Viavi Solutions Inc (VIAV) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2012 JDSU earnings conference call. My name is Keisha, and I'll 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) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Ms. Cherryl Valenzuela, Senior Manager of Investor Relations. Please proceed.

Thank you, operator, and welcome to JDSU's fiscal 2012 third quarter financial results conference call. Joining me on the call today are Tom Waechter, Chief Executive Officer; and Dave Vellequette, Chief Financial Officer. David Heard, President of the CommTest business segment will join us today during the Q&A section 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 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 (inaudible) their usefulness and limitation 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 "Investor Resources" 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, Cheryl, and good afternoon. I will provide an overview of our March quarter and market trends before handing the call to Dave for a more detailed discussion of our financial results. JDSU delivered fiscal third quarter revenue of $409 million, within $1 million of the lower end of our guidance range. The March quarter typically has a seasonal revenue decline due to the timing of budget releases by carriers. This year, we experienced a later than expected budget and order release cycle.

In addition, there has been continued cautious spending by European customers and a higher mix of deferred revenue from software and solution sales. In spite of the slow start to the quarter, book-to-bill was above 1 for JDSU, as well as the CCOP and CommTest segments. CommTest had approximately 50% of its bookings take place in the last four weeks of the quarter which impacted revenue by approximately $3 million. The AOT segment's book-to-bill came in slightly below 1 following exceptionally strong bookings in December. Improved gross margin from CommTest and disciplined control of expenses resulted in an operating margin of 7.3%, at the high end of our guidance range. Each of the business segments was within or above the operating margin guidance ranges we previously provided.

EPS was $0.11 and we continued our long streak of positive cash flow from operations. Although we saw lower than expected revenues in the quarter, I am pleased with the progress we have made towards obtaining CommTest and AOT target business models along with the strong end-of-quarter bookings. During our analyst day in February, we presented business model targets and action plans for CommTest and CCOP. Specific actions we have taken include the following. In CommTest, a greater mix of software revenue led to a sequential increase in fiscal Q3 gross margin. We also took steps during the quarter to reduce our internal manufacturing support infrastructure and we are working with our vendors to reduce our cost of materials.

These actions are a part of a set of initiatives aimed at capturing gross margin improvement of 3 to 5 percentage points and operating efficiencies of 2 to 3 percentage points for the CommTest segment by the December quarter. Our confidence continues to grow that we will achieve the CommTest target model. In CCOP, we communicated a similar set of initiatives. In fiscal Q3, we completed the transfer of our fiber laser manufacturing to Asia. A number of differentiated products related to Self-Aware networks will launch by calendar year-end and contribute favorably to product mix.

We continue to aggressively implement cost reduction and supply chain improvements across CCOP. AOT's operating margin of 33% for the March quarter was within the target model. Now, to the market drivers and lineup of innovative products for our core markets. As we outlined during analyst day, JDSU's core business focus is on the network and providing anti-counterfeiting solutions. These two areas drive the primary growth of our business.

Market drivers are strong and continue to strengthen for both networking and anti-counterfeiting. We did, however, continue to see a gap between the strength of the network drivers and the level of spend by the network operators. We anticipate that this gap will close in the mid-term as network capacity remains stretched across the globe. In order to help address explosive demand on the network driven by streaming video, the growing number of connected devices and media-rich applications, JDSU continues to add a number of differentiated products to its already extensive portfolio of solutions. These are critical for building and enabling Next Generation networks.

I will highlight four representative products. First, in February we launched PacketPortal, a smart network application platform that uses microprobe technology to cost effectively gather intelligence anywhere in the network for use with a suite of customer care, marketing and other applications. Initial interest in PacketPortal has been very encouraging. It is currently in trials with more than 10 global Tier 1 and Tier 2 service providers and we have started shipping solutions for deployment in their networks.

PacketPortal is an open platform and this week we added two new application partners to the platform to provide software for mobile customer experience management and enterprise network management. Another closely related and differentiated software solution, PacketInsight, was recently introduced with very favorable response from our customers. PacketInsight significantly reduces time to resolve network performance issues. Historical network data is often required to quickly identify and resolve network problems.

PacketInsight is the only solution that captures network data at rates up to 10 gigabits per second, indexes the data, and allows service providers to rewind to points in time on the network in order to pinpoint quality impairment issues. Third, during the quarter we announced we have shipped samples of our Twin 1x20 WSS product to customers. These Next Generation ROADMs are part of the TrueFlex product suite designed for Next Generation colorless, directionless and contentionless networks that will operate at data rates at or faster than 100G. Customer design evaluations continue to go well and we expect TrueFlex products to start shipping for revenue before the end of calendar year 2012.

In our fourth example, JDSU continues to expand its portfolio of 40G and 100G solutions as overall market migration to these speeds ramp. We are already shipping 40G coherent transponders and several 100G components that will be incorporated into our vertically integrated high speed 100G transponders. Likewise, on the CommTest side, revenue from 40G and 100G grew 25% year-on-year with greater emphasis on instruments for field tests. In addition to these new products, JDSU added to its portfolio of mobile network enablement solutions with the acquisition of Vancouver-based Dyaptive in January. The Dyaptive product line provides subscriber emulation systems for wireless technologies including LTE solutions to ensure quality of service performance.

Dyaptive achieved its targeted results and was accretive to operating income in the quarter. Collaborative innovation with our customers drives growth and profit expansion in the network with 61% of optical communications and a new high for CommTest of 60% of revenue coming from products less than two years old. Moving on to our second core area of focus, anti-counterfeiting solutions, which is served by our AOT business segment. Revenue from currency pigments and other anti-counterfeiting solutions grew 7.1% year-over-year.

Recent initiatives to expand our capacity for security pigments and threat features are going well and we now expect this additional production to be online by the end of the June quarter. In addition to these two core markets, we are also leveraging our technology to address adjacent markets with commercial lasers as a prime example. We had an excellent quarter for high power fiber laser shipment with more than $10 million of revenue generated by our strategic collaboration with Amada. This is double the revenue for the previous quarter as we primed our customers' manufacturing line. We also completed the transfer of our fiber laser manufacturing to Asia which is the first step in localizing the supplier base and lowering the cost of materials.

R&D developments for NextGen fiber lasers remain on track. I'll now hand the call over to Dave, who will take you through the details of our financial performance in fiscal Q3 and will discuss our outlook for Q4. Following Dave's remarks, I will provide more details on our business outlook and strategy moving forward.

Thank you, Tom. Before I start, please note that all numbers are non-GAAP unless I state otherwise. Third quarter revenue of $409.2 million was down 1% from the prior quarter and down slightly more than 10% when compared to the third quarter of fiscal 2011. Revenue was impacted by later than expected order releases from operators in North America and continued soft demand from European customers due to the current economic uncertainty. Total book-to-bill for the Company was greater than 1 with CommTest and CCOP above 1.

AOT was slightly below 1 following strong bookings in the previous quarter. The third quarter's gross margin was 45.5% of revenue, down sequentially from 46.8% and down from 47.6% for the previous year. The sequential decline was related to segment mix and lower CCOP gross margin. Operating expenses of $156.1 million were up $2.2 million from the prior quarter, due primarily to incremental employer payroll taxes and benefit costs typically associated with the start of the calendar year.

The third quarter operating margin of 7.3%, down from the previous quarter's 9.6%, was due to lower gross margins and slightly higher operating expenses on lower revenue. Net income for the quarter was $25.3 million or $0.11 per share which compares to $35.8 million or $0.15 per share for the prior fiscal quarter, and to $51 million or $0.22 per share for the year ago period. 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 $21.6 million, a $13.4 million charge for stock-based compensation and a $2.3 million accrual for restructuring and non-recurring charges, primarily due to CommTest workforce reductions and to manufacturing support organization. Including the noted items, the fiscal third quarter 2012 GAAP net loss was $17.4 million or a loss of $0.08 per share which compares to a prior year third quarter GAAP net income of $38.6 million or $0.16 per share.

Now looking at quarterly revenue by region. Americas revenue of $191.2 million or 47% of total revenue was down $17.4 million from the prior quarter. The decrease was due primarily to seasonally lower North American service provider demand. EMEA revenue was $102.2 million or 25% of total revenue, up $1.5 million from the prior quarter. Asia-Pacific revenue grew $12 million sequentially to $115.8 million, or 28% of total revenue due to stronger demand for CommTest and laser product.

Moving to the segments. First, the CCOP segment. Total CCOP revenue was $173.1 million, up 6.1% from the prior quarter. Revenues for both optical communications and lasers grew sequentially. Gross margin for CCOP was 28.1%. The gross margin declined from 30.5% from the prior quarter due primarily to the impact of a 4.8% sequential ASP decline in Optical Communications.

The ASP decline for Optical Communications was below our previously projected 6% decline due to product mix. Sequential ASP decline for the current quarter is expected to be within the historical range of 2% to 4%. CCOP's operating income was $14.1 million, down from $16.6 million in the prior quarter due to higher R&D expenses and lower gross margins. Operating margin was 8.1% compared to 10.2% in the prior quarter.

Now looking at the Optical Communications business. Optical Communications revenue in fiscal Q3 was $143.2 million, up 3.7% when compared to the previous quarter's revenue. Seven of 12 product lines grew sequentially with particular strength in modulators, Tunable XFPs and pluggables. Optical Communications' bookings grew for the third consecutive quarter. ROADMs represented 23% of Optical revenue, down from 28% in the prior quarter.

ROADM revenue is project driven and we believe the sequential decline was due to lower NEM demand related to the timing of carrier budget releases. ROADM book-to-bill was greater than 1. Tunable XFP revenue grew 17% sequentially and represented 16% of revenue compared to 14% of revenue for the prior quarter. We now have 41 customers [and] 64 active configurations. Our tunable SFP+ products are now sampling. They are expected to be in production as planned this summer.

Optical Communications' gross margin for the quarter was 24.9%, down from the prior quarter's 29% due to ASP erosion and product mix. We expect Optical Communications' gross margins to improve in fiscal Q4 relative to Q3 as vendor cost reductions take effect. We continue to target a gross margin range of 30% to 35%. In our lasers business, third quarter revenue of $29.9 million was [19.1% compared to the prior quarter]. Our fiber laser revenue exceeded $10 million during the quarter. This was offset by slightly lower revenue from our solid state lasers as demand from semiconductor equipment manufacturers remained soft. Laser gross margin was 43.2%, up from 38.8% in the previous quarter.

The improvement in margin was primarily due to higher revenue and a transition of our fiber laser production to our contract manufacturer in Asia. Finally, as we mentioned during analyst day, our CCOP operating model is for operating margins of 16% to 20% when revenues are above $210 million. Our operating model assumes laser revenue of $42 million at 46% gross margin and Optical Communications revenue of $168 million at 32.5% gross margin. We continue to focus on achieving our operating model and believe we will have the structure in place for the December quarter.

Now moving on to our CommTest segment. Fiscal Q3 revenue of $177.8 million was down 9.4% sequentially. The sequential decline was due to typical seasonal buying patterns in North America. Fiscal Q3 gross margin for CommTest was 61.6%, our highest ever at this revenue level and compares to 60.2% for the previous quarter. Gross margin improved sequentially as a result of favorable product mix.

CommTest operating profit was $20.1 million, or 11.3% of revenue, which compares to 14.3% in the prior quarter. The lower operating margin was driven by lower revenue. The 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 64% to 66%. We continue to focus on achieving our operating model and believe we will have the structure in place for the December quarter. The Advanced Optical Technologies, or AOT segment, fiscal Q3 revenue was $58.3 million, up 8.6% when compared to the prior quarter due to demand for security pigments and other anti-counterfeiting solutions.

Fiscal Q3 gross margin for AOT was 47.8%, up from 47.4% in the prior quarter due to higher volume and product mix. AOT operating profit for the quarter was $19.3 million, or 33.1% of revenue, up from 30.7% for the prior quarter. 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% when quarterly revenues for the Company are $480 million or greater and gross margins are 49% or higher.

Moving to the balance sheet. For fiscal Q3 2012, the Company generated $13.2 million of cash from operations. The capital expenditures totaled $16.1 million. At the end of fiscal Q3, the Company held $749.8 million in total cash and investments. Headcount as of March 31, 2012 was 4,915.

Now to our Q4 guidance. Based on our current visibility, we expect the current macroeconomic environment to continue to impact our carrier and NEM customer demand in fiscal Q4. Therefore, on a sequential basis, for CommTest we expect revenue to grow 4% to 10%. For CCOP, we expect revenue to be flat to up 4%, and for AOT, we expect revenue to be flat to up 2%. The Company's operating expenses are expected to increase by $6 million to $8 million primarily driven by investments in R&D given the current product investment cycle and for variable compensation for our employees.

Now looking at the operating margins for the segments. CommTest operating margin is expected to be in the range of 11.5% to 13.5%. CCOP operating margin is expected to be in the range of 8% to 9%. AOT operating margin is expected to be approximately 33%. Taxes, interest, and other income are expected to result in a net expense of $5 million to $6 million.

Share count for calculating EPS is expected to be approximately 238 million shares. Capital equipment purchases will be approximately 4% to 5% of revenue. Taking into consideration the factors above, we expect fourth quarter revenue to be between $415 million and $435 million and our non-GAAP operating margin to be between 7.5% and 9%. I will now turn the call back to Tom.

Thanks, Dave. Despite macroeconomic uncertainty and limited visibility in the current quarter, we are optimistic with respect to JDSU's longer-term outlook due to the strong demand drivers and trends across our core businesses. Our book-to-bill ratio is greater than 1 for the overall Company and for the majority of our businesses. New products such as PacketPortal, TrueFlex and Tunable SFP+ have been met with very high customer interest.

Third-party research supports our view we are winning market share in areas such as ROADMs and wireless instrument. Our products continue to earn industry accolades. During the quarter, JDSU Innovation was recognized with awards for leadership in LTE 4G, IP video, Ethernet, and mobile backhaul network buildout and enablement. Looking ahead, we anticipate investments in the network are poised to accelerate in the second half of the calendar year. We are encouraged by recent announcements of a consolidation in the optical communications market.

We view a leaner industry structure as favorable development and an opportunity to extend the leadership position we have established in the fastest growing segments of the market. With respect to CommTest, we continue to increase our investments in mobility and video as we believe these two areas will grow faster than the overall test market. In summary, we continue to execute our strategic priorities. JDSU's differentiated product portfolio and solid balance sheet position us well for growth in both our core markets and adjacencies. We will continue to focus on profitability and cash flow generation while investing in R&D that will further differentiate us in the marketplace. Operator, we'll now take questions.

(Operator Instructions) Your first question comes from the line of Patrick Newton with Stifel Nicolaus. Please proceed.

Yes, good afternoon, Dave and Tom.

Hey, Patrick.

A question for both of you, I guess. How far are we into the process of consolidating your CommTest manufacturing footprint and supply chain and was a meaningful portion of the streamlining operations already present in the current quarter? And then kind of dovetailing off the same CommTest theme, you had a statement in your slide deck stating that you have confidence in attaining the CommTest segment targeted model by the end of the calendar year, or that your confidence continues to grow. Is it fair to interpret that to mean that you expect to eclipse $250 million in CommTest revenue in the December quarter?

Patrick, let me take the first part of that and then I'm going to let David Heard address the last part. As far as the activity that we announced, this is headcount that will be reduced from our manufacturing support structure over the next three quarters as we reduce our CM footprint. So I'll let David handle the rest. I want to let you know the benefit gets realized over the next three quarters.

Thank you.

David?

Yes, thanks, Dave. Yes, so I think that that question really ties to the confidence question because I think you're asking how far are we along and what gives us the confidence. Did I get that right?

Yes, that's fair.

So as Dave mentioned, we committed in our February analyst day that CommTest would be reaching its intended goal at revenues of $215 million, gross margins of 64% to 66% and operating margins of 20% to 23%. And when we look at the current period today, we are at 61.6 points of gross margin on $177.8 million of revenue and that is without the flow-through of the reduction of the supply chain by 50% as we committed at the analyst day. What gives us confidence is we have taken those actions in terms of the identification of personnel notification and the negotiation with our contract manufacturers along that path.

We are on our target and performing as promised along those categories. And so that is just one element of what we talked about at the analyst day of our business model improvement plan was that supply chain consolidation. The other elements Tom covered nicely in the overall discussion, the earnings discussion about new products, we also have higher margin mix products that we talked about in the analyst day primarily driven around mobility and software. Tom mentioned PacketPortal.

He mentioned another revolutionary product, PacketInsight, that both are accretive to the overall CommTest model. So against the milestones that we [outlaid] in that February session, we've made clear and definitive progress along not only the supply chain, the overall operating efficiency, and the new product levels being at an all-time high for us at 60% of new product revenues. But that's even on a much lower, today, proof point base of revenue to gross margin, so that gives us clear and definitive demonstrable confidence. Did that help answer your question?

Yes, I guess just as a follow-up, so you addressed -- when you say increased confidence of obtaining the model you addressed the gross margin aspect and you addressed the operating margin aspect, but there's also the revenue component. So the revenue is greater than $215 million is the bogey that you set out there in order to reach that model and if you have increased confidence, are you [ultimately] implicitly saying with these products coming, with PacketPortal, with PacketInsight, that you think that that $215 million is achievable by the December quarter?

So we're not providing guidance above the current quarter in terms of the top line. I think the important part to kind of walk away with is with the late capital release that we saw primarily in North America, because we all know CapEx budgets and OpEx budgets have never been tighter, and so I think our investment focus on mobility and video are at the high priority of where those dollars are spending. And as we look at the CapEx flow for the remainder of the year, I think we feel pretty good and well positioned, being at 60% of our products being of those new products and those products being positioned in mobility and video, A) they're high priority, B) they're growing at a much faster rate than the rest of the communications test market. So I think that's what we feel good about.

Okay, and then one last one, still for you Dave on the PacketPortal side. I think in your prepared remarks you talked about some purchase orders secured for PacketPortal and I think at your analyst day you said you had some expectations of a ramp in the first half of calendar '13. So based on the commentary in the press release relative to your analyst day, has there been, is that representative of a pull-in in demand for PacketPortal?

I think as we look at the outlook for, no, there's not a change in what we provided in analyst day. I think the good news is with the release of PacketPortal we've seen a nice funnel of activity from the carriers. We've seen a large funnel of activity from application providers that can provide applications on our platform, both of which are very, very encouraging. But are also mindful that when we deploy this groundbreaking technology into networks, it takes time, and that's why we've kept with the same timeframe in terms of when it has an impact on revenue. Dave, anything to add there?

No, I think that's fine.

Next question please?

The next question comes from the line of Nikos Theodosopoulos with UBS. Please proceed.

Yes, thank you. Just a couple of quick ones. Back on CommTest, you mentioned 50% of bookings occurred in the last month. Is that, I guess you're implying that that's higher than normal. What would you normally see in terms of the last month's bookings in that business?

It would be closer to the low 40s.

Okay, all right, thank you. And then on the budget cycles, taking longer to release, would you say that was an all region or predominantly in the US since that's where you saw the most significant sequential decline, and are you seeing the release of the budgets continue into April?

So what is mostly in North America, as you noted, as we noted, that North America is where the decline was for CommTest in the revenue, and so it was mostly there. And what we're seeing is we're seeing the back end load of that in the bookings this quarter. That's what we contemplated in our guidance that we provided today, so that contemplates exactly how we're seeing business coming in.

Okay, okay, and then just one last one. On OpEx, it was a little bit lower based on, I guess, additional employees from acquisitions and other things, was there some kind of offset this quarter? I mean, it's good that it came in lower but I'm just curious what led to the slightly lower number?

You're talking about CommTest margin?

Total operating expenses for the Company.

Oh, total operating expense for the Company, yes, it basically came in lower as we saw the -- as the demand was coming in, right, we, therefore, two things happened. One, we had contemplated in our previous guidance that we would have variable compensation or bonus compensation being accrued in the quarter and because we didn't meet our threshold we didn't have that accrual. That's why you see the OpEx for next quarter increasing because we hit certain thresholds that have us accruing for that, and then we obviously reduced other expenses as we saw that the orders were coming were back end loaded.

Got it. Okay, thank you.

Your next question comes from the line of Kevin Dennean with Citigroup. Please proceed.

Great. Thanks very much, everybody. Quick question on ROADMs. I guess, what gives you the confidence that it's not share losses or that you're getting designed out of some customer wins that you may have already?

Yes, so Kevin, we're basically we looked at the bookings for the last three quarters for ROADMs and they've been pretty constant in a pretty tight range. So this looks -- our view had more to do with the, when the orders came from the carriers to the NEMs, and so that basically from the pulls that the NEMs had forecasted they would be doing and what they did do it looked like it had more of a correlation to where they were getting the orders from the carriers.

Okay, and then on CommTest, can you share with us how much revenue Dyaptive contributed this quarter and what you're expecting for the June quarter?

So it's low-single-digit millions right now and we look for it to start to move up to mid-single-digit millions, but right now its been in the low-single-digit.

Okay, and then just a follow-up. Maybe this could be directed towards David Heard. So if we say Dyaptive's, call it $3 million this quarter, CommTest declined 7.5% to 8% year-over-year. Can you talk about what's in that decline because it sounds like you're positioned in the right markets between 40G and 100G. You mentioned 40G, 100G ramping 25% year-over-year, the NSD acquisition should position you well in wireless. I'm just surprised that we aren't seeing better annual growth. Can you talk a little bit about what's happening there?

Yes, sure. I think two points probably to make, one of which is when we looked at the CapEx hold, it was historic in terms of the late release in North America of carrier CapEx. And we've always had a very strong participation with some of the world's largest service (inaudible), not just abroad but also here domestically.

And so with that happening so late in the quarter, obviously, the ability, as Dave discussed, to have revenue hit the books is slightly impaired. So the good news is the demand was there, the bad news is it took them a while to lay out their budget. And your second piece on the segmentation question is what we're beginning to see is, yes, strong demand continues for 100G and 40G, but a lot of that is also right now in the US in terms of its build. So when you had a late release, some of that didn't get flowed through where we are.

Overall, we saw very strong growth in the wireless portfolio quarter-over-quarter and year-over-year, and that's not only from things like the Dyaptive acquisition but it's synergy with the rest of the total portfolio as it pertains to wireless.

David, just one quick follow-up. You mentioned at the analyst day pruning the portfolio of some older lower margin products. Is that process fairly well complete and is that having an impact on what we're seeing in terms of annual growth rates?

Yes. Good question. I think year-over-year, I think at analyst day we talked anywhere from $6 million to $7 million of quarterly impact that that currently has. While you're never really done managing the portfolio, yes, I think the major efforts in terms of our business model improvement are underway and flowing, beginning to flow through the income statement.

We expect, again, our major investments to be growth in that basic broadband network Ethernet, 40G, 100G, media access and content via IPTV, DOCSIS 3.0, mobility across-the-board, and in cloud in things like 12G, 16G, and Fibre Channel over Ethernet. That's where our major investments are focused and we think those markets are going to show growth faster than the market as we move forward.

Your next question comes from the line of Ehud Gelblum with Morgan Stanley. Please proceed.

Hi, guys, thank you. Appreciate it. I thought if you went over this before, I was still kind of confused on a couple things and trying to put some pieces together. It sounds like things got better in the last four weeks of the quarter, hence the stronger order in bookings strength in the last four weeks and a couple other things you talked about there, yet the guidance doesn't necessarily reflect it and the commentary that you said in a couple places was that things haven't really gotten better, haven't really changed yet. How do I put those two pieces together? Have things picked up and, therefore, are things getting better or are things exactly as they were January 20th or whatever?

I think they have gotten better and that's reflected in, again, the second quarter in a row book-to-bill greater than 1 for almost all of our (inaudible) business. AOT was very strong, it was 1.15 approximately in the December quarter, so combined that's over 1. We focus more on what we think is going to happen in the second half of the calendar year is where, I think, we focus that we do think there will be more of a general pickup based on what we're seeing in the market and hearing from our customers, but definitely saw improving trends as we got into the last part of the March quarter.

So any particular geographies you think that's coming from? Is it North America that's going to be stronger? Is it going to be Asia or China or Europe as far as the end markets go? Obviously, you don't sell into the end markets but through CommTest you do.

If you looked at APAC, it was pretty strong percentage-wise for us this past quarter and we expect to see continued growth there. Europe remains sluggish, I think that's true for almost all businesses that we look at today, and we don't expect that to pick up any significance in the next couple quarters, work through some of the macroeconomic conditions there. Latin America is healthy for us. We think there's a lot of activity going on, getting into Olympics and World Cup and those types of things, there's a lot of preparation going on there. So most of the regions of the world we would see a pickup with the exception of Europe and we think that's going to be the sluggish for awhile.

So the pickup you're expecting in the second half of the year, what's that going to be driven by and what indications are you having?

Well, let me take that. I think first indication is if you look at the spending, for example, Verizon and AT&T did in Q1, the combined number is down about $650 million year-over-year of CapEx and they both have talked about being flat year-over-year. The stuff that I read says that they are going to be more like 45% in the first half of the year and 55% in the second half and certainly an indicator based on what Q1 was it looks like it would be more back end loaded so that --

Dave, that's the stuff we see out here. That's us playing games and doing our best with the numbers but you have better insight, you actually have conversations with customers and so what --

Yes, but we're saying what we're seeing out there in the public is that's what we're also -- we're hearing that in the public and that's basically part of our confidence because of our conversations are supported by what we're hearing out in the public, Ehud.

Okay, but you are actually having real conversations with real customers that are saying we are going to spend more in the second half but just second, Q2, may not be quite as strong, so kind of bear with us but you'll see things better in calendar Q3 or Q4?

Well, the conversation support, what we're reading out there in the public, right? They're talking about activities of investment they are going to be making and then the triangulation is what we read out there in the public.

But as long as they aren't getting information from us and we're getting our information from you it doesn't run in some big turbo cycle. So the last thing is, when you do look at the communications market and there is some consolidation, as you said, do you think that there's need for more consolidation and would you be looking to be a consolidator or [consolidatee]? Do you think you still need and could use some more?

No, I think very similar to what we stated at the analyst day, we are not looking to consolidate the industry, per se. If there is a specific asset opportunities out there for specific technologies that may be of interest, but we're not really looking to consolidate the industry. We're very pleased with our progress and our strategy to keep working up the food chain, higher levels of integration, differentiated products and we'll keep down that path.

Your next question comes from the line of Nathan Johnsen with Pacific Crest Securities. Please proceed.

Yes, hi. Thanks for taking my question. Actually, two questions. First, in terms of seasonality, typically the September quarter is weak and I think particularly CommTest because of the European summer. Was wondering given the trajectory that you guys have in terms of book-to-bill and the fact that Europe is already at a pretty low level, if we would potentially see a lower seasonal headwind in CommTest in the September quarter?

And then, secondly, just in terms of the ROADM recovery for the rest of the year, was wondering if you guys anticipate that the ROADM mix will pick up throughout the year and if that should effectively grow faster than the rest of your business?

We'll take the ROADM part first. We did have very strong book-to-bill in ROADM, so that's encouraging, and we do believe that's tied into the major projects that are being rolled out by the network operators. So we are encouraged by those two parts of the ROADM. As far as the September quarter, we really don't have visibility out specifically around CommTest into the September quarter, really don't give guidance beyond the quarter we're in, so I wouldn't really speculate on that level of seasonality at this point. As we get, obviously, through the June quarter into the next earnings call, we can give some specific details around that.

Next question, please?

Your next question comes from the line of Mark Sue from RBC. Please proceed.

Thank you. The macro, the concerns that you bring around the macro and CapEx concerns, and related to what we're seeing now, however offset by the optimistic view for the second half, it sounds very similar to the discussions we had a year ago. Now since then the revenues for year ago have become just in the CCOP business are declining year-over-year. So I'm just trying to get a sense, when does that stop on a year-over-year decline and are there structural things that are going on as it relates to the environment or the group in particular which is kind of limiting your ability to grow revenues? Is it a question of when or is there something larger you think that is going on?

I think, Mark, this is Dave. First, from a net standpoint, what we've seen, if you look at year-over-year, we've seen Europe drop off quite a bit. The EMEA environment, Q3 a year ago was doing about $127 million and then Q4 $123 million and the last three quarters we've been doing just about $100 million. So that has really been the biggest hit as far as our revenues go is that the drop off in the European market. So I think that's what we're contemplating in the guidance we have, that we don't expect Europe to be coming back from this level of about $100 million a quarter right now.

We are seeing positive signs, as we've already stated earlier, from the North America market where the largest carriers are talking about spending more in the second half. And as David mentioned, more than 60% of his revenue now is coming from recently introduced products that typically have better margins than the historical portfolio, so those are things that give us confidence. Europe, though, we are not anticipating coming off this $100 million or so quarterly number.

Yes, I think there are transitions going on in addition to the macro where we're moving to more of the spend around mobility and that's where, obviously, we're lining up our future products and solutions and we're quite excited about that, LTE are rolling out, and then we did see acceleration of 40G and 100G, both as we mentioned, on the component side and the test solution side. So there are those transitions going on.

It does at some point cause a pause before those accelerate, and we believe we are in a bit of that pocket along with what's happening in Europe and that's causing some of the slowness that, again, we expect that to pick up more in the second half of the calendar year as they get through some of these transitions and the plans are laid out in the spending accelerates in these areas and our products are lining up well for that acceleration.

Next question please?

Your next question comes from the line of "Subu" Subrahmanyan with The Juda Group. Please proceed.

Thank you. I had two questions. First, on the Optical Communications market, can you just talk about demand trends if you ex- out the impact of flood, it seems like demand trends kind of bottomed out in the September timeframe and have been flat, maybe even slightly down from there. If you ex- out the impact of the manufacturing issues, is that kind of a fair comment? And I'm wondering, when you typically think about the cycle after several down tick quarters its typically followed by upticks and how you're thinking about resumption in the growth cycle there?

I think one of the other factors there is that we talked about Europe, I think a couple of the European NEMs actually have gone through some pretty heavy transitions and I think that did impact the spending over the last quarter or quarter and a half as they were transitioning some of their organizations, making those changes and that does tend to slowdown the release of orders and certain projects. So that's another element that we didn't really speak about that I think is having an impact or has had an impact on the Optical Comm side of things.

And, Tom, are those the NEMS or the carriers? I'm sorry, I didn't catch that.

Those are the NEMs. There's a couple of NEMs who publicly announced restructuring of their organizations which were pretty significant and that has a natural impact of slowing the ordering process down until you get through those transitions and have the leadership in place that make the decision going forward.

Understood, and the question I asked before but I thought I would try again. If you look at achieving the operating margin numbers you're talking about by the December quarter, there's obviously a revenue variable part to it and a cost structure margin structure variable part to it. Are you communicating that you will, you expect to have the costs and margin structure in place and then the revenue will, obviously, depend on demand, we don't have visibility for that or are you trying -- are you implying that you think that given the recovery through the course of the year that the revenue would hit, there's a likelihood that the revenue would hit those levels, as well?

Yes, it's really the margin and operating expense structure to support that. We're not giving guidance for December on the revenue levels. There's revenue levels would need to be. We have a high confidence level especially, I think, around CommTest and AOT is already there on the structure that will get there but we aren't giving guidance on the revenue for December quarter at this point.

Okay, next question please?

Yes, I would say also the third future measure of that that gives us a bit of good outlook is we think about that, is Tom talked about the innovation index and the new products. What that says is we've got new products very well aligned with the strongest drivers, as we talk in intimate discussion. All the new products that Tom mentioned were collaboratively innovated with our customers, and so we know when the demand returns and the CapEx returns, and we know that the network is under pressure and that 40G, 100G aren't going to go away. In fact, they're necessary to get that content out there that we will be positioned to win.

Thank you, the next question, please?

Your next question comes from the line of Michael Genovese with MKM Partners. Please proceed.

Great, yes. Thank you very much. Just one question, and I think we've been talking about these issues but I just want to ask this directly. We had the delayed release of the budgets in the first quarter and the guidance for the second quarter which is sort of seasonally normal to maybe even a little bit softer when we were maybe expecting it to be stronger.

Just looking at the difference between the CCOP and the CommTest guidance, the CommTest is much stronger sequentially than CCOP. Just help me understand why CCOP is at 0% to 4%, is there something to do with the commercial lasers in there, is it particular product lines on optical components? Why is it subdued almost sub-seasonal outlook for the second quarter?

A portion of that is, the slower growth it is reflective of the bookings have been coming in but also it's reflective of what Tom was just talking about is the European market that we're seeing a softness there that there's been a number of restructurings by the European NEMs. So that's impacting that, that set of numbers. In the CommTest, the growth rates you're seeing there is because of the, again, recovery in the North American market demand, right. You can see the significant decline in the numbers being from North America in test and so that's why they have more of a, I'll call it a bounce back, where CCOP just has more of a good call, slow and steady growth, flat to growth kind of number.

So there's no real difference between the lasers and the components outlook for Q2?

Well, Tom did note that the large number that we shipped of the fiber laser had more to do with the customer priming their manufacturing lines, so that -- we don't expect the fiber lasers to necessarily be at that level again. So overall laser revenue will probably be in the same range and the growth that we're talking about will be, almost all will be in the optical side of it.

Your next question comes from the line of Simon Leopold with Raymond James. Please proceed. Please proceed.

Hi, guys. It's (inaudible) for Simon Leopold. Can you talk about the customer split between cable and telecom in your CommTest business and how this compares to (inaudible), were you surprised by the verticals or end markets?

Yes, so while we're not breaking out the particular revenues from our cable customers and the traditional telcos, and those lines are obviously beginning to blur, we continue to see a very strong demand based on DOCSIS 3.0 from the cable providers with the strong growth in content across the network. We saw it a little bit lighter than normal in the last quarter in that last quarter, in Q3. We had a very, very strong Q2 as it related to the cable providers, as they were clearing out their end of year budgets and preparing for the next wave of DOCSIS turn ups on the ports that are out there in the network.

It's interesting to note that the total opportunity for DOCSIS is still only at about 10% of the overall penetration in terms of lines turned up versus homes passed and CMTS is activated in the network.

Okay, sure. You also mentioned about a delays in release in carrier CapEx. Was this attributed to any specific customer or was it widespread?

It was concentrated on a group of large customers. It wasn't uniform, but it was concentrated on where the spend dollars typically are in terms of purchasing power.

Okay, sure. And lastly, you announced the TrueFlex ROADM last quarter. Can you please tell us if the new ROADM flavor has gained any acceptance among customers and do you still expect to organize revenue from this product in 2012, like how many, for example, customers are in trials or have you experienced or expect any customer push out of legacy ROADMs in the anticipation of the TrueFlex?

You're talking about the 1x20 WSS TrueFlex ROADM?

Yes.

As we mentioned, we're in sampling. The response to that has been very favorable. We would expect the volumes of that to actually occur in the first part of calendar year '13. We will see some revenue before that but it won't be significant volume at this point.

Your next question comes from the line of James Kisner with Jefferies & Company. Please proceed.

Great. Thanks, guys, for taking my questions. First, housekeeping question, did you guys mention at some point how big (inaudible) recognition was?

No, we didn't. As we've noted previously, at one point it was just slightly under 4% of revenue and most recently, its been less than 2% of revenue.

So that's the way it was in this last quarter was less than 2%?

Yes, it continues to be less than 2%.

Okay, thanks. And just to drill down on gross margin here in the CCOP division. It's obviously down quite a bit. Was the erosion worse than you expected? Obviously, you're guiding up operating margin sequentially. How much of that is gross margin? Can you just give us some color there around the gross margin weakness and the progression as we go forward?

Actually, when we gave guidance on the last call we talked about an ASP decline expectation of 6%. It actually came in at 4.8%, and the revenues actually came in lower than the range we had anticipated for CCOP. So the amount of the erosion was less because of the fact that the ASP came in lower than what we anticipated. So we see it improving, one, from the fact that now the ASPs are going to be more of a 2% to 4% range and we expect the revenues to improve.

Okay.

It has a bit to do with the mix of ROADM.

And the mix, right. The ROADM revenue was lower, that also, yes, exactly, affected it.

Got it, okay. And just one last one here. On 40 gig and 100 gig, I guess I'm curious, can you tell us on a combined basis, it would be mostly 40 gig, or all 40 gig now, how much of your business in CCOP Optical Communications is 40 gig and 100 gig, is it still less than 5%? Is it more than 5% and I guess I'm curious how quickly could those two together end up being 10% of your business, if they aren't already?

We haven't given the exact percentage, but you're probably in a reasonable range there. As we mentioned 40 gig is starting to accelerate and we're starting to get some 100 gig products to the field but, obviously, is a smaller percentage of our revenue today. We do see that accelerating.

And there are no further questions in queue at this time. I would now like to hand the conference back over to Tom Waechter for any closing remarks.

Thank you, operator. As our call concludes, I'd like to thank our employees for their numerous achievements and strong support of our customer base. I'd also like to thank our customers, partners, vendors, and long-term shareholders for their continued interest in JDSU. Have a great evening.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect your lines. Good day.