gave calendar 2010 on a December quarter operating margin targets based on revenue levels that are -- sounds like within reach. And was wondering, will you be giving sort of a -- on a going-forward basis, a six-month look through? Or is this somewhat unusual?

This was more about -- we've talked over a period of time of getting to our operating model of -- previously, we talked about 11%. As you can tell from the model that 11% was sort of the minimum, and so we wanted to let everybody know that we've got a model now that should be able to allow us to execute in a 11% to 14% range, depending, obviously, on the mix in any quarter.

So it was really more about an operating model. I think as we get better visibility into our business, we'll stay to our normal quarterly view, but it was more about the steps we've been taking to get to the model.

Just one quick follow-up. If you look at the December quarter, your -- pretty noticeable improvement in margin. And it looks like the bulk of that is coming in the test and measurement. [Apart] from the leadership changes, what are the big swing factors that you're able to expect to improve the test and measurement margin so much between now and December?

One of the things is we believe we're moving to the other side of these material shortages, not that there aren't still issues, but there's been quite a bit of expediting fee and charges around getting these materials in, because there's been an industry shortage. So that's definitely helping us.

And as we mentioned on the call here, we've gotten through now, if not all, the majority of the outsourcing for the North American sites for manufacturing. And there was, up to this point and probably for another quarter here, some duplicate costs as a result of that. And in the December quarter, we're primarily through those duplicate costs and associated costs with that.

And then I also believe we're -- as we're getting through this transition, we're getting a much better handle. And as the material shortages start dying down, we'll get a much better handle on material cost reductions out back through the supply chain.

And finally, on the NSD acquisition, the first, it will be five months when we finish September of having the acquisition. We're incurring some incremental costs as we transfer the people into our own facilities from the Agilent facilities and just hook everything up and get the business running. So those are some costs we shouldn't be impacted by in the December quarter or going forward.

Thank you very much. Good luck.

Greg Mesniaeff, Needham & Company.

Looking at your testing business, the two areas of growth are ethernet backhaul and DOCSIS 3.0. I was wondering if you can give us some color as to the pricing trends you're seeing in each one of them, in terms of ASPs and just the general pricing environment? Is one noticeably different from the other? Or are they similar? Give us some color. Thanks.

Okay. I think they're generally similar. In the DOCSIS 3.0, as we mentioned, we believe we have a competitive advantage with that product, and that allows us to be in a reasonable position from a pricing standpoint.

And then on the ethernet backhaul, we've got quite a bit of value-added services wrapped around the equipment because of our inherent knowledge in carrier-grade ethernet and its capabilities. So we tend to see reasonable margins in that area, because it's more than the hardware sale for those -- for that implement -- application of our products and our knowledge base.

Cobb Sadler, Catamount Advisors.

Just going back to the test and measurement operating margin guidance, the long-term guidance of 20% to 23%. That looks like that's on a revenue level -- it's like about a 1,100 basis point expansion on a revenue level a little bit below what you just posted. So, I guess, how are -- what's the pricing dynamic incorporated into your expectations, I guess, is the first question?

I think the way to look at it is, if you look at last December at the test and measurement business, it hit roughly that level of revenue and had a 17% operating profit. We noted a $3 million charge that we took. So we were right on top of it in that -- in the model.

What's happened is we have been impacted by a pricing dynamic over the first six months. And we've had some of these expedited costs, et cetera, for -- that we've incurred for our customers. So, as Tom had mentioned, we don't expect that pricing dynamic to continue. We expect to have some of these other costs behind us through the transitions.

And so those are the elements, plus we'll have a full quarter of NSD without having some of these incremental NSD transition costs. So those are really the main points.

If you look at the test and measurement business without the NSD impact, you would have seen that we were almost 14% operating profit for the quarter. So those are -- so we think we've got a model that gets us there. We think that there's -- it's about execution, as always. And we're positioning ourself to do that.

Ladies and gentlemen, that does conclude the time that we have available for Q&A today. I'd like to turn the call back over to Mr. Waechter for any closing remarks. Please proceed.

Thank you, Operator. As our call concludes, I'd like to reiterate some key points.

First, we continue to see robust demand for our products across all of our business segments. We reported revenue of $398.1 million in a book-to-bill greater than one for the Company in all three segments. Bookings in our Optical Communications business were particularly strong.

We are starting to see significant benefit from the improvements we made to our operating model. Gross margins for all three of our segments improved sequentially. Our working capital metrics also improved, leading to stronger cash flow in fiscal Q4. The integration of our NSD acquisition is progressing well, and we reiterate our expectations that it will be accretive to earnings in fiscal Q1.

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, 3D, and wireless test. We are making strategic investments to build capacity and to support the demand growth over the next fiscal year, as we build on the momentum we've established in fiscal year '10.

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

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.