Viavi Solutions Inc (VIAV) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2012 JDSU earnings conference call. My name is Jeremy and I will be your Operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today, Ms. Michelle Schwartz, Senior Director of Investor Relations. Please proceed.

Thank you, Operator. And welcome to JDSU's fiscal 2012 second quarter financial results conference call. Joining me on the call today are Tom Waechter, Chief Executive Officer; Dave Vellequette, Chief Financial Officer; and Alan Lowe, President of CCOP. Per your input, we will rotate the leaders of our business segments to participate on our earnings call for the purpose of being available during the Q&A portion of the call.

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, 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 second quarter revenue of $413.1 million and operating margin of 9.6%, beating the high end of our guidance range. I'm pleased to report that we resumed full production our products at Fabrinet's manufacturing facilities in Thailand more quickly than expected. Due to the outstanding efforts of our team and our partner, Fabrinet, the net revenue impact of the Thailand flooding was approximately $15 million, which was less than our original estimate.

Demand for our products improved over last quarter, as book-to-bill was above 1 for each of our business segments, and was our highest bookings level in the past year. New product revenue remains strong with 62% of Optical Communications revenue. And 56% of CommTest revenue being generated from products less than two years old. Our financial strength continues to provide us with the necessary capital to fund our robust new product pipeline, as cash generated from operations totaled more than $45 million.

Although broadband drivers remain strong, and networks continue to be overloaded, spending by network service providers has been more measured. We believe this cautious spending reflects global macroeconomic uncertainty, delayed investment in the US due to contemplated M&A activity, and the fact that service providers continued to refine their own business models. Slower spending and more competitive bidding by service providers negatively impact pricing and margins in our Optical business. We are confident these issues are not systemic or long-term in nature. And therefore we will continue to execute against our strategic priorities to drive growth and profitability.

Our first strategic party is collaborative innovation. JDSU was first to market with ROADMs, tunable XFPs, and a number of key test products. We firmly believe that ongoing innovation is critical to providing differentiated solutions to our customers. We will continue to invest in filling our new product pipeline to maintain our technology leadership and further advance ourselves in the marketplace. At our upcoming analyst day, we will showcase some recent results of our collaborative innovation, including some technology that will be introduced for the first time.

Second, we'll remain focused on profitable, strategic mergers and acquisitions. In January we announced the acquisition of Dyaptive Systems, which provides mobile test solutions that support network capacity planning and quality by emulating thousands of mobile devices in the lab. We will continue to pursue M&A opportunities where we can expand our portfolio and participate in market growth. Third, we'll focus on expanding our global presence and deepening our penetration in high-growth markets such as Brazil, Russia, India, Indonesia and China. We have facilities in each of these markets and are well-positioned to grow our revenues in these fast-growing markets.

And finally, we'll continue to focus on building a leaner and more scalable business. Our improvement in gross margin and operating profit over the past few years illustrates our progress in this area. We will continue our efforts to fine-tune our contract manufacturing model and reduce operating expenses. We are working with our supply chain to reduce costs and improve gross margins in our product portfolio. We will expect to see the results of these efforts in the coming quarters.

I will now hand the call over to Dave who will take you through the details of our financial performance of fiscal Q2, and will discuss our outlook for Q3. Following Dave's remarks, I'll 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.

Second-quarter revenue of $413.1 million was down almost 2% from the prior quarter. And down slightly more than 13% when compared to the second quarter of fiscal 2011. The net revenue impact from the Thailand flooding on our CCOP segment was less than expected at approximately $15 million. Book-to-bill for the total Company and for each segment was greater than 1. The second quarter's gross margin was 46.8% of revenue, down from the previous quarter's gross margin of 47.3%, and down from the second quarter fiscal 2011's gross margin. The decline was primarily due to product mix in CCOP and in CommTest, and an increase in inventory reserves.

Operating expenses for the quarter of $153.9 million were up $1 million from the prior quarter, primarily due to annual merit increases which were partially offset by a $1.3 million facilities accrual release. The second quarter operating margin for the Company was 9.6%, down from the previous quarter's 10.9% due to lower gross margins and slightly higher operating expenses on lower revenue. Net income for the quarter was $35.8 million or $0.15 per share, which compares to $40.9 million or $0.18 per share for the prior fiscal quarter. And $67 million or $0.29 per share for the year-ago period. The year-ago period benefited from significantly higher revenues, including $20 million of revenue from Carrier year-end budget flush.

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 $22.6 million, a $12.5 million charge for stock-based compensation, and a $5.5 million accrual for restructuring and nonrecurring charges, associated primarily with CommTest related site consolidations and workforce reductions. Including the noted items, the fiscal second-quarter 2012 GAAP net loss was $10.2 million, or a loss of $0.04 per share, which compares to a prior year second-quarter GAAP net income of approximately $23.6 million, or $0.10 per share.

Now looking at quarterly revenue by region. Lower CCOP revenue due to the Thailand flooding impacted each of the regions. Revenues for the Americas and for Asia-Pacific were down sequentially primarily, due to the lower CCOP revenue. EMEA revenue was essentially flat on a sequential basis, as lower CCOP revenue was offset by seasonal buying in CommTest. As a percentage of total Company revenue, the Americas revenue represented 51%, EMEA revenue was 24%, and Asia-Pacific revenue was 25%.

Moving to the segments. First, the CCOP segment. Total CCOP revenue was $163.2 million, down 9.5% from the prior quarter. The lower revenue was primarily due to the $15 million impact from the Thailand floods Optical revenue was impacted by approximately $12 million and the laser revenue was impacted by approximately $3 million. Gross margin for CCOP was 30.5% and operating income was $16.6 million or 10.2% of revenue. The gross margin declined from 32.3% for the prior quarter, due to a higher mix of optical revenue relative to laser revenue and lower laser gross margins. The operating income declined from $25.6 million for the prior quarter due to lower gross margins and higher operating expenses on lower revenue.

Optical Communications revenue in fiscal Q2 was $138.1 million, down 8% when compared to the previous quarter's revenue, and down 18% from the prior year. Despite the $12 million impact from the Thailand flooding, 6 out of 12 product lines saw sequential increase in their revenues. The majority of the Thailand revenue impact was in the ROADM and tunable XFP product line. That said, revenue from ROADMs was $38.9 million, down slightly from the prior quarter. And tunable XFP revenue was $19.3 million, up more than $3.4 million from the prior quarter. ROADMs represented 28% of Optical revenue, flat from the prior quarter. Super Transport Blade revenues for the quarter were down 4%. But bookings grew nearly 20% as we expanded our customer penetration with new designs. Tunable XFPs represented 14% of Optical revenue, up from 10% of revenue for the prior quarter. We currently have 41 tunable XFP customers, many with two configurations. And we are adding new configurations this quarter. As expected, gesture recognition revenue continued to be less than 2% of total JDSU revenue.

Quarterly, ASP decline was 2.7%, which was below the midpoint of our historical quarterly decline of 2% to 4% sequentially. Given our recently completed annual price negotiations, we expect the sequential ASP decline for fiscal Q3 to be approximately 6%. Optical gross margins for the quarter were 29%, up from the prior quarter's 28.8% due to product mix and lower manufacturing spending. Our Optical gross margin target is 30% to 35%. Also, we expect Optical gross margins to improve in Q4 relative to Q3, as current inventories are sold and vendor cost reductions take effect.

In our lasers business, which includes not only our commercial lasers but also our photovoltaic business, second quarter revenue of $25.1 million was down 16.9% when compared to the prior quarter, and up 10.6% compared to the prior year. The sequential decline was primarily due to the production interruption in Thailand. On a product line basis, fiber laser revenue continued to grow as we shipped almost $5 million in the quarter. Gas and solid state laser revenue declined, primarily due to lower demand from semiconductor equipment manufacturers. Lasers gross margin was 38.8%, down from 49.3% in the prior quarter. The decline in margin was due to lower revenues, product mix, which saw higher photovoltaic revenues, and a delay in the fiber laser transition to our contract manufacturer. We expect fiber laser margins to improve once we have completed the transition to the contract manufacturer, localized our supply chain, and volumes increase. 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 Q2 revenue of $196.2 million was up 5.9% from the prior quarter's revenue. On a year-over-year basis, second quarter revenue was down 15.2%. Carrier year-end budget flush came from the cable operators and was approximately $5 million. This compares to a carrier budget flush of approximately $20 million for the year-ago period. On a sequential basis, CommTest saw each geographic region's revenues increase. Fiscal Q2 gross margin for CommTest was 60.2%, which compares to a gross margin of 61.9% for the previous quarter, and 60.9% for the year-ago quarter. The lower gross margin was primarily driven by the impact of product mix and an increase in inventory reserves. CommTest operating profit was $28 million or 14.3% of revenue, which compares to $24.1 million or 13% of revenue in the prior quarter. The higher operating margin was driven by higher revenue and lower operating expenses. Our targeted CommTest operating model is for operating margins of 20% to 23% when quarterly revenues are greater than $215 million, and gross margins are at or above 61%.

In the Advanced Optical Technologies, or AOT, segment, fiscal Q2 revenue was $53.7 million, down 3.4% when compared to the prior quarter due to a decline in demand for our transaction card and gesture recognition product. AOT's book-to-bill in the quarter was greater than 1.15 to 1, reflecting strong demand across the portfolio. Fiscal Q2 gross margin for our AOT business was 47.4%, up from 47.1% in the prior quarter, due to a higher mix of our currency product. AOT operating profit for the quarter was $16.5 million, or 30.7% of revenue, down from 31.5% for the prior quarter, due to the lower revenue and higher operating expenses. The AOT targeted operating model is for operating margins of 32% to 35% when quarterly revenue is greater than $55 million. As a reminder, JDSU's total Company targeted operating margin range is 14% to 17%. And quarterly revenues for the Company are $460 million or greater and gross margins are 49% or higher.

Now, moving to the balance sheet. For fiscal Q2 2012, the Company generated $45.7 million of cash from operations. Capital expenditures totaled $19.6 million. And at the end of fiscal Q2, the Company held over $755 million in total cash and investments. In January we established a five-year $250 million revolving credit facility. This credit facility will provide us with continued access to low-cost financing after we retire $325 million of 1% senior convertible notes callable in May 2013. We believe this was an opportune time to establish this bank line due to the favorable pricing and terms. Headcount as of December 31, 2011 was 4,904.

Now to our Q3 guidance. First, some points to consider as you think about our financial performance over the coming quarter. Based on our current visibility, we expect a normal seasonal revenue decline in CommTest as America's service providers typically release their budgets near the middle of the first calendar quarter. Therefore, we expect CommTest revenue, inclusive of the contribution from the Dyaptive acquisition, to be down 4% to 8% from the previous quarter. AOT revenues, due to the strong order flow in fiscal Q2, are expected to be up 5% to 9% sequentially. For CCOP, our customers continue to be cautious with their inventory investments, given the macroeconomic environment. That said, we expect revenues for the quarter to increase by 7% to 10% sequentially. The Company's operating expenses are expected to increase by approximately $7 million sequentially, primarily due to incremental operating expenses of more than $2 million associated with the Dyaptive acquisition, $3 million of incremental expense associated with typical start of the calendar year increases in employer payroll taxes and benefits, and the fact that Q2 had a $1.3 million benefit from an accrual release.

Now, looking at operating margins for the segments. CommTest operating margin is expected to be between 10% and 11%, due to lower revenue and higher operating expenses, which include the expenses from the Dyaptive acquisition. AOT operating margin is expected to be between 31.5% and 33%, due to higher revenue. CCOP operating margin is expected to be between 8% and 9.5%, primarily due to higher-than-average [ASP] reductions as a result of the annual contract negotiations.

Taxes, interest and other income are expected to result in a net expense of $4 million to $5 million. Share count for calculating EPS is expected to be approximately 234 million shares. Capital equipment purchases will be approximately 5% of revenue. Taking into consideration the factors above, we expect third-quarter revenue to be between $410 million and $425 million, and our non-GAAP operating margin to be between 6% and 7.5%.

I will now turn the call back to Tom.

Thanks, Dave. I will now provide highlights from the quarter. Our discussion will differ from our usual format in that I will now focus on end markets rather than our specific business segments, with the goal of providing a more market-driven and simplified view of our business. JDSU's core business focus is on the network, and providing anti-counterfeiting solutions. These two areas drive the primary growth of our business. 80% of our business is a result of broadband demand and associated network build. Unique from our direct competitors, JDSU provides network building blocks for optical components and subsystems, combined with communications test instruments, software and services for network and service enablement.

Our other core business area involves anti-counterfeiting technologies that mainly protect currencies and pharmaceutical products around the globe. This represents a smaller portion of our revenue, but is a significant contributor to profitability, and serves to offset a portion of the cyclicality experienced in the telecom and datacom markets. In addition, we are leveraging our core technology expertise to address adjacent markets, which today include commercial lasers, gesture recognition, and solar or CPV. All these represent potential breakout opportunities for JDSU, less dependency on the telco industry, and an increase in our total addressable market, or TAM.

Let's start with our core markets. Despite global macroeconomic concerns and other issues I described earlier, network equipment manufacturer and service provider customers continued to spend in Q2 to keep pace with the steep growth of traffic, the addition of millions of devices connected to fixed and wireless networks, and changing protocols to drive more efficiency from the network. Our customers need tools to enable greater network agility. They also need deeper visibility into, and intelligence from, their networks. We call these self-aware networks, and they start with the building blocks JDSU provides to enable greater network agility for optical components and subsystems.

First, our next generation of ROADMs that we call TrueFlex allows our customers the ability to truly have flexible grid spacing and performance for network speeds of 100 Gigabit and beyond. Our family of TrueFlex WSS ROADMs include ROADMs for the core of the network using our Twin architecture, as well as ROADMs for the metro and edge of the network using our 1-by-9 and low-port count TrueFlex. We began to supply samples of these ROADMs to customers and expect to begin shipments within the calendar year. Our TrueFlex ROADMs are also leading the way to next generation of SuperTransport Blades. These blade developments are now underway with multiple customers, and include our TrueFlex WSSs, our next generation of amplifiers, as well as our TrueFlex optical channel monitors and selector switches.

Second are our 40 and 100 Gigabit transmission products, both on the line side and the client side, that allow self-aware networks to respond to ever-growing bandwidth demand. We are now in volume production with 40G and 100G modulators and 40G and 100G coherent receivers. As well as other components that go into high-speed transmission line cards and modules. These next-generation components are enabled by our three industry-leading wafer fabrication facilities, and provide the vertical integration needed to lead the market. Utilizing these components, we have demonstrated to our customers both 40G and 100G coherent transmission in our labs. Our vertical integration, down to the wafer and chip level, allows us to provide our customers with the lowest cost, lowest power consumption, and highest performance transition modules and line cards in the industry.

Third is our continuing leadership in tunable technology. We have now begun to sample customers with our tunable SFP-plus modules. The development of these modules is progressing to plan, and we will be ready for production of the tunable SFP+ by the summer. We also continue to drive the proliferation of our tunable XFPs with more customer design wins, replacing 300-pin tunable devices. These are only a few of the examples of the collaborative innovation taking place within our Optical Communications business. And it is these new products that will allow our customers to compete effectively and to provide the network flexibility needed by the self-aware networks of the future.

Now let's turn to network and service enablement, the communications test solutions that provide deep network visibility and intelligence needed to cost-effectively address today's network challenges. We continue to invest in R&D to align our new product development with the way our customers are focusing their investments now and in the future, including broadband build, mobility, media access and content, and the cloud and data center. First is broadband network build out, which includes metro core, ethernet, fiber and transport. We are currently seeing slower-than-normal spending in metro and transport, as customers push out projects and leverage their current infrastructure. Although we believe an intensive increase in video traffic will drive spending in the near-term.

In North America and Europe, our customers limited spending is now focused on base station construction and subscriber growth. 40G and 100G remain strong, as we recorded record shipments in 100G test systems, and continued to maintain global leadership in this area. These products start in the lab, which is currently the primary source of revenue. However, this quarter we began 100G shipments in the field. This trend will significantly expand the growth opportunity for these products. Our T-BERD 5800, designed for ethernet testing in high-growth markets, had record shipments in the quarter, as well.

Second is mobility. The growing numbers of mobile devices and rapid traffic and bandwidth demand growth continue to put pressure on the carriers to support their customers. With 248 service providers in 76 countries investing in LTE, and 49 in commercial deployment, 4G and LTE remains a small but growing component of mobility spend, with the majority of our carrier and NEM investment in 2G and 3G. JDSU's ability to work with these customers through the entire life cycle of LTE with our end-to-end solution is a key competitive advantage.

This quarter we expanded our end-to-end product portfolio with the addition of mobile emulation testing through our acquisition of Dyaptive. Which allows our customers to emulate large numbers of devices on the network in a dynamic mix and payload of applications, at a much lower cost and faster speed than traditional methods. We also announced an LTE smartphone application for advanced LTE deployments and saw strong demand for SART, or Signaling Analyzer Real Time, the only real-time application for protocol analysis currently on the market, which saves valuable time and operating costs. JDSU's LTE network trial solution received a 2011 Mobility Tech Zone Wireless Backhaul Distinction Award for enabling service providers to quickly and cost-effectively deploy LTE networks with high-quality in advancing the deployment of advanced wireless technologies.

Third is media access and content, including video. Rich content, especially video, is stressing access networks and increasing demand for bandwidth and broadband network buildouts. And in the cable market, DOCSIS 3.0 is becoming increasingly available worldwide. But only 10% of all homes passed on DOCSIS 3.0 have the service turned on. The opportunity for JDSU is when the service is turned on, leaving a majority of the market to penetrate. Our DSAM handheld field tester for DOCSIS 3.0 cable modem installation, that enables cable installers to increase the speed and efficiency in deploying these high-speed data and video services, had record sales this quarter.

This quarter we introduced another industry first, our Smart ID Advanced Coax Probes, that can test the home network in minutes, reducing repeat service calls and improving the customer experience. We also had record sales of our Home PM software-based probes that virtually assures broadband multi-play services in the home in real time. Home PM enables significant op-ex savings for customer support operations, improves the overall user experience, and helps reduce churn. We announced this quarter that Home PM now supports Microsoft Mediaroom IPTV services, which is the standard implementation for over 50% of the world's IPTV services. JDSU earned high marks in Broadband Technology Reports 2011 Diamond Technology Review for the role our products play in ensuring consumer quality for advanced broadband service deployment.

And finally are the cloud and data center. An increase in demand for cloud computing creates increased traffic and bandwidth demands across the broadband network, a trend which is continuing to grow. We're also seeing steady growth in the SAN equipment market which is expected to nearly triple from 2010 to 2015. This quarter, JDSU introduced the industry's first 12 gig test solution for next-generation storage solutions. JDSU is also the leading provider of a 16G fiber channel analyzer, critical technology to meet the demand of off-site data storage. We continue to be at the forefront of storage technology innovations, critical to facilitating the consolidation of data centers and support the massive growth of this data.

Our other core market for JDSU is anti-counterfeiting for bank notes and pharmaceuticals. JDSU is a leading developer and producer of high-security authentication technologies that protect currencies and pharmaceuticals worldwide. Over 100 currencies use JDSU pigment to prevent counterfeiting. We continue to see steadily rising demand for our optically variable pigments, driven largely by continued adoption of these products in bank note and other high-security anti-counterfeiting applications. In particular, we are encouraged by the adoption of our next-generation product, Optically Variable Magnetic Pigment, or OVMP, currently deployed in 12 countries. OVMP's unique attributes, integration with advanced and proven ink formulations in industrialization within modern bank note printing systems, enables banknote designers to add depth and motion effects that cannot be readily simulated by conventional printing techniques, or by using conventional printing materials.

Recognizing the need to keep up with the growing demand for optically variable pigment, OVP and OVMP, we embarked on a capacity expansion project several quarters ago to add a new production line in our Beijing facility that will add 25% capacity to our overall global capacity to produce OVP and OVMP for a target markets. This deployment of our capital is currently running according to plan, and we expect production to come on-line and be operational by Q1 FY13 to meet customer requirements.

While the safety and health of consumers is one of the largest concerns to pharmaceutical companies, counterfeit products also prevent them from achieving intended revenue or profits that could be invested into future research, while also eroding their brand loyalty with customers. The World Health Organization estimates that nearly double the amount of counterfeit drugs were sold in 2010 compared to 2005. We work collaboratively with the pharmaceutical industry to design solutions that include a combination of our authentication technologies to help them protect against the counterfeiters. Total revenue for our currency and pharmaceutical products grew over 13% from a year ago.

Now turning to our adjacent markets, commercial lasers, gesture recognition and solar. Our most recent addition to our commercial laser family is our high-power fiber lasers. JDSU collaborated with Amada, a leading manufacturer of machine tools for metal fabrication to develop our high-powered 2 kilowatt and 4 kilowatt fiber lasers. These fiber lasers have been integrated into Amada's new sheet metal cutting system which Amada notes provides the fastest linear cutting speed available worldwide. A third-party analyst estimates that the laser market for kilowatt materials processing will grow to more than $1 billion by 2013. Our fiber laser continues on its growth path with the highest revenue levels in Q3 since we started the shipments and bookings were strong.

Flooding in Thailand disrupted our plans to move our manufacturing to Fabrinet in the quarter, and therefore reduced our laser gross margins as we performed much of the manufacturing and procurement in North America. However, we expect that as volumes go and we move as planned to a lower-cost manufacturing model, our gross margins will improve. We are currently developing a second-generation suite of kilowatt fiber lasers with Amada due to strong end customer interest.

Our CPV products had their highest revenue levels as we shipped to installations in Italy and western China. We are currently undergoing qualifications at two additional customers. Today we have demonstrated greater than 40% conversion efficiency, with plans to increase this level by merging JDSU's CPV technology with that of QuantaSol which we acquired last year. Gesture recognition revenue remains less than 2% of total revenue due to continued inventory in the supply chain, and seasonal demand. We are currently in talks with five potential customers for our laser diode and filter technology for gesture recognition applications. There was much discussion of gesture recognition technologies at CES this year and we expect these new applications to be launched within the next two years.

Operator, we'll now take questions.

(Operator Instructions) Nikos Theodosopoulos, UBS.

I had a question on gross margin in the CCOP segment. Given the 6% ASP decline expected next quarter, can you give us a sense of how much you think gross margin will decline there? And then afterwards, do you see a more historical 2% to 4% decline going forward? Thank you.

Yes. So, first let me go backwards on that. So afterward, yes, we expect to get back in the normal ranges of the 2% to 4%. That's our historical experience. As far as the impact on the margin for the coming quarter, that was contemplated in the operating margin range. But again, as you can imagine, the mix could be shifting between the products and so forth.

So it's a little bit hard to call the precise margin. But we do look at a range of margins and that's how we came up with the operating margin impact. So the impact, if you look at the operating margin range we gave, you would say that OpEx will have some effect on it but the gross margin will probably have a greater effect on the reconciliation bridge between last quarter and the Q3.

Okay. That makes sense. And then, beyond this quarter, beyond the March quarter, if you get back to this 2% to 4% normal price decline, would you expect to see gross margin improvement thereafter?

Yes, that's the point I made about things like the fiber laser, where we're moving that to the contract manufacturer, working that, as we also work through the current inventory levels are priced at the cost that we paid for them. And as we work those through and then get the next round of inventories, we're obviously always working with our vendors to get their costs down. So, we should start to see some benefit from that.

Okay. And just lastly, with these price declines this quarter, do you think your market share held given the concession you made?

You say concession. It was a very competitive environment out there right now for pricing. And that being said, yes, I think we're in good shape as far as margin. We're always looking forward to grow the market share -- we are always looking to grow the market share.

Thank you.

Subu Subrahmanyan, The Juda Group.

I wanted to ask about the optical end market demand. Given the $12 million impact on Optical Comm would suggest that from a demand perspective was relatively flat for September. And the guidance for March also suggests flattish demand. So I'm wondering how you guys are thinking about end-market demand given the growth in orders. And then operating margin for CommTest, I think you've had the 20% to 23% goal for some time, and it hasn't gotten up to those levels for a few quarters now. I'm wondering what are some of the key variables. And also, did you mention what the revenue would be for Dyaptive?

Why don't I let Alan first handle the optical mutations part of it, CCOP part.

I think with the pricing reductions that we've given this quarter, and the revenue growth, we believe that we're going to be growing faster than the market. That said, it's very hard to tell how fast is the market growing. But I can tell you that the products where we have fairly differentiated capability, our demand is quite strong. So, I think overall, the market is growing at a lesser pace today than we would like it. But our focus is really to develop new products where our customers want to continue to buy from us.

Is it fair to say, though, I think when you provided your guidance last quarter, you had thought that excluding the issue of Thailand, growth in Optical Comm would have been low to mid single digits. And if you add back the revenue impact of Thailand it's essentially flat. So from a order growth trajectory perspective, did it turn out to be a little bit slower than you had thought three months ago?

It's hard to tell with the absolute number that we lost because of the flooding. But I can tell you that the overall forecast prior to the flood was that we were going to have an up quarter. I think we did see some slow down in the LAN SAN part of the market that could have impacted our results excluding the flood. So it's hard, and that's why we gave estimates on what we thought was impacted by the flood versus just overall demand.

Subu, I think your second question was around operating margins for CommTest. And how do we see that playing out and are we on that trajectory. I would say, from a gross margin standpoint, we continue to hit in the high end of our range; range being 57% to 61%. We've been at 60% or greater for the last five or six quarters, at least. So we're happy with that direction. We continue to look at improving that gross margin through mix of new products. Which, again, was well above 50% in CommTest this last quarter. So that's continued to gain traction. More software content, we'll see and we'll display some of that at the upcoming analyst show that we're going to have on February 16.

I think also we've been working with the PMs to get more efficiency throughout our entire supply chain. I think we have a pretty aggressive plan there and I see good progress happening in that area. And then of course, just top line growth in itself will help quite a bit. So we do see a path to get there. And I think your last question was around Dyaptive revenue.

We've said Dyaptive is low single-digit millions per quarter at this point.

(Operator Instructions) Alex Henderson, Miller Tabak.

Just to clarify, the normal price declines occur January 1 and July 1 each year; the semiannually. And you normally see a little bit of a sequential price erosion in the interim quarters. But the bulk of it happens there. But you offset that with 2% to 4% cost improvements, as well, right?

Certainly. We continue to drive our costs down through design iterations, as well as working with our supply chain and yield improvement.

I just wanted to clarify that because there seemed to be a little confusion on it. The question I wanted to ask, because you talked about your ROADM products having a next-gen offering coming down the pike this summer and addressing some of the grid spacing issues. Could you give us a little bit more detail on what the technology based on that is, whether we're talking about still on MEMS or whether you're going with a liquid crystal offering? How should we be thinking about that? And then, along the same lines, you talk about that coming out in the middle of the year. I assume there is a qualification process. Can you give us some sense of how long that qual process will run before you actually see those incremental designs coming in as revenue?

Thanks, Alex. The ROADM technology that we have on our TrueFlex product lines is LCoS based. We believe that there is a market demand for both the LCoS based products, as well as our existing MEMS products. So that's number one. As far as developing or qualifying the products, we have sampled customers today with our TrueFlex products but they're early samples. I think what we said in the script was that we'd be ready for production during this calendar year. So it does take quite a while to qualify the ROADMs. And then the Super Transport blades take even longer. So, what we want to do is make sure we have the right products today, so that when our customers generate new products on their platform, that we have the right product at the right cost and the right performance for them.

Just the last point is, the TrueFlex is really more than just variable grid spacing. Because in order to do 200 and 400 gigabits per second, you need more than just being able to switch your grid spacing. And so there's a lot more to what we call the TrueFlex than just being able to run at 25 gigahertz or 50 gigahertz.

Kevin Dennean, Citi.

This question, maybe it is best targeted towards Alan. I'm wondering, Alan, if you could discuss the competitive environment in tunable XFPs? Are you seeing more suppliers come online? Any change in pricing there?

Yes, I think we see a lot of customers talk a lot about it and have been talking about it for the last several years. I think we can only focus on what we're doing, and that's really to make sure we provide our customers the variations and the qualifications that they need to be able to advance their network performance and their products at our customers. Our competitors are entering the market. I think it's not a surprise. We have been in production for over two years so we're driving the cost down as rapidly as we can, and driving performance up. And then working on the next generation with our tunable SFP-plus. So we sample products there with our customers. And we expect, as we said earlier, to be production-ready by this summer.

Alan, one follow-up. Just in general, how have lead times developed in light of the Thai flooding situation? The book to bill's above 1, but I'm wondering, have lead times started to move out?

It depends. And what we really have been focused on is to get our lead times down so that we can win business if others aren't able to supply. Where we might not necessarily have that slot. So we do as good of a job as we can to forecast the capacity needs that we need to meet our customer requirements. But our customers don't always know what they need. And so, if we can work closely with our supply chain, provide flexibility, I think we all win. And we are trying to drive down to the two- to six-week or less for all of our products. And in many cases, we have inventory on the shelf at our customers VMI hub, so they pull it the day they need it.

Mark Sue, RBC Capital Markets.

By all counts, the service provider segment still seems somewhat challenged when we look at CapEx and spending linearity. Is there a way we could confirm that the delay or the pause is temporary and timing related? And what does that mean for JDSU? Should we think about a snapback by the time it gets to the June quarter? And in terms of the overall optical cycle, what you might be observing from your customers to relate to where we are as a resumption to the overall start of Carrier projects? Anything anecdotal would be helpful. Thank you.

I think as far as the service providers or network operators, we have seen some budget flush in the December quarter. And we've seen it somewhat muted spending. And I think that's been pretty visible, especially two of the large North American network operators. But I do think we're lind up well for where they're going to spend their money. So, even though they may spend less money in total, I think we're very well aligned for the sweet spot of where they are going to spend, especially with what we're doing to build out the wireless test capabilities, some of the improved solutions and services that we have out there in the markets. Especially for the rollout of LTE. So, I feel comfortable with that. I see the demand is continuing on the network, and the networks do need to be upgraded and become more agile. So we believe that spending has to happen in order to keep the end customer happy and reduce churn. So we're feeling good where we are positioned in the sweet spot. We believe the spending will increase as we look out here in time because of the high level of demands on the network.

I think as far as the optical cycle itself, again I think we continue to be in a growth cycle here with what's happening in the amount of traffic over the networks, the amount of devices being hooked up to networks. Just some of the forecasts we see on the projected future growth of devices is very encouraging. So we do believe we are in a continued growth cycle. But we will see, as some big major network buildouts happen from time to time, we'll see some lumpiness in that cycle. Alan, I don't know if you have anything else to add around the optical cycle itself?

I think that captures it. I think our customers are saying that their customers have dramatic needs to be able to solve the bandwidth problems that they have. And so we've gotten closer with our customers to collaborate and make sure that they have a way of driving down the bandwidth cost. And having flexibility, because the networks don't know where the data is going to come from or where it has to go. So that's the whole concept behind the sub aware networks, and that's what we're working with our customers on.

I think also key is that our customers, our network equipment manufacturers, their lead times are very much reduced. And our lead times to them, as Alan noted, are reduced. So the cycle between an order on the NAM to the order on us, back to the delivery to the carrier is much more normal range of anywhere between 8 and 13 weeks. So that keeps the inventory levels in check.

James Kisner, Jefferies.

Just want to clarify quickly on CCOP, the sequential increase, is that all just optical? Or how much of it is commercial or just recognition? Can you parse that for us? And I also would be curious on CommTest, do you have any underlying assumption on when the major operators might be coming back to spend in this quarter (inaudible)? Do your guidance pretty much assume that things are as they are in the December quarter through the quarter? Could there be upside if they were to come back and spend on released budgets, say, this week? Thanks.

I can take the question on the sequential increase. I think it's a mix. All three areas we expect growth from. Laser's probably a little bit more than average. With the growth in fiber laser.

I think as far as CommTest and what we projected into the spending, we know that the timing of the budget releases for the network operators in this quarter is a bit unpredictable. It's usually by the middle of February, sometimes a little bit sooner. And sometimes it drags in later. So we tend to be conservative with our approach, especially in the March quarter, around CommTest, and what we expect to see. We didn't see the budget flush at the end of the December quarter, but we're being, we think, prudent with what we're expecting in the March quarter here as a result of timing of the release of the budgets. Beyond that, we think we will see some reasonably healthy spending.

William Stein, Credit Suisse.

I'm wondering if can talk a little bit about the supply/demand balance in the optical components part of the business? We've heard from one of your admittedly much smaller competitors about significantly raising prices recently. And yet in your case, there is still what sounds like a supply constrained environment, and yet ASP is going down 6%. So how do we reconcile that? How close are we to balance today? And when do you think it comes into balance?

I think the Thai flood has impacted certain product lines of some of our competitors that put them in a severely constrained environment. I think our recovery, having been so quick, I don't think we have those kinds of situations. Nor are we going to hold a gun to our customers' heads for short-term gains when we're really focused on long-term partnerships. And so, while we have sequential ASP reductions in this quarter, those contracts that we tried to land with our customers are, in some cases six months, in some cases one year, and in a certain case two years. And so, those are the kinds of things that we try to work with our customers to get them what they want, while at the same time insure a long-term partnership with them.

Todd Koffman, Raymond James.

In the CCOP segment, you have a long-term operating margin model of 16% to 20%. You're at 10% now and you're guiding up revenues. But because of the price cuts, you're guiding operating margin is 8% to 9.5% or something. My question is, is the long-term operating margin model that you have of 16% to 20% still realistic?

I think it is. We are going through an abnormal quarter. If you go back even a year ago, the ASP decline wasn't anywhere close to 6%. And so I think, as we refresh our product lines, and as Tom talked about, some of the new stuff we have coming out this calendar year, those have added value to our customers. And we believe we'll be able to justify higher gross margins. So I think between that and the fiber laser gross margin improvements, we'll be able to achieve the operating margin between 16% and 20%, if revenues are above $190 million. And certain things happen as we drive down cost with our supply chain as we introduce new products. So I do think it's very feasible.

I think the thing to note for all of fiscal year 2011, the CCOP profitability was over 16%. And we at almost 18.25%, almost 19% in another. So we can get there. As noted, given the revenue levels and some of the recent price adjustments, we're below that level but we think we can get back there.

Ehud Gelblum, Morgan Stanley.

Good Afternoon, it's Kim Watkins in for Ehud today. I wanted to follow up with a question on AOT. It looks like you're going to see some pretty good growth in that segment next quarter after a couple of softer quarters here. If you could give us a little bit more detail or insight into what's driving that, that would be helpful. And then, just looking at profitability within that segment, it's your most profitable. It's clearly pretty important to the bottom line. But it looks like, particularly gross, and also operating margins, have been coming down over the past couple years, or even the last year. I wanted to just get a sense of what's causing that. And if that's part of the improvements to the cost structure that you discussed working on in the manufacturing side of the business? Thanks.

Yes, you're welcome. The bookings were strong this quarter for AOT. I think it was 1.15 book to bill. So very healthy. And a reasonable portion of that was aligned with our Flex products, which is a healthy profitable part of our business there. So we're encouraged by that. We do, as I mentioned, have some additional capacity coming online towards the end of this fiscal year, which will add about 25% more capacity in that area for these pigments that go into the inks for bank notes for anti-counterfeiting purposes. So we're very encouraged, investing the money, bringing on additional capacity because we do see the demand there. So the majority of that uptick in demand is coming from that area.

I think as far as the gross margins, and the operating income or operating margins for the AOT business, they are very healthy today. Dropped a little bit below our range this past quarter because revenue was below the $55 million. But I do see us being able to move into that range and maintain very healthy performance financially in that business. We have gone through some cost-cutting measures and a little bit of restructuring, which is going to help going forward, as well.

And if you look at the range we provided, we said 31.5% to 33%. And 32% to 35% is the range. So the midpoint of that range we provided would be in the target range.

Troy Jensen, Piper Jaffray.

Two quick questions here. The CCOP side, does guidance reflect any share gains from your flood impact to the competitors? And specifically amplifiers from Oclaro, given they're underwater and out of production until March? And then also, why would you guys expect to have a normal seasonal decline in CommTest, given we didn't see the normal seasonal uptick here in December?

Let me start with the CommTest side and I will let Alan address the optical. So, if you look at what we've typically had in the test measurement area, you first would take out the budget flush. And then you would have a decline that sometimes would be as much as 10% or more. So, we're seeing a seasonal decline. It's actually, at the range we provided was at a lower range than what we've seen historically. So that's really how we viewed it. So it's going to be seasonally lower, we expect, but the percent decline is actually lower than what we've seen from most recent history. I'll let Alan talk to the optical side.

Yes the guidance that Dave gave for CCOP does contemplate us catching up on anything that we didn't ship during the December quarter, as well as, hopefully, potential share gains that we might get from our competitors if they aren't able to deliver.

Patrick Newton, Stifel Nicolaus.

Tom, on the CommTest side, have you seen any change recently in customer tone? Are we still in a situation where scrutiny of orders is the norm and is likely to continue to be the norm as long as macro economic uncertainty persists?

Actually, we've seen some improvement in Europe. That's where, I would say, over the last three or four quarters we had seen the most significant softness. We saw our order funnels improve there, and actually, business increased in Europe. That was an area that we were pleased to see some improvement. Asia remains reasonably healthy for us. And Latin America is definitely picking up, especially on the cable side, which I mentioned during the call. So we are seeing areas that we see reasonable spend. Primarily, I think the biggest pullback has been in North America. And again, I think it's for reasons that I mentioned. I think some of that was contemplated M&A activity that was out there. And then just some pull back at the end of the year.

But I do, again, see the strong drivers. We're seeing some good signs from those operators. And I think we have the right products. And some of the products we'll talk about at the analyst day on the 16th. I think will be encouraging to see where we're going with these products and solutions to help solve some of the network operators' issues out there with these complex networks and the demands on the networks.

At this time there are no questions queued. I'd like to hand it back to Mr. Tom Waechter for closing remarks.

Thank you, Operator. As our call concludes, I have some final comments. I am pleased with the results of the quarter, especially given the challenges of the floods in Thailand and the macro environment. Demand for our products improved over the last quarter as book to bill was above 1 for each of our businesses. And was our highest bookings level in the past year. The macro environment is causing more cautious service provider spending and an increase in competition for our NEM customers. As a result, we are feeling the pressure on gross margin in our optical communications business. We are currently working with our supply chain to reduce costs. And I'm confident we will make progress towards improving gross margins this year. Especially given the introduction of the next generation products that I discussed earlier.

The underlying fundamentals of our business remain healthy. We are focused on executing our strategy to address the strong market trends in our core businesses related to the network and anti-counterfeiting. As well as identified adjacencies 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, and 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 who were on the ground in Thailand working tirelessly around the clock to do everything possible to fulfill our customer commitments. We also greatly appreciate our CM partner, Fabrinet, for all their efforts, as well. I would also like to thank our customers, partners, vendors and long-term shareholders for their continued support of JDSU. And finally, JDSU will be holding an analyst day on February 16 in San Francisco. There, the JDSU management team will share their strategic vision to create shareholder value and showcase new technologies in our differentiated product road maps. Please see the press release issued today for more details, or contact our investor relations department. We hope you can join us.

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

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