Viavi Solutions Inc (VIAV) 2012 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first-quarter 2012 JDS Uniphase Corporation earnings conference call. My name is Erin and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of today's conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today's conference, Ms. Michelle Schwartz, Senior Director of Investor Relations. Please proceed, ma'am.

Thank you, operator and welcome to JDSU's fiscal 2012 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 30, 2011. 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 Investor section of our website. I would now like to turn the call over to Tom.

Thank you, Michelle. And good afternoon everyone. JDSU delivered first-quarter revenue of $421.1 million, at the high end of our guidance range. Gross margins for the quarter improved from the prior quarter, despite lower revenues. Operating expenses declined by over $9 million due to stringent cost controls resulting in an operating margin of 10.9%, which exceeded our guidance range. In fiscal Q1, new product revenue remained strong, with 67% of Optical Communications revenue and 56% of CommTest revenue being generated from products less than two years old. Additionally, our financial strength continue to provide us with the necessary capital to fund our robust new product pipeline, as cash generated from operations totaled $22.9 million.

On our last call, I highlighted that we expect some short-term revenue volatility due to uncertainty in the macro environment, and that Optical customers were reducing their on-hand inventory levels. I would like to provide an update on these topics, as well as some clarity on the impact of the recent flooding in Thailand. Significant improvements in our Optical customers' inventory levels have been made over the past six months. [Q1] bookings for some of our key Optical products were very encouraging. ROADM bookings were up nearly 25% from last quarter and were the highest level in the last three quarters. Our tunable, XFP bookings were up 70% from the prior quarter. 7 out of 12 product lines saw their bookings increase on a sequential basis.

Turning to the situation in Thailand, the floods have created a great deal of hardship on the Thai people, the infrastructure and the ability to do business in the affected areas. I am happy to report that all they JDSU employees in Thailand are safe but many of them have been displaced from their homes due to the flooding. We are doing what we can to help them with this situation. As for the impact on our business, I am happy to say that our equipment is safe and dry at this point; the water level at the Pinehurst, Fabrinet facility has been steadily subsiding, and over the past week has dropped by several inches, which is encouraging. Fabrinet has reported that power has been restored to the Pinehurst facilities, and that the equipment is being readied for production.

We are also executing some of our contingency plans in an effort to maximize output, to satisfy our customers' top priorities. The timing of achieving full production is still not certain, as water levels are still causing challenges with the infrastructure in area, but we are very encouraged by the events of the past several days and expect to have some level of production within the next week or two weeks. While there are a number of logistical challenges, we have been able to ship some existing finished goods to our customers. Dave will talk more about the Thailand situation when he updates you on our guidance shortly.

Moving onto demand for our products, broadband drivers remain strong; however, the macro economic environment remains challenging and recent indicators have become more volatile since our last call. As a result, we are seeing our service provider customers implement lengthier CapEx approval processes, and we now expect little to no budget flush in the December quarter. We cannot predict exactly how long the current macroeconomic conditions will impact our revenues or when the Fabrinet, Pinehurst facility in Thailand will be back in full production. At the same time, given the healthy underlying fundamentals of our business, we remain focused on meeting our customers' needs, profitability and cash flow generation while continuing to invest in R&D and new products that will further differentiate us in our markets. I'll now hand the call over to Dave, who will take you through the details of our financial performance in fiscal Q1, and will discuss our outlook for Q2. Following Dave's remarks, I will provide more details on our results, the trends we are seeing, and our strategy moving forward.

Thank you, Tom. Before I start, please note that all numbers are non-GAAP unless I state otherwise. First-quarter revenue of $421.1 million was down 10.8% from the prior quarter and up 2.4% when compared to the first quarter of fiscal 2011. Revenues declined sequentially in each of our business segments as expected. Book-to-bill for Lasers was approximately 1; CommTest, Optical Communications, and AOT book-to-bill for each, less than 1; book-to-bill for the total Company was also below 1. The first quarter's gross margin was 47.3% of revenue, up from the previous quarter's gross margin of 46.7%, and relatively flat with first-quarter fiscal 2011's gross margin. The sequential increase in gross margin was primarily due to segment mix and improved CommTest gross margins.

Operating expenses for the first quarter of $152.9 million was down from the prior quarter's $162.3 million primarily due to lower headcount in CommTest, a direct result of the previously announced restructuring activities and lower corporate spending. The first quarter operating margin for the Company was 10.9%, up from 10.8% for the year-ago period, due to lower operating expenses as a percentage of revenue. Net income for the quarter was $40.9 million, or $0.18 per share, which compares to $53.9 million or $0.23 per share for the prior fiscal quarter, and to $44.8 million or $0.20 per share for the year-ago period; the year-ago period benefited from a favorable tax provision. A detailed reconciliation of our non-GAAP results to our GAAP results is available in today's press release.

Our non-GAAP operating income excludes, among other items, amortization of acquired technology and other intangibles of $21.2 million, $11.6 million charge for stock-based compensation, and a $7.4 million accrual for a legal dispute. Including the noted items, the fiscal first quarter 2012 GAAP net loss was $5.8 million, or a loss of $0.03 per share, which compares to a prior-year first-quarter GAAP net income of approximately $100,000 or breakeven earnings per share.

Now, looking at quarterly revenue by region -- Americas revenue of $212.4 million, or 50% of total revenue was down $17.7 million, in the prior quarter. The decrease was due primarily to CommTest experiencing lower demand due to macroeconomic conditions and a typical summer seasonality. EMEA revenue of $101 million, or down 24% -- I'm sorry, or 24% of total revenue was down $21.5 million compared to the prior quarter due primarily to seasonal demand in CommTest and inventory adjustments in Optical Communications business. Asia-Pacific revenue was $107.7 million, or 26% of total revenue, down $12 million, from the prior quarter. An increase in AOT and Laser revenues was offset by a slight decline in CommTest revenue as well as the decline in Optical Communication's revenue primarily driven by lower demand for gesture recognition components.

Moving to the segments; first, to the CCOP segment. Total CCOP revenue was $180.3 million, down 10.9% from the prior quarter, and within our guidance of down 10% to 13%. Gross margin was 32.3%, and operating income was $25.6 million, or 14.2% of revenue. The decline in operating profit was primarily due to lower Optical revenue and gross margin. Geographically, our Optical business saw strength in the Americas and a decline in Europe and Asia whereas Laser saw a decline in the Americas but solid growth in Asia and a slight increase in Europe. Optical Communications revenue in fiscal Q1 was $150.1 million, down 14% when compared to the previous quarter's revenue and up 5% when compared to the prior year. 6 out of 12 product lines grew sequentially including our pluggable products for LAN/SAN applications.

As expected, gesture recognition revenue declined to less than 2% of total JDSU revenue and accounted for more than 50% of the sequential decline in Optical revenue. Revenue for ROADMs and tunable XFPs declined primarily due to customer inventory correction. Quarterly ASP decline was 2.7% which was below the midpoint of our historical range of 2% to 4% sequentially. Gross margin for the quarter was 28.8%, down from the prior quarter's 31.1%, and just below our target range of 30% to 35%. Gross margins declined due to product mix and lower volumes. Product lead times during the quarter were four weeks to six weeks for the majority of our Optical products allowing our customers to respond better to their customer requirements. We anticipate that lead times for our Fabrinet assembled products due to the complications from the flooding will be extended during Q2.

This includes our ROADMs, our tunable XFPs, some of our amplifiers and some of our other low-volume product. In our Lasers business which includes not only Commercial Lasers but also our Photovoltaic business, first quarter revenue of $30.2 million was up 8.6% compared to the prior quarter and up 20.8% compared to the prior year due to strength in our Q-series solid state Lasers, our CPV solar cells, and our recently introduced 4 kilowatt fiber laser. We recognized approximately $2 million of revenue from our kilowatt fiber Laser in the quarter. Gross margins were 49.3%, up from the prior quarter, primarily due to growth in our solid state Lasers. As a reminder, the majority of our commercial laser products are manufactured at Fabrinet in Thailand and is subject to supply chain disruptions due to the flooding. Finally, our targeted CCOP operating model is for -- operating margins of 16% to 20% when revenues are above $190 million.

Now, moving on to our CommTest segment. Fiscal Q1 revenue of $185.2 million, was down 12.4% from the prior quarter's revenue due to macroeconomic conditions and typical summer seasonality. On a year-over-year basis, first quarter revenue was up 1.3%. On a sequential basis, each geographic region saw revenues declined except Latin America, which had a slight increase. Fiscal Q1 gross margin for CommTest was 61.9%, which compares to a gross margin of 59.3% for the previous quarter and 60.7% for the year-ago quarter. Gross margin improvement was mainly driven by favorable product mix as 56% of CommTest revenue came from products introduced in the last two years. CommTest operating profit was $24.1 million, or 13% of revenue, which compares to $21.7 million, or 11.9% of revenue in the prior year. The higher operating margin was driven by higher gross margin.

Our targeted CommTest operating model is for operating margins of 20% to 23% when revenues are greater than $215 million, and gross margins are at or above the higher end of the 57% to 61% targeted range. For the Advanced Optical technologies, or AOT segment, fiscal Q1 revenue was $55.6 million, down 5.3% when compared to the prior quarter, due to a decline in demand for currency, transaction card and gesture recognition products. As previously noted, demand for currency products will fluctuate according to the level of bank note printing. Fiscal Q1 gross margin for AOT business was 47.1%, down from 49.4% in the prior quarter due to volumes and product mix. AOT operating profit for the quarter was $17.5 million, or 31.5% of revenue, down from 34.1% for the prior quarter, due to the lower gross margin. The AOT target operating model is for operating margins of 32% to 35% when quarterly revenue is greater than $55 million.

As reminder, JDSU's total Company targeted operating margin range is 14% to 17%, when quarterly revenues for the Company are $460 million or greater and gross margins are 49% or higher. Moving to the balance sheet. For fiscal Q1 2012, the Company generated $22.9 million of cash from operations, capital expenditures totaled $21.2 million, and at the end of fiscal Q1, the Company held over $723.3 million in total cash and investments. Headcount as of October 1, 2011, was 4,929.

Now, to our Q2 guidance. First, some points to consider as you think about our financial performance over the coming quarter. Based on our current visibility, we expect below normal seasonal revenue levels in CommTest due to continued weak demand from EMEA service providers and lower demand from Americas service providers including little to no end-of-the-year budget flush. Therefore, we expect CommTest revenue to be flat to up 4% from the previous quarter. AOT revenues are also expected to be flat to up 4%, sequentially. For CCOP, we believe that the September quarter would have been the low point in revenue for the fiscal year had the Thailand flooding had not occurred. As we saw in the quarter, customer inventory levels during Q1 reduced to more targeted levels combined with stronger bookings.

Without the impact of flooding in Thailand, we believe our Q2 CCOP revenue guidance would have been for sequential growth in the low to mid-single digit percent. Given the current conditions in Thailand, and the uncertainty of the ramp to full production, our revenue guidance for Q2 is for sequential reduction of 15% to 25% from Q1. The 25% number being driven by an assumption of continued challenges in Thailand, and a slow and gradual return to production. While we are implementing our contingency plans, and are encouraged by the events over the past week in Thailand, we cannot be assured that our plans will be successful or the rate at which production will ramp which leads us to this wide guidance range. This guidance estimates a $35 million to $45 million revenue impact due to the flood. The Company's operating expenses for Q2 are expected to increase by less than $5 million sequentially, primarily due to our annual employee merit increase, and certain R&D investment activities.

Now, looking at operating margins for the segments. CommTest operating margins are estimated to be between 12.5% and 14.5%. AOT operating margins are expected to be between 30% and 32%, and CCOP operating margins, due to the wider revenue range and incremental costs being incurred to attempt to bring production back on, are expected to be between 3% and 7%. Taxes, interest and other income are expected to result in a net expense of $4 million to $6 million. Share count for calculating EPS is expected to be approximately 234 million shares. Capital equipment purchases will be approximately 5% of revenue. Given the current macroeconomic conditions and the impact on our CCOP business from the Thailand flooding, we are providing a broader guidance range for the December quarter. Taking into consideration the factors above, we expect second quarter revenue to be between $375 million and $405 million and our non-GAAP operating margin to be between 5.5% and 8.5%. I will now turn the call back to Tom.

Thanks, Dave. I will now provide fiscal Q1 highlights from each of our business segments. I will start with the CCOP segment; first, Optical Communications. Innovation remains robust, as we saw 67% of revenue from products less than two years old. ROADMs were 28% of Optical revenue with strong bookings, book-to-bill was nearly 1, following three consecutive quarters of book-to-bill less than 1 due to the inventory buildup. During the quarter, Informatics identified JDSU as the leading provider of ROADM products for the first half of the calendar year at over 50% market share as we took significant share from a major competitor. In Q1, we also secured an increase in share at a major customer for a 50 gigahertz ROADM, expanding our leadership position into the second half of fiscal year '12.

Tunable XFP revenue was 10% of Optical revenue. Bookings were up 70% quarter-over-quarter and book-to-bill was over 1. Super Transport Blade revenues were up 18%, and bookings increased by 28% quarter-over-quarter. 40G demand continues to gain momentum as we are winning new slots at the component level and with our new 40G modules. In the second half of FY '12, we will launch our coherent 40G solution line-side module and additional 40G client-side solutions to add to our existing portfolio. 100G design activity is also strong and customers are engaging with us on new partnerships. In Q1, we increased our shipments of 100G coherent receivers and coherent modulators, and made significant progress in the development of our 100G coherent solutions, and client-side solutions. Our vertical integration of 100G components provides us with a competitive advantage, as we develop and introduce our 100G module solution.

As we introduce these products over the next several quarters, we will provide additional updates. For 40G and 100 applications, we currently have 18 design wins and 39 wins more in process with 20 customers. We continue to focus on our Optical Communications Technology leadership, with the development of new products. During the quarter, we announced a new suite of 5 products to be rolled out in the second half of calendar 2012, critical to the build out of next generation Optical networks, or what we are referring to is Self-Aware Networks.

Self-Aware Networks are needed to support the growing volume of high-bandwidth and unpredictable traffic and require a new architecture and a new set of compact, high-performance and cost-effective components. Our development of this product suite is based on several years of collaboration with customers, to understand the requirements of next-generation networks. Included in this product portfolio is our Twin WSS product, Two independent 1 by 20 WSS integrated into a compact form factor. This co-packaging saves space and costs for the customer and can support the needed colorless, directionless and [contentionless] capabilities.

Now, turning to our Lasers business. In fiscal Q1, we achieved the highest revenue for this business in over two years. The growth is due to strength in solar, Q-series solid state lasers and high-power fiber lasers for macro machining application. We are currently developing a second generation suite of kilowatt fiber lasers with Amada due to strong end customer interest. We are also developing a fiber-based class of pulse lasers which is expected to ship during the second half of calendar 2012.

Now, the CommTest segment. CommTest performance for Q1 reflects solid operational progress, evidenced by improved gross margins at 61.9% and lower operating expenses despite a softer spending environment, as carriers are becoming more cautious with CapEx spending. Q1 revenue from products less than two years old represents 56% of total revenue, as we continue to collaborate closely with customers to bring innovation to the market. Macro economic conditions in Europe and North America are causing increased scrutiny of orders and delays in placement but the fundamental demand for more bandwidth, access and quality improvement continue to grow. Asia-Pacific and Latin America are investing aggressively. Although we are seeing China starting to moderate the rate of build out, investment levels remain healthy. Bookings from high-growth markets increased 18% year-over-year, with strength in Brazil, China, Indonesia and Korea.

This quarter, we saw our customer spend more on access to support service activations for millions of new mobile, cable and IPTV subscribers as well as business ethernet deployments but push out a more discretionary spending for metro projects and continued spending to upgrade the core to 100g to support the huge increases in content heavy traffic. On the [access] side, we are seeing momentum in our newly released HST module, that test Bonded VDSL2/ADSL2 to support IPTV testing. Also our investment in the T-BERD/MTS-5800 is being well accepted in high-growth markets, proving our success in developing products for these markets. Our Fiber business, recognized by Frost & Sullivan as the worldwide leader in fiber tests, launched 5 new products during the quarter, to support 14% year-on-year revenue growth.

As carriers cope with increasing bandwidth demand, we continue to see strong traction for 100G tests, chipping 26 units to 15 customers during the quarter. 100G revenue in Q1 was up 41% year-on-year, and 11% sequentially. In the cable market, Informatics projections for DOCSIS 3.0 deployment indicates 60% compounded annual growth rate for 2010 through 2015 for cable market subscribers. We saw strong year-over-year growth for our PathTrak products; expect continued growth as DOCSIS 3.0 is deployed. Our products are being recognized in the industry for their technology leadership. JDSU is honored with Frost & Sullivan's 2011 Global Customer Value Enhancement Award for JDSU's market-leading xDSL test solutions used by service providers worldwide to provide high-quality broadband services.

And finally, JDSU earned high marks in Broadband Technology Reports; 2011 Diamond Technology Reviews for the role our products play in ensuring customer quality for advanced broadband service deployment. During the quarter, we had 10 new product launches, key launches of note are as follows -- in Fiber Optic, we launched ONMSi for remote fiber optic testing; it will allow service providers to achieve 30% less downtime by using our technology during troubleshooting than with conventional methods. We also introduced a new Drive Test solution for LTE test capabilities, which expands the range of LTE networks and equipment tested, allowing service providers to test with a single tool. We also introduced a new release of our award-winning SAARC Protocol Analyzer. This release brings enhanced LTE and 3G testing capabilities to help manufacturers develop LTE products faster and service providers to build out networks more quickly and operate them more effectively.

Lastly, we introduced the first Optical Transport Network multi-channel test solution for 10G, 40G and 100G networks. This solution enables service providers to accelerate the development and deployment of high-speed OTN-based equipment for more cost effective transmissions of high-bandwidth traffic. We will continue to support our customers' requirements and invest in R&D to keep our innovation pipeline strong to support tests and [measurements] for 3G and LTE mobility, video, IPTV and broadband deployment.

Now onto our remaining segment, Advanced Optical technologies, or AOT. Revenues for the quarter were impacted by the slowing global economy, especially in the currency and transaction cards. We continue to invest in the growth of this highly profitable business including the upgrade of our production capability and thin film technology platforms to more efficiently produce security threat products expected to come online in fiscal Q2. We're also increasing our production capacity to serve ramping demand of security pigments; this capacity addition is on plan and is scheduled to be commissioned by the end of fiscal Q4. Both of these capital investments support the demand forecast from our bank note and security customers. We also continue to focus on 3D glasses and projector color wheels as growth drivers for this segment. Applications include cinema, 3D rides at theme parks and education. Operator, we will now take questions.

(Operator Instructions) Nathan Johnsen, Pacific Crest Securities.

Hi, thanks so much for taking my questions. Two quick ones, one, just in looking at the bookings spike in Optical, I was wondering what, if any, of that booking spike could be attributed to customer behaviors associated with concerns surrounding the flooding in Thailand? And then secondly, just you guys have highlighted the Self-Aware Networks and then clearly, an area of differentiation for you. I was curious how many competitors you guys see as having the necessary components to follow you guys into that demand? Thanks.

Okay, maybe to address your first question, regarding the uptick we saw in Optical bookings for the quarter. The bookings really were recorded before any knowledge of the Thailand flooding or any impacts from Thailand flooding were identified so I would say there really wasn't any anticipation or any impact from those [so] healthy bookings in the quarter. I think as far as the Self-Aware Networks, we do expect competitors to be out there but as we've demonstrated, I think, on some of our recent technologies, we planned to jump out ahead in this area and we'd, from a technology standpoint, to solve our customers' needs in this area. I think additional color is through the first four weeks of this quarter, we saw orders in the Optical space also coming in at a slightly higher rate than the previous quarter through the first four weeks. So that's why we are encouraged with the statement we made about September being, we thought would be the low, it wasn't from the floods in Thailand.

That's really helpful and one last thing for me, just on the gross margin line, any potential implications, just typically having to scramble to meet demand particularly with the constraints that you guys are dealing with has can have a persistent headwind to gross margins. Do you guys anticipate gross margins being under pressure for Optical through any period of time past this quarter?

Well as far as -- if you exclude the Thailand impact, just normal course of business, I think -- we think we'll see our normal -- we're going through the contract negotiations now. Over the year, we see a typical 2% to 4% impact from ASPs but we don't see any unusual gross margin impact on the business.

That's really helpful. Thanks for the color, guys.

Alex Henderson, Miller Tabak.

Great. If we could just delve into a couple of those issues a little bit more detail, it would be helpful. First, the negotiation on pricing, I would assume, is going on as we speak relative to the price adjustments that are typically made January 1. So, is there going to be any adjustment to those price discussions that would impact the rate of change in pricing in the first quarter of next year or into the second quarter because of the tightness of supply as a result of the flooding?

And second, I know it is almost impossible to get your arms around the timing of when you are going to get that facility back up, but would you expect the cost associated with bringing the facility back up in Thailand to be a cost that increases beyond the December quarter and continues to impact you into the first quarter? Or will those lines be up and running by the end of the year and therefore, no incremental pressure and conversely, would you get that revenue back that you lost in the December quarter in the first quarter in a non-seasonal fashion as they make up for the lost orders in 1Q or in the December quarter? I know there's a lot of material but it's all related.

All right, let me see -- this is Dave, let me see if I can work on that, one, as you may recall before when we have shortages of supply, we noted that the customers don't really tolerate inappropriate pricing behavior. So, we don't expect the prices to change dramatically from what is being negotiated now just because of the floods in Thailand. Second, with regards to the carryover of any revenue, we believe there will be some carryover of revenue at the same time as our customers will be looking for are there folks who can meet their immediate needs. So that portion could potentially be diverted elsewhere and so it will really be a factor of how quickly we bring the revenue or the production lines back on track.

As we noted in the call, as you asked about the cost rolling into December, we believe we can get the factory, from what we know right now to a higher level of production. Obviously, we'll have much more information, week by week and we expect by the end of the quarter we'd be at -- ramped up to full production provided there are no other logistic issues that interfere with that. So, I think we are in a wait-and-see to see if we can back to full production. That's why we gave that range but we certainly anticipate we will get to full production by the end the quarter.

Very helpful. Thank you very much.

William Stein, Credit Suisse.

Thanks. If we can delve into the Thai flood just a little more, if you can comment on how you're seeing customers react, we saw post the Japan earthquake and tsunami, we saw customers try to pull in as many component orders as possible. Are you seeing any of that behavior? Also related to that, how do you expect to adjust your supply chain going forward as it relates to other contract manufacturers in addition to Fabrinet. As a follow-up, I wanted to ask in the CommTest business, whether there was a pull in from Q4 into Q3 like we saw at one of your bigger competitors?

I think, as far as the first question around flooding in Thailand, I think first of all, our customers are trying to get clarity obviously as to when we are going to be back up and running. We did note in our earnings call that we were able to ship some finished goods that were already completed so that's, I think, helping with some of the immediate customer needs. But I think primarily they want to get clarity and see what type of contingency planning they might need to make during this period of [decline]. I haven't seen any, what I would call, abnormal behavior. I think everybody's being rational at this point and just trying to understand the facts. We're providing those on a -- updates on a daily basis and being very transparent with our customers so they can do the best they can to meet their end customers' needs. I didn't -- I'm not sure on the CommTest, if you could just repeat that question on the pull-in?

Sure. So one of your competitors in the CommTest Service Assurance Base talked about earlier than expected Rev-Rec in calendar Q3 that they previously expected to happen in Q4 in North America in particular. Do you see any of that, is that at all part of what's driving the below seasonal outlook or the no-budget flush view for calendar Q4 for that business? Is that a view based on what you see in backlog now or is this just a matter of being conservative relative to the macro?

I think to answer your question on calendar Q3, we didn't see really any pull-in of Q4 orders that we're aware of; nothing significant so I don't think that was -- that's not impacting Q4. I think Q4 is primarily knowing what the macro economic climate is now, looking at some of the larger carriers and what they've announced as far as spending and how that's proportioned out in the year gives us the inclination that Q4 is going to be -- not have robust budget flush and be slower than what we normally see in the December quarter. I think Europe has been soft for a number of quarters and we're starting to see a bit of that more hesitancy in North America on the spending.

And the lengthier, as we noted in the call, the lengthier approval cycles that appear to be getting implemented by the carriers.

That's helpful, guys. Thank you.

Subu Subrahmanyan, Sanders Morris.

Thank you. I had some follow-up questions on the Optical Comm side as well. Dave, could you talk about what the level of exposure is from a revenue perspective to Fabrinet, if you could quantify that? And I'm just trying to understand between having almost had a month of production in the current quarter, some finished goods, what the assumption is for the range of revenue impact $35 million versus $45 million. That $45 million, I assume that the Pinehurst facility does not come back at all during the course of the quarter and then I know you're not guiding to March, but directionally, should we expect revenues for Optical Comm to be back to a normalized level in the March quarter or could this be a multi-quarter effect?

So the -- you asked a question about how much revenue we do out of Fabrinet and as we said, our commercial lasers are done out of there plus the ROADMs and tunable XFPs, so if you -- and some of our amps. So if you take just those numbers, you can see that it -- you can expect greater than or right around approximately 50% of the revenue that we reported last quarter. Now, obviously, that's what goes through Fabrinet; not all of that is impacted by the events that are occurring and that's what we've basically contemplated in the guidance we gave. And then on the $35 million to $45 million, on that question, that's just basically looking at what we know right now and basically ranging it, as I stated in the guidance on -- at what rate we can bring back on the production. We didn't really talk about, at this point, how that is by product line because we are assessing at what rate each of the factories is coming up [in] the product line.

Is it fair to say, though, you expect both of those expect some production starting to happen in the current quarter or does $45 million, not [assumingly] recovery at all production in the current quarter?

We're expecting a level of production; it's really just a matter of how much production, right? So if we have had assumed zero production for the quarter from this point on, the range would've been greater.

And for March, would you expect to be back to a steady run rate, meaning the [$150 million] you did last quarter, plus or minus a little bit back to the March quarter level?

No, again, the visibility is pretty limited right now and I think at right now, our focus is on getting to production back online for this quarter and as we get better visibility into that, we will be able to get a better focus on what the opportunity is for the March quarter.

Next question, please?

Todd Koffman, Raymond James.

Yes, Dave, can I just get a clarification on that last question? You said 50% of CCOP comes through Fabrinet and is that all coming through only historically this Pinehurst facility?

It's -- we're only in the Pinehurst facility, and a number of buildings there. I believe it is 2 different buildings that are in Pinehurst. I think there's 3 total buildings there at the Pinehurst and we've basically said the commercial lasers are manufactured there, our ROADMs and tunable XFPs. And if you just look at the numbers which we disclosed there, you can see that it's roughly 50% of the revenue that we did in the last quarter.

So, it looks like you are guiding down, I don't know, $45 million sequentially. It would seem as though if there is extended difficulties with those facilities, that there is additional revenue at risk if those facilities did not get back online?

No, the range we gave is what we believe the revenue that's at risk -- if they don't come online at all, again and our projection is that we will get a level of production out of those facilities.

Right, so assuming there is a more difficulty and it extends further, you would not be able to do the, I don't know, $150 million in CCOP revenue in the December quarter; it would be something even worse than that?

We're not assuming that. We're just, like I said, we're assuming that we will get a level of production out of those facilities. And as I said with [Subu], that if we had assumed that we get nothing out of the facilities, we would have given a different range, but --

Can I just ask a quick follow-up to this? As it relates to the competitive landscape, are you significantly disadvantaged relative to some of your competitors in these product areas who may be in the same product areas sourcing from different contract manufacturers or is everyone in the same boat?

I would say the majority of our competitors get some level of products out of Thailand so there's 4 of us probably that are in a somewhat similar situation. One of our competitors has a manufacturing outside of Thailand that probably puts them in, short-term, in a better situation on some of these products.

There's a number of factors there, are they also qualified in the same slots that we're qualified in? What are their inventory levels at the customers so that question is -- there's no single answer to that question. There's a number of factors that have to be taken into consideration. I think right now what we can give you is how we think is going to impact us.

Next question, please?

(Operator Instructions) Kevin Dennean, Citi.

Great, thanks very much. Hi everyone. Tom and Dave, just wondering if you could talk a little bit about CommTest? It was down seasonally but could you talk a little bit about how the various pieces performed? In other words, field tests, lab equipment, service assurance and even wireless?

Sure. I think as far as field testing, it remained reasonably strong during the quarter; that's always a strong point for us. We talked about the fiber test being up and being strong quarter-after-quarter and year-over-year. So, I think that has held up pretty well. I think lab, on the lab side, as I mentioned, we're continuing to see significant orders from 100G test equipment so that continues to expand and to grow. I would say service assurance, we continue to focus on that area; it's a growth area but still remains a smaller part of our total revenue. So I would say that was not -- did not grow significantly during the quarter.

Okay, great and just one more quick one, and maybe it is for both you and Dave. Just, if you could update us on your thoughts around M&A. You've got a healthy cash position; you're generating solid operating cash flows, and valuations in the [sector] have obviously come in, come way in. At this point in time, or maybe once we get a little bit more clarity on Thailand, and that starts to resolve itself, how should we judge your appetite for M&A -- increased, flat, the same? And should we think about the priorities in M&A still being CommTest even though no component value -- Optical component valuations have really gotten depressed?

I think M&A remains one of our top priorities for use of our cash that and investing into innovation into our R&D so that continues to be at the top of the list. We do see a number of opportunities out there; our valuations have pulled in so with some of the uncertainties in the market, et cetera, so we do see a number of opportunities out there that are interesting. I would say, because of the fragmented nature of the CommTest market and the areas of -- that we see to be able to continue to build out in places like wireless and the LTE deployment, it does offer a number of opportunities for us that are pretty visible at this point. It doesn't mean we are not looking in the other 2 parts of our business, but I would say there are -- tend to be more of those opportunities in CommTest because of what I just mentioned.

Next question, please?

Thanks very much.

Ehud Gelblum, Morgan Stanley.

Hi, thanks. This is Kim Watkins in for Ehud today. Just had 2 questions, first on there -- I believe that Fabrinet has a new building coming online. I'm just curious if you've entered into any discussions with them potentially using that building at all to increase your capacity at the Fabrinet site? And secondly, are there any markets you think JDUS could possibly benefit assuming that manufacturing comes on again towards the end of the quarter, perhaps amplifiers come to mind but are there any others where you could possibly benefit from other competitors having lengthier production limits? Thank you.

You're welcome. Yes, Fabrinet is in the process of building a new building, just really adjacent to the main facility or 2 main facilities we are in on the Pinehurst campus. So that is potential area for expansion of capacity into the future and that was one of the reasons for them bringing that facility on. And I think as far as opportunities that may come out of this, out of the flooding conditions in Thailand, there are the potential for some opportunities where we're manufacturing in other locations certain product [as] some of our competitors will probably be down, not able to produce for awhile. So right now it's, I think, a little hard to say what the size of that opportunity is but we do think there are some opportunities out there to fill some of those voids.

Okay, so Tom, just to clarify the first one, is there any opportunity for you to use the new building [fix] to get back online faster?

I don't think it is completely -- I don't think the building is completely fitted out at this point so I think the main focus is going to be on getting the 2 buildings up on the Pinehurst campus that we are in. So I don't see that as a potential today. That hadn't come up as an area where we could get ourselves going faster. Okay, thank you.

Cobb Sadler, Catamount Advisors.

Thanks a lot for taking the question. I had a question on the CCOP business and your XFP tunables, if I do the math correctly, looked to be down, a pretty strong quarter-on-quarter. ROADMs looked to be down a little bit also but the bookings were really strong and I understand that you do both -- you manufacture both of them in Thailand. So how does all that shake out? I mean, with the bookings strong, are you going to be able to deliver given your manufacturer is in Thailand?

That's, so -- and again as I said, the lasers, the tunables, the modems and the amps, those are all impacted by the Thailand situation. So as we bring the production online, those are the 2 buildings that are impacted, that's what they build. That's what we basically contemplated in the guidance. So we're expecting it to be impacted, obviously, and so you would assume that the revenue levels for those products would be down from the quarter we just reported just based on the impact that we talked about. So, but we, again, we're -- there's not very many suppliers of the tunable XFPs out there, so we are working with our customers and on the ROADMs, again, it comes down to the products that you are designed [into], if there is a competitor [not] and we're working with our customers again to meet their needs.

Mark Sue, RBC Capital.

Thank you. Tom, in Optical, as competitors are qualified, and they don't rely on Thailand, it sounds like they would gain share in the near term. But why would that revert longer term? Are customers telling you that they're holding a spot in line for you when things get back to normal?

In some cases, we do have contracts with our customers that would give us those opportunities back even though they may -- we may be displaced over the short term. In fact, what you just said happens so that's one factor. And then I think it also comes down to past performance, quality, delivery, service, total service to the customer and we think we rank very high with most of our customers in those areas. So if we do get displaced in the short term, well, we're going to work really hard to get that back and in some cases, we are covered contractually once we're back online.

And the other thing to consider is with this situation in Thailand, other suppliers to our customers could be impacted which then could affect their total capability of building the end product which would include our products. So I think our customers are still figuring out what that -- those other impacts are.

Troy Jensen, Piper Jaffray.

I'd be just curious to know if any of the products coming out of the Fabrinet facilities, would they need to be recertified now with customers?

No, not as far as we know, we haven't seen that dialogue with any of the customers because we're not going to change the process, we're not changing equipment. In fact, they have all the operators back so --

The [facility] was dry so it's really -- it's almost as if they just had a temporary shutdown because there was no breach of the [clean] rooms.

Ajit Pai, Stifel Nicholas.

Just a question on your gross margin and then your laser business. Your Test and Measurement business had gross margins that were above your target range so is that reflective of something that could continue so you would raise your target range for the business? And then, on your Laser side, you also had probably the best gross margin you have had since you started providing us some color there. And also, record quarter for revenue when I go back and look at the business. So I know you're including [photovoltaic] products within that but is that really a record quarter since you started breaking that out and can we expect the growth over there to continue?

I think in Lasers, we believe it's, at least, the best quarter we've had in two years, so probably since we've been -- it's pretty close to when we were breaking it out. So, I think that's the case. I think lasers, it's mix and also, this kilowatt fiber laser is being well received in the field with a modest customer base. I think from a CommTest standpoint on gross margins, that's an area, as you know, we've been working real hard on bringing that business model up. The mix of new products is continuing to grow -- 57%, I believe it was this past -- or so it continues to grow pushing well above 50%. I think we're also gaining efficiencies with our outsourced partners through the supply chain now where we had talked about refining that flow and that process and that's starting to happen. So, as far as your question, are we going to move the range up? Not at this point. But we are hitting now pretty consistently above [60%] and into the, above the high-end of our range.

I will now turn the call over to Tom Waechter for closing remarks.

Thanks, operator. As our call concludes, I have some final comments. I am pleased with the progress JDSU continues to make to further our operating model. This quarter, we improved our gross margins through new product revenue and leveraging our contract manufacturer model. Our flow of new product introductions has been strong and we continue to innovate through collaboration with our customers. While the macroeconomic environment and the flooding in Thailand have created a challenging environment in the short to medium term, the underlying fundamentals of our business remain healthy. We remain focused on executing our strategy to address the market trends of broadband demand, focusing on profitability and cash flow generation while we continue to invest in R&D and new products that will further differentiate us in the marketplace that will benefit the Company over the long term.

I would like to thank our employees for their hard work and commitment and contributions to JDSU, especially those on the ground in Thailand, who are working tirelessly around the clock to do everything possible to fulfill our customer commitments. We also greatly appreciate our CM partner, Fabrinet for all of their efforts as well. Finally, I'd like to also thank our customers, partners, vendors and long-term shareholders for their continued support of JDSU.

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

Thank you for your participation in today's conference. This concludes the presentation; you may now disconnect. Have a great day.