Viavi Solutions Inc (VIAV) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2011 JDSU earnings conference call. My name is Regina and I will be your operator for today. (Operator Instructions). As a reminder, today's event is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Cherryl Valenzuela, Senior Investor Relations Manager. You may proceed, ma'am.

Thank you, Regina, and welcome, everyone, to JDSU's fiscal 2011 first-quarter financial results conference call.

Joining me on the call today are Tom Waechter, Chief Executive Officer, and Dave Vellequette, Chief Financial Officer.

I'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 of our annual report on Form 10-K filed on August 31, 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.

As a reminder, the quarterly earnings press release, supplementary slides, and historical financial tables are posted 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 investors section of our website.

I would now like to turn the call over to Tom.

Thank you, Cherryl, and good afternoon, everyone.

I would like to begin by providing an overview of our Q1 financial results, followed by highlights of our business achievements in the quarter. JDSU reported revenue of $411.3 million inclusive of contributions from our NSD acquisition, which represents growth of 37.7% year on year and 3.3% sequentially.

Book to bill for the Company was above one for the sixth straight quarter, driven by strong bookings in our optical communications business. Gross profit of $195.1 million, or 47.4% of revenue, improved from 44% in the prior fiscal year and 45.5% last quarter. In both dollar and percentage terms, this represents the highest level of quarterly gross profit for the Company in the last five years.

JDSU also reported operating income of $44.4 million, or 10.8%, compared to 3.4% in the prior fiscal year and 9.3% in the prior quarter. This operating margin exceeds our guidance and is the second highest reported by the Company in the last five years. It is within sight of our target operating model of 11% to 14% operating margin when quarterly revenue is greater than $415 million.

Now let me provide highlights from each of our individual business segments. Given recent mixed messages with respect to the optical communications sector, I would like to begin with our CCOP segment. This segment is comprised of two businesses, optical communications and lasers.

The combined CCOP results are as follows. Fiscal Q1 revenue was $168 million, and operating margin was 14.4%, at the high end of our target model for this segment. Gross margin of 31.9% has improved by more than 11 percentage points year on year. Book to bill for this segment was greater than one.

Now let me provide more color on each business. First, optical communications. Fiscal Q1 revenue was $143 million and gross margin was 29.5%. Gross margin improved by approximately 10 percentage points year on year and one percentage point sequentially, due to primarily an increasing mix of new products and cost-reduction activities.

On the revenue side, the 66% year-on-year and 6% sequential revenue increase was driven primarily by growth in our ROADM, Circuit Pack, tunable XFP, and gesture recognition products. Revenue from products introduced within the last two years accounted for more than 60% of total revenue in fiscal Q1, exceeding our target of 50%. We believe that we are positioned very well with our customers and with our differentiated product offerings to see continued growth in this business.

Fiscal Q1 book to bill was significantly greater than one. Our combined book to bill was greater than 1.6 for our ROADM, Circuit Pack, and tunable XFPs. Our optical communication backlog entering fiscal Q2 was at the highest level in many years.

We did have a few product lines where our book to bill was less than one in fiscal Q1. These were telecom pumps, passive components, and pluggables where the combined book to bill was approximately 0.85.

I would now like to provide an update on some of our key products, beginning with our tunable XFP. In Q1, tunable XFPs accounted for approximately 7% of total optical communications revenue. Since its introduction, JDSU has shipped more than 12,000 tunable XFPs, and we believe the demand will remain strong as customers design new variants of the product.

In September at the ECOC tradeshow, we highlighted an enhanced tunable XFP, which features technology that provides improved performance for network transmission, including increased optical output power and improved optical signal-to-noise performance. We are executing our tunable roadmap to continue to provide additional differentiated products to our customers.

Gesture recognition also grew for the fourth consecutive quarter. As a reminder, we supply two key products for a current gaming platform -- laser diodes from our optical communications business and optical filters from our AOT segment. The combined revenue from these two products in fiscal Q1 was greater than 3% of total JDSU revenue.

ROADM revenue grew more than 150% year on year and 9% sequentially, and was again over 25% of total optical revenue. Book to bill for ROADMs continues to be significantly over one.

Revenue for the Super Transport Blade has grown 14 times in the past year and 28% sequentially. Our mini 50 GHz and mini 100 GHz WSS product lines are also significant contributors to our continued success in the market, as they now represent more than 50% of our total ROADM revenue.

This quarter, we enhanced our offerings by introducing low port count WSS products for both the mini-50 and mini-100 offerings. These low port count offerings are designed to provide high performance, but lower-cost points, for edge and metro regions of the network.

Our market leadership in ROADMs was recognized by Infonetics Research last month.

Additionally, we are seeing strong demand for our 40G and 100G products. Through close collaboration with our customers, we are winning design slots for our components at the leading network equipment manufacturers. Our component and module roadmap is strong, and through partnerships with key suppliers and customers, we believe we will continue to see strong traction with our customers for both line side and client side 40G and 100G solutions.

Demand continues to exceed shipments across the majority of our product lines, and we are steadily ramping our ability to supply these products in greater volume, particularly for our competitively-differentiated products, such as the tunable XFP, Super Transport Blade, gesture recognition, and ROADMs.

Early in fiscal Q1, we had a number of external supply constraints. These constraints eased later in the quarter, and this led to better capacity utilization and increased shipments as we progressed through Q1. Since June, we have increased our production capacity significantly and we expect that our -- over the course of the fiscal year, we will have added 50% more operating capacity.

Turning to our lasers business within the CCOP segment, fiscal Q1 revenue grew approximately 11% sequentially to $25 million, while gross margin improved to 45.5% due to product mix and continued cost improvements. Book to bill was less than one for the quarter.

The recently launched JDSU 4 kW fiber laser product continues to gain market traction. Incorporated into the heart of the Amada laser-cutting system for metal processing applications, the JDSU laser enables up to three times higher processing speeds on thick materials as compared to traditional CO2 laser technologies. Only last week, Amada won best product at the EuroBLECH international sheet metal trade show in Germany for this system.

We expect the 4 kW fiber laser to be shipping at low volumes in the beginning of calendar 2011 and in full production by the summer of 2011.

We are also developing a new fiber-based class of pulse lasers. These new lasers will expand the capabilities of existing products used in high-precision micro-machining applications. We expect first revenue from these new lasers to start in fiscal 2012.

Moving on to the CommTest segment, last month we named David Heard as the President of our Communications Test and Measurement segment. David brings a depth of experience and extensive industry knowledge to this role in areas that are key to JDSU's growth strategy.

During his 20 years in the communications sector, David has grown and managed a range of networking and wireless businesses and has extensive operational and international experience. I'm pleased to welcome David to JDSU's senior leadership team and I look forward to his contributions.

Turning to fiscal Q1 results, CommTest revenue was $182.8 million, an increase of 27.5% year on year and a sequential decrease of 1.8% due to the impact of backend loaded orders and deferred software revenue. CommTest book to bill was less than one.

Gross margin was 60.7%, more than four percentage points higher than the prior quarter's gross margin of 56.1%, as a result of continued execution on cost-reduction initiatives, as well as product mix including greater NSD revenue. Operating margin also improved sequentially, to 11.9%.

In its first full quarter with JDSU, NSD was accretive to earnings. While LTE-related revenue was a small portion of the total, our unique end-to-end LTE solutions puts us in a position of strength as the number of global carriers committed to deploying LTE continues to rise. For LTE projects, we currently are working with 30 customers on protocol tests, 25 customers on drive tests, and nine customers for service assurance.

We have recently announced engagements with SingTel and Chunghwa Telecom, two leading carriers in Asia-Pacific. LTE revenue currently is being led by protocol and drive test offerings with service assurance to follow.

As service providers deploy LTE and high-speed packet access technologies across more cell sites to cope with both growing numbers of mobile broadband subscribers and increased user bandwidth, efficient backhaul of mobile traffic remains a priority. Infonetics reports spending on mobile backhaul ethernet equipment will be $1.8 billion this calendar year with a compounded annual growth rate of 35.1% from 2009 to 2014.

Our leadership in helping service providers turn up powers across North America positions us to earn new business as service providers worldwide begin to deploy this technology. Frost & Sullivan recognized our market traction by awarding JDSU a 2010 Market Penetration Leadership Award for gigabit ethernet test equipment.

The cumulative effects of higher bandwidth demand, more video across networks, and richer mobile applications continues to push upgrades across the metro and core networks. We shipped 17 40G and 100G test systems in the quarter to customers worldwide. 10 of these systems were new customers for 40G and 100G. As 40G and 100G migrate to the field, our presence in the lab positions us with a competitive advantage to earn revenue as these higher speed networks are deployed.

We saw sequential revenue growth in North America. Fiscal Q1 highlights included significant growth in revenue from the U.S. federal government, steady sales to support ethernet backhaul testing, and sales for mobility applications, including a multimillion dollar first office application for LTE.

The quarter also delivered major CommTest wins in other regions, including a multimillion dollar deal for service assurance in Europe; multiple sales of our optical network management system in Eastern Europe, Africa, and Asia-Pacific; our first win in Sri Lanka for 3G UMTS; key wins for DOCSIS 3.0 in Latin America and EMEA; mobile verification tests in Middle East and Africa; and multiple protocol tests and drive test wins worldwide.

JDSU's continued focus on collaborative innovation resulted in products and features introduced within the last two years accounting for approximately 45% of CommTest revenue in fiscal Q1.

Our remaining segment is Advanced Optical Technologies, or AOT. Fiscal Q1 revenue was $60.5 million, an increase of approximately 11% sequentially. Gross margin was 54 -- 50.4%, while operating margin was 36.5%. Book to bill was less than one.

Revenues for the quarter included growth in currency pigments for banknotes, continued recovery in the transaction card market, and growth in the use of our optical filters for consumer applications.

In order to meet growing demand for optical coatings and filters in a cost-efficient manner, we formally opened a new facility in Suzhou, China, to manufacture high-precision optical coatings for a wide variety of markets that include 3-D, gesture recognition, theater projection, and sensing applications. This also supports our strategic initiative of expanding our presence in the Asian market.

As I conclude my formal remarks, I would like to thank our employees for their focus, commitment, and contributions this quarter. 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 Q1 and will discuss our outlook for Q2.

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

First-quarter revenue of $411.3 million was up 3.3% from the prior quarter and up 37.7% when compared to the first quarter of fiscal 2010. Revenue was at the lower end of our previously stated guidance.

CommTest revenue was impacted by seasonal backend-loaded orders and deferred revenue -- software revenue, while CCOP revenue growth was constrained by vendor lead times and test capacity at the beginning of the quarter. Both supply and capacity constraints in CCOP steadily eased during the quarter.

First-quarter gross margin was 47.4% of revenue, up from the previous quarter's gross margin of 45.5% and up from first-quarter fiscal 2010's gross margin of 44%. The first-quarter gross margin improvement reflects improved margins in CommTest due to favorable product mix and a full quarter of NSD revenue and improved margins in our CCOP segment.

Operating expenses for the first fiscal quarter of $150.7 million were at 36.6% of revenue, a slight increase from the prior quarter's 36.2% of revenue. As a result of improved gross margins, our operating income for the quarter of $44.4 million was 10.8% of revenue, which compares to a 9.3% operating margin for the prior quarter.

Net income for the first quarter of $44.8 million, or $0.20 per share, compares to a fourth-quarter fiscal 2010 net income of $33.1 million, or $0.15 per share. Net income and earnings per share for the quarter benefited from a favorable effective settlement of uncertain tax positions in the amount of $4.5 million, or $0.02 per share.

A detailed reconciliation of our non-GAAP results to our GAAP results is available today in today's press release.

Our first-quarter non-GAAP operating results exclude, among other items, amortization of acquired technology and intangibles of $22.7 million, a $9 million charge related to stock-based compensation, and acquisition accounting adjustment to revenue of $6.1 million, and nonrecurring charges primarily related to NSD of $5.4 million. Including the noted items, the first-quarter fiscal 2011 GAAP net income was $100,000, or breakeven on an earnings per share basis, which compares to a prior-year first-quarter GAAP net loss of $31.9 million, or a loss of $0.15 per share.

Now, looking at quarterly revenue by region. Americas revenue of $206.5 million, or 50.2% of total revenue, was up $12 million from the prior quarter, driven primarily by increased revenue from North American service providers and network equipment manufacturers.

EMEA revenue of $104.2 million, or 25.3% of total revenue, was approximately flat from the prior quarter. And Asia-Pacific revenue was $100.6 million, or 24.5% of total revenue, up $1 million from the prior quarter.

Moving to the segments, in the CCOP segment the breakout of the key metrics for optical communications and lasers is as follows. Optical communications revenue in fiscal Q1 was $143 million, up 6.2% when compared to the prior quarter's revenue and up 66.3% when compared to the prior year.

Due to supply and capacity constraints, we were unable to ship over $10 million of optical communications demand this quarter. We saw strong sequential growth in the Americas and EMEA regions, while Asia-Pacific revenue declined sequentially due to supply constraints which limited shipments to this region. Sequential ASP decline was less than our historical quarterly range of 2% to 4%.

Gross margin for the quarter was 29.5%, up from the prior quarter's gross margin of 28.5%. The sequential improvement was driven by product mix, better factory utilization, and cost-reduction activities. We believe our optical communications gross margin can be between 30% and 35% when quarterly revenues are $150 million or more.

In our lasers business, first-quarter revenue of $25 million was up approximately 11% when compared to the prior quarter. Gross margins were 45.5%, up from the prior quarter's gross margin of 44.6% due to product mix and cost structure improvements.

Total CCOP revenue was $168 million, up 6.8% from the prior quarter. Gross margin was 31.9% and operating income was $24.2 million, or 14.4% of revenue, at the high end of our targeted operating margin range of 10% to 15%. Profitability in this segment continues to improve, due to higher revenue levels, improved factory utilization, and a higher mix of laser revenue.

Now moving on to our CommTest segment. First-quarter revenue of $182.8 million was down 1.8% from the previous quarter and up 27.5% from the prior fiscal year. The sequential revenue decrease was due to seasonal backend-loaded orders, which resulted in the deferral of $4 million of end-of-quarter shipments.

In addition, we deferred $7 million of NSD software revenue that will be recognized over the next four quarters. NSD revenue recognized in the quarter was approximately $30 million. With a full quarter of NSD revenue, service assurance is now greater than 20% of CommTest revenue.

On a regional basis, we saw a seasonal decline in the EMEA and Asia-Pacific regions with lower field test and lab and production revenue. CommTest revenue did increase sequentially in the Americas region, as Tom noted earlier.

Fiscal Q1 gross margin for CommTest of 60.7% was at the high end of our targeted range of 57% to 61%. The gross margin improvement was driven by improved product mix, which included higher revenues from the NSD business as well as cost structure improvements.

CommTest operating profit was $21.7 million, or 11.9% of revenue, which compares to 11% in the prior quarter. Targeted operating margins for CommTest are between 20% and 23%.

For the Advanced Optical Technologies, or AOT, segment, fiscal Q1 revenue was $60.5 million, or 10.8%, compared to the prior quarter, driven by strength in our currency pigment, transaction card, and consumer electronic applications businesses. As previously noted, the currency product will see demand fluctuate according to the level of bank note printing needs.

Fiscal Q1 gross margin for our AOT business was 50.4%, down from 51.9% in the prior quarter. This is due to higher manufacturing spend in our new Suzhou, China, facility. AOT operating profit for the quarter was $22.1 million, or 36.5% of revenue, up $2.3 million from the prior quarter due to the higher revenues. The AOT segment continued to operate in its targeted operating margin range of 34% to 37%.

Moving to the balance sheet, for fiscal Q1 2011, the Company generated $35.7 million of cash from operations. Capital expenditures totaled $23.3 million, or 5.7% of revenue. At the end of fiscal Q1, the Company held $620 million in total cash and short-term investments. Headcount as of October 2, 2010, was 4,744.

Now to our Q2 guidance. Based on our current visibility, we expect CommTest and CCOP revenues to each grow between 6% and 10% in fiscal Q2. CommTest has additional potential revenue of up to $10 million from carrier end-of-year budget flush. CommTest operating margins are estimated to be between 15% and 18%.

AOT revenue is expected to decline by slightly more than 10% due to cyclical softening of currency pigment demand and delays in printing of the U.S. $100 bill. This will also reduce AOT operating margin to below 30%.

Operating expenses are expected to be between $159 million and $162 million due to variable selling costs, increased R&D investment, and incremental IT infrastructure investment. Taxes, interest, and other expenses are expected to result in a net expense of $5 million to $6 million. Share count for calculating EPS is expected to be approximately 230 million shares. Capital equipment purchases will be between 5% and 6% of revenue as we invest in our Suzhou facility and in expanding our capacity for optical communications products.

Taking into consideration the factors above and based on our current visibility, we expect second-quarter revenue to be between $425 million and $450 million, and non-GAAP operating margin to be between 10% and 12%.

Thank you, and operator, we will now take questions.

(Operator Instructions). Ajit Pai, Stifel Nicolaus.

A couple of quick questions. I think you've seen very broadly a number of comm equipment vendors, your customers over there, guide down sequentially for the December quarter, and you had mixed results out of some of your competitors in the optical component side. So what is your view right now of what's happening?

You've talked about tremendous bandwidth growth. You've talked about capacity constraints in the network. What do you think is happening and why are you seeing some of these pushouts and staggered spending or supply chain correction taking place. Could you give us some view what you think is happening?

I guess we can just really speak directly about our business. But we're not seeing any major pushouts at this point, like some others have reported, and we believe that our differentiated products, like the tunable XFP, Super Transport Blade, and some of our ROADM products, are really in a sweet spot of the demand cycle.

So we're not seeing any significant pushout or really weakening in the demand. As we mentioned, we went into our Q2 quarter with a very extensive backlog and continued strong demand.

Got it. And then, just looking at the commentary you made about the 40G and 100G systems, I think you're referring to those sales primarily into R&D labs, and then you talked about being well positioned on the field test side. So, could you give us some indications since you are speaking with customers on the carrier side as well as the equipment side, when do you expect the acceleration in field test for 40G and 100G to begin to start taking place?

We're seeing some of that on 40G already. As I mentioned, we had a number of products shipped out to customers -- 40G products during the first quarter. I think -- so that's happening on 40G and we believe that will continue to accelerate because of the bandwidth demands.

100G will take obviously to longer to move out of the lab, and expect that will be out into later calendar-year 2011 and beyond.

When do you expect 40G to be material to the overall test and measurement business?

I would say as we move into the second half of next calendar year, of calendar year 2011, we'd expect that to -- be seeing revenues that are noticeable in our total CommTest numbers.

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

Just a clarification. Is the revenue guidance $415 million to $440 million with a potential $10 million extra for the budget flush, or is it actually $425 million to $450 million with a potential for $10 million, making the high end of the range $460 million? Just some clarification there.

Yes, I think you want to think of it as $425 million to $450 million, and the $450 million includes up to $10 million of budget flush.

Okay, so $450 million would be the upper limit. And then, maybe if you could help us qualitatively, with the book to bill less than one in CommTest, lasers, and advanced optical, do we -- is it typically less than one at this point of the year or is it just kind of -- are you seeing more turns business? Just your comfort level with the sequential growth guidance, considering the book to bill [low] one in these segments. Thank you.

Yes, in the test and measurement business, it is pretty typical for it to be less than one for the quarter ended September, as you have. The, as we noted, the orders are pretty quiet in the August timeframe as the European markets get very quiet for us, and then the orders start to come in the September and late September timeframe, and we noted how we saw the orders of very backend-loaded, in fact, in September, so that is not atypical.

I think in the AOT business, as we noted, that we believe that revenue will come down based on, again, it has more to do with bank note printing needs, and those are really the two areas where we had the book to bill less than one, and I think we guided AOT appropriately and CommTest is pretty typical for that quarter.

I think specifically on AOT with the bank notes, it's been publicly announced that the $100 bill is moving out, as far as volume introduction, so that's -- probably had a bigger impact on this quarter than normally.

One last question. On linearity, should we expect December quarter linearity to improve from the September quarter?

I think in CommTest, it will be better than the September quarter, with the exception of what gets flushed at the end of December, and it's always an exception.

But I think the normal base business, we do expect that it will have better linearity. The September quarter is especially impacted by vacations, and by the time people get back from vacations and get back into the ordering cycle, it gets really late into the quarter. But it will improve in December, but back-end flush will sack some additional orders in December.

Thank you, gentlemen. Good luck.

Kevin Dennean, Citigroup.

Thanks very much. I guess a quick question on optical components. Can you talk a little bit about the drivers from here to get to the upper end of your gross margin range?

I think on optical components from a gross margin standpoint, we continue to pick up manufacturing or operation efficiencies, so that's going to be a significant driver.

So, some of the new products, as they're moving into higher volumes, will get better yields through the -- both through our fabs and through the CM partners, and that will have an impact. And then, I think also the mix. As we mentioned, 60% of our revenue in Q1 was from the newer products, and we expect that will continue to increase as we go through the rest of the fiscal year. So, I think it's primarily a combination of those two factors.

And then, Tom, as a follow-up to that, with expanding -- with further expansion in gross margins, should we expect to see that drop down to the operating margin line?

Yes, because I think from an operating expense, I don't see a significant increase in the operating expenses, proportionally to that incremental revenue. So, I think you will see a healthy amount of that drop down.

And then one last quick one, if I could. The component shortages you cited in the beginning of the quarter, can you give us some color on what sort of components they were, the magnitude of it, and the state of affairs today? It sounds like the component shortage has fully eased, but if you could give us some insights.

So it's, again, primarily around integrated circuits have been probably the primary shortage with trying to ramp in the semiconductor industry. I would say that that did ease as we went through the quarter and improve significantly.

We also saw power supplies become one of the more significant items on our [parade o] of bringing material shortages in. As we were initially entering the quarter, we did see that ease somewhat during the quarter and we expect that will continue to get better.

Troy Jensen, Piper Jaffray & Co..

A quick question for Dave and another follow-up here. The optical gross margin guidance of 30 to 35 at revenues of $150 million and higher. I'm assuming it's 30% gross margins at $150 million. What revenue level would you need to reach 35% gross margins?

Well, it depends on the mix, first, and then, of course, if we're at the higher-end products that have fewer competitors, et cetera, we're really not talking about what that dollar amount would be, exactly.

So, I think that's a fair statement to say -- as we cross $150 million, we should be able to get to the 30, and then beyond that, it has a lot more to do with the mix and the competitive nature of the offerings at the time.

So, I really didn't give a number on that. I think this is sort of a range that we're going to shoot for, and as we go through the $150 million level, we'll see how we can get closer to that -- operate consistently in that 30% to 35% range.

Got you, and then a quick one for Tom here. Colorless, directionless, and contentionless ROADMs, just curious to know you guys' roadmap there and when you think carriers are really looking for CDC ROADMs.

It's definitely on our roadmap, and I think the introduction of those type of products is always difficult to give the exact timing, but we would see it out into calendar 2011. I don't believe we will see significant volume with those products in this calendar year.

Good luck going forward, gentlemen.

Jeff Evenson, Sanford C. Bernstein & Company, Inc..

I was wondering if you could give us some more color on your gesture recognition business. I'm interested in both the timing of the orders, how would you expect your revenue in the December quarter to compare to the September quarter, and also if you could talk a little bit about the ratio of your revenues divided between CCOP and AOT.

Yes, from the division of revenue between CCOP and AOT, it's approximately one-third AOT and two-thirds CCOP, as far as the split.

And then, I think as far as volumes, we will see higher volumes in the December quarter than we saw in the September quarter, so we see a continued ramp through December quarter. Then to some degree beyond that, it depends on bringing on new customers and how the sales beyond this initial offering of the gaming products grows.

Subu Subrahmanyan, The Juda Group.

Two questions. First, can you talk a little bit about NSD? You mentioned that the revenue contribution this quarter was $30 million. There was a $7 million deferral, but the run rates for that business had been about $40 million in 2009, so just wondering kind of when you expect to get back to that run rate and what are the factors playing there?

And then, the other question I had was on the operating margin goal of 11% to 14%. At the mid-point of your range, you get to the low end of that level just after this quarter. But you know, that's a level that you guys had expected to be at on a sustained basis starting in December quarter, and I'm just wondering if you're still feeling that that's achievable, not just for the December quarter but also going forward.

Let me talk about the -- on the NSD. So, because of the mix of the products and the software recognition rules, we deferred the $7 million. As you remember last quarter, previous quarter we deferred about $5 million.

We expect that as these deferrals roll off, we'll get those benefits in the December quarter. Right now, I would say that we're looking at the revenue levels to get closer to that $40 million range as we get in the December and March quarter timeframe. So, it has more to do with the mix and the software revenue recognition rules.

As you can see, we shipped $37 million of value in the quarter and were only able to recognize $30 million because of the deferrals.

Your next question was about the operating margin range in that we did 14.4% operating margin, which is at the higher end of the range, and then as the revenues stay above the $150 million range, we'll look at adjusting, potentially, those ranges [in] the 10% to 15% for CCOP going forward.

Dave, actually it was for the full Company, my question was, the 11% to 14% level that you'd talked about. Your -- the midpoint of the guidance for December gets you there. I was wondering about the sustainability of that for the full Company.

Yes, so we believe that we get there in the quarter because the revenues will be above the minimum range, as we said. And so, we think we are now at a model that we could sustainably stay in that 11% to 14% range.

And again, as you can see, the mix is what has impact on that. AOT in the quarter, the mix will change where they're coming out. It will be dropping 10% and that their operating margins will be dropping. But I think now we have a mix of products and profitability that allows us to stay in those operating profit ranges that we have identified in the model.

Got it. And final question, on the seasonality, CommTest seasonality for fourth quarter is usually more pronounced, especially in field services segments, and the 6% to 10% kind of number that you are talking about, is it just macro factors, lower kind of U.S. sequential ramp for test and measurement CapEx? Why is it more muted this year than previous years?

When I look at the -- if you look at the history, it's the -- the budget flush is really what helped grow it beyond what I'll say that the range that we provided here, and that's why we identified the budget flush as incremental to that 7% to 10%.

So, as we get the benefit of that, that should help us provide an incremental increase, provided that budget flush shows up, similar to what you've seen in the past.

Todd Koffman, Raymond James & Associates.

My question was answered. Thank you.

With that, I will turn the call back over to Tom Waechter for closing remarks.

Thank you, operator. As our call concludes, I'd like to reiterate some key points. First, JDSU continues to improve its business model.

Today, we reported the Company's highest gross margin and second highest operating margin in five years while at the low end of our revenue guidance. We are within sight of our target operating model of 11% to 14% operating margin, and quarterly revenue is greater than $415 million. Our objective is to attain this model by the end of fiscal Q2.

The integration of the NSD acquisition is proceeding as expected with an accretive contribution in its first full quarter inside of JDSU. While we work through unanticipated software and service-related revenue deferrals, we did realize cost and revenue synergies in fiscal Q1 and we are bullish on the wireless and LTE growth opportunity this business provides.

The demand for our products remains strong as carriers continue to make investments in order to meet the need for greater bandwidth worldwide. We expect to continue growing our business as supply constraints ease in our optical communication and test and measurement businesses, and we invest in incremental capacity for our optical communications and AOT businesses.

Our relentless focus on collaborative innovation, leading to a significantly increased revenue level from new products, continues to contribute to improved financial performance.

Thank you again for taking the time to join us on this earnings call. We appreciate your interest in JDSU. Have a great evening.

Ladies and gentlemen, thank you so much for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a wonderful day.