Viavi Solutions Inc (VIAV) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2012 JDSU earnings conference call. My name is Deanna and I'll be the operator for today. At this time, all participants are in a 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 conference over to your host for today, Ms. Cherryl Valenzuela, Senior Manager of Investor Relations. Please proceed.

Thank you, Deanna, and welcome everyone to JDSU's fiscal 2012 fourth quarter and year end financial results conference call. Joining me on the call today are Tom Waechter, Chief Executive Officer, and Dave Vallequette, Chief Financial Officer. Tom will provide an overview of our June results and strategic execution before handing the call to Dave for a more detailed discussion of our financial results.

We will follow that with Q&A where Alan Lowe, President of the CCOP business segment will join us today. 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 which could cause actual results to differ materially from management's current expectations.

We encourage you to look at the company's most recent filings with the SEC, particularly the risk factors section of our annual report on Form 10-K filed on August 30, 2011. The forward-looking statements, including guidance, provided during this call are valid only as of today's date.

And, JDSU undertakes no obligation to update these statements as we move through the quarter. Please note that all numbers are non-GAAP unless otherwise stated. A detailed reconciliation of these non-GAAP results to our GAAP results, as well as a discussion of their usefulness and limitations, is included in today's news release announcing our results.

Which is available on our website along with supplementary slides and historical financial tables. Finally, and as a reminder, this call is being recorded and a replay will also be available shortly on our website. I would now like to turn the call over to Tom.

Thank you, Cherryl, and good afternoon everyone. JDSU delivered solid fourth quarter results in a challenging macroeconomic environment. Revenue of $439 million topped our guidance, and operating margin was 8.7%, on the high end of our forecast range. Book-to-bill was greater than 1 for the company overall, and for two of our three business segments.

Cash from operations was $38 million, further contributing to our healthy balance sheet. Our steady execution on our strategic priorities has enabled JDSU to outperform despite difficult market conditions, further differentiating ourselves from competitors and increasing our leadership in the markets we serve. Our latest financial results reflect market share gain and a financial leverage stemming from our commitment to these priorities.

We continue excellent forward momentum with our technological innovation. Two products accounted for 58% of revenue in core network market consisting of Optical Communications and Communications Test and Measurement. CommTest in particular had a strong quarter, recording a record high 62% of revenue from new products in fiscal Q4. We are seeing broad-based growth from our diverse product portfolio covering high speed access, wireless, Ethernet, and 40G, 100G transport.

One of the areas of accelerated growth for CommTest is software. We recently announced PacketPortal and PacketInsight, two new solutions that provide carriers with greater intelligence and visibility into their networks and allows them to conduct real-time analysis and troubleshooting of network issues. We are seeing good traction with both products. We started shipping PacketPortal in February and we now have 3 customer orders, 15 trials completed, and 6 trials in progress.

We are also off to a solid start with our PacketInsight and compliance where we have already shipped 10 units to a large Tier 1 North American carrier. Initial feedback from this customer has been very favorable. Trials are either planned or presently taking place with 10 additional customers. Another key growth driver for CommTest is wireless.

Today, we announced the signing of an agreement to acquire GenComm, a provider of test and measurement solutions for wireless base stations and repeaters based in Seoul, South Korea. JDSU is GenComm's exclusive reseller outside of Korea. Revenue from GenComm products was more than $7.5 million of CommTest revenue in fiscal 2012.

From a strategic perspective, acquiring GenComm brings our wireless engineering talent in house to JDSU and further expands our competitive presence in the fast growing Asia-Pacific region. Dyaptive, our capacity testing business acquired earlier this year, is also driving wireless test momentum for JDSU as it delivered record revenue in the June quarter.

The integration into JDSU is complete and we are leveraging our global sales team to rapidly grow its customer base. These recent acquisitions continue JDSU's expansion into wireless that began with the NSD acquisition two years ago. GenComm and Dyaptive complement our already broad and market leading set of wireless test solutions including network protocol analyzer, drive test systems, and service assurance systems.

We are now organically investing in innovative ways to cross-leverage the capabilities between these products so we can bring even more value to our customers. Turning to Optical Communications, we are pleased with the progress we have made on disruptive new products, particularly those addressing next generation networks in enterprise/data com markets.

Revenue from 40G and 100G components is growing rapidly. We have multiple high speed modulators and receivers in high volume production. With many additional customer programs in the development pipeline. We also continue to make solid progress with our TrueFlex product suite designed for next generation networks of 100G and faster.

Stevia S samples have been delivered to customers while TrueFlex and NextGen blade design activity is steadily progressing. Another disruptive product is our Tunable SFP Plus. We have received orders for Tunable SFP Plus and shipments have started this quarter as planned.

As with our Tunable XFP, we expect the introduction this quarter of Tunable SFP Plus to have a significant time to market advantage to our competitor. We also had a very successful quarter in pluggable transceivers. We are increasing market share and penetration into key accounts with our broad range of client side pluggables to address enterprise LAN/SAN needs and the cloud.

Our focus on collaborative innovation continues to resonate with customers. Resulting in sequential revenue growth at 8 of our top 10 Optical Communications accounts. Moving on to our other core business, Anti-Counterfeiting. We have completed the technology conversion required to introduce security threat substrates for currencies to the market.

We have also completed most of the expansion of our capacity for both OVP and OVMP security pigment. Both of these capacity expansions better position us to meet the critical and growing needs for NextGen security features. The adoption of our OVMP product on bank notes is growing at an encouraging rate with 20 countries having either issued or announced bank note designs that include OVMP.

Looking at our adjacency's, fiber lasers continue to be an area with significant growth potential. While revenue did slow in June quarter after a record March quarter, demand for this product remains strong. Meanwhile, our solid state lasers showed a healthy recovery in June. These are our Q series lasers which are used primarily for semiconductor processing and other micro machining activity.

We also continue to develop new applications for gesture recognition, another add adjacency. We recently signed an advanced development contract with a major customer in the home entertainment area. And, we are collaborating with several others in related commercial application.

This is in addition to ongoing work related to our current customer's NextGen platform. As we mentioned on a previous earnings call, we expect new applications for gesture recognition to launch within the next 12 to 18 months. I'd like to switch gears now and provide an update on our initiative to drive business model improvement.

In CommTest, we completed the heavy lifting to refine and consolidate our operation. In fiscal 2012 we implemented a number of initiatives to reduce costs by driving supply chain leverage and operational efficiency. We expect to see significant benefits from these initiatives over the next two quarters.

We recently outsourced repair services through a third party which will improve customer satisfaction and result in additional savings. At the same time, we are significantly consolidating our contract manufacturing footprint. In CCOP, we continue to increase our use of dual sourcing to drive cost reduction. We've also reduced our inventory significantly as we are working to realize supplier cost reductions into product cost reductions more quickly.

Regarding our AOT business segment, we are sharpening our focus on our core activity of providing anti-counterfeiting solutions for currency and pharmaceuticals. With this focus, we will be realigning this segment by separating the bank part hologram business from our optical security and performance technologies.

As a result of this strategic realignment, Luke Scrivanich, who has successfully led our Flex business, consisting primarily of anti-counterfeiting solutions for currency for the last four years, will expand his role as the Senior Vice President and General Manager for the newly created Optical Security and Performance business unit reporting directly to me. OSP combines the previous Flex and Optical Codings product line.

Roy Bie, who has led AOT for the last six years, will now focus on bank card hologram, where he will oversee the evaluation of our strategic alternatives for that business. Finally, Dave Vellequette will step down as JDSU's CFO on August 31 following the filing of our 10-K. And, will leave the company on September 29 to pursue another opportunity.

For over eight years Dave has been a key member of our leadership team and an important contributor to our corporate strategy. On behalf of the Board and the entire management team, I'd like to thank him for his dedication and service to the company. And, wish him good luck with his new role.

I'm pleased to announce that effective September 1, Rex Jackson, currently JDSU's Senior Vice President of Business Services, will assume the role of acting CFO. Rex has served as a member of the executive team in key roles since joining JDSU in January of 2011.

And, recently served four years as CFO at two public technology companies, Symyx Technologies and Synopsis. We look forward to a seamless transition of the finance function. With that, I'll now hand the call over to Dave who will take you through the details of our financial performance in fiscal Q4 and will discuss our outlook for Q1.

Thank you, Tom. Before I start, please note that all numbers are non-GAAP unless I state otherwise. Fourth quarter revenue of $439.3 million was up 7.4% from the prior quarter, and down 7% when compared to the fourth quarter of fiscal 2011. The sequential revenue increase was driven by strength in CommTest and continuing growth in demand for CCOP products, particularly in North America.

Total book-to-bill for the company was greater than 1 with both CCOP and AOT above 1. CommTest book-to-bill ratio was below 1. Fiscal Q4 gross margin was 45%, down sequentially from 45.5% and down from 46.7% from the previous year. The sequential decline was primarily due to lower overhead absorption in CCOP and inventory related charges in CommTest.

Operating expenses of $159.5 million were up $3.4 million from the prior quarter, due primarily to employee variable compensation. The fourth quarter operating margin of 8.7% was up from the previous quarter's 7.3% as a result of higher revenue. Net income for the quarter was $35.3 million, or $0.15 per share, which compares to $25.3 million or $0.11 per share, for the prior fiscal quarter. And, to $53.9 million, or $0.23 per share, for the year-ago period.

For the full fiscal year, total revenue was nearly $1.7 billion, down 7.4% from the prior year. Gross margin for the full fiscal year was 46.1%, down from 47.6% for fiscal 2011. The decrease in gross margin was primarily due to lower gross margins in the CCOP segment.

Operating income for the fiscal 2012 was $153.7 million, or 9.1% of revenue, down from 12.7% of revenue for fiscal 2011. The lower operating income resulted from lower revenue and the associated lower gross profit. Our net income for the year was $137.3 million, or $0.59 per share, down from $0.93 per share for fiscal 2011.

A detailed reconciliation of our non-GAAP results to our GAAP results is available in today's press release. Our non-GAAP results exclude, among other items, amortization of acquired technology and other intangibles of $22.1 million, an $11.6 million charge for stock based compensation, a $23.7 million charge for asset impairment of our hologram business, and a $7.8 million accrual for restructuring and nonrecurring charges.

These charges were partially offset by a $10.5 million payment from our insurance carrier for claims associated with the Thailand flooding. Including the noted items, the fiscal fourth quarter 2012 GAAP net loss was $24.3 million, or a loss of $0.10 per share, which compares to a prior year fourth quarter GAAP net income of $9.3 million, or $0.04 per share.

For the full fiscal year, GAAP net loss was $57.7 million, or a loss of $0.25 per share, which compares toss a GAAP net income of $71.6 million, or $0.31 per share, for fiscal 2011. Now, looking at quarterly revenue by region. Americas revenue of $236.3 million, or 54% of total revenue, was up $45.1 million from the prior quarter.

The increase was due to seasonally higher demand from service providers and higher demand from network equipment manufacturers. EMEA revenue was $98.8 million, or 22% of total revenue, down $3.4 million from the prior quarter. Macroeconomic concerns continue to drive cautious spending behavior in the region.

Finally, Asia-Pacific revenue was $104.2 million, or 24% of total revenue, down $11.6 million sequentially due to reduced revenue from a CommTest customer and, as expected, lower revenue from our fiber laser customer. Moving to the segment. First, the CCOP segment. Total CCOP revenue was $185 million, up nearly 7% from the prior quarter.

Gross margin declined slightly to 27.8% from 28.1% in the prior quarter, due primarily to lower overhead absorption in Optical Communications, resulting from a reduction in the inventory. CCOP's operating income was $15.7 million, up from $14.1 million in the prior quarter due to higher revenue. Operating margin was 8.5% compared to 8.1% in the prior quarter.

Now, looking at the Optical Communications business. Optical Communication's revenue in fiscal Q4 was $155.4 million, up 8.5% when compared to the previous quarter's revenue. And, down 10.9% from the prior year. 9 of 12 product lines grew sequentially with significant growth in pluggables and Circuit Pack.

Optical Communication's bookings grew for the fourth consecutive quarter and had the highest level of bookings in six quarters. ROADM revenue grew slightly more than $2 million over the prior quarter and represented 23% of optical revenue. Super transport blade revenue also grew sequentially.

Tunable XFP revenue declined sequentially and represented 11% of optical revenue compared to 16% of revenue for the prior quarter. The Tunable XFP book-to-bill was greater than 1. Optical Communications gross margin for the quarter was 24.5%, down from the prior quarter's 24.9% due to product mix and lower overhead absorption has reduced our optical inventory level.

The sequential ASP decline for Optical Communications was below the midpoint of our historical 2% to 4% range. Our target gross margin range for the Optical Communications portfolio is 30% to 35%. In our lasers business, fourth quarter revenue of $29.6 million was approximately flat compared to the prior quarter, and up 6.5% compared to the prior year. Fiber laser revenue was $2.5 million.

Book-to-bill for lasers was slightly greater than 1 with bookings at their highest level in eight quarters due to solid state laser demand. Laser's gross margin was 45.1%, up from 43.2% in the previous quarter. The improvement in margin was due to product mix. Our target CCOP operating model is for operating margins of 16% to 20% when quarterly revenues are above $210 million.

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 Q4 revenue of $196.2 million was up 10.3% sequentially and down 7.1% year-on-year. The sequential improvement was due to strength in field test instrument particularly for Metro, Ethernet, and cable.

Fiscal Q4 gross margin for CommTest was 60.3%, compared to 61.6% for the previous quarter, and 59.3% in the previous year. Gross margin was impacted primarily by inventory related charges which included adjustments resulting from contract manufacturer consolidation and product portfolio pruning.

CommTest operating profit was $26.1 million, or 13.3% of revenue, which compare toss 11.3% of revenue in the prior quarter. The higher operating margin was driven by higher revenue. Our targeted CommTest operating model is for operating margins of 20% to 23%, and quarterly revenues are greater than $215 million, and gross margins are at or above 64% to 66%.

We also believe we will have a CommTest structure in place for the December quarter to meet this model. For the Advanced Optical Technologies, or AOT segment, fiscal Q4 revenue was $58.1 million, approximately flat to the prior quarter. Fiscal Q4 gross margin for AOT was 48.3%, up from 47.8% in the prior quarter. The higher gross margin was driven by product mix.

AOT operating profit for the quarter was $19.4 million, or 33.4% of revenue, up slightly from 33.1% for the prior quarter. Going forward, given the structural change that Tom announced earlier on the call, we will be reporting OSP separately from hologram. For fiscal fourth quarter, OSP revenue was $52.9 million and gross margin was 51.1%.

Hologram's revenue was $5.2 million and gross margin was 19.2%. The AOT targeted operating model is for operating margins of 32% to 35% when quarterly revenue is greater than $55 million. The OSP targeted operating model is for operating margins of 34% to 37% when quarterly revenue is greater than $52 million. The operating model for the hologram business is breakeven when quarterly revenue is $5 million to $6 million.

As a reminder, JDSU's total company targeted operating margin range is 14% to 17% when quarterly revenue for the company is $480 million or greater and the gross margin is 49% or higher. Moving to the balance sheet. For fiscal Q4 2012, the company generated $38 million of cash from operations and capital expenditures totaled $15.3 million.

At the end of fiscal Q4, the company held nearly $753 million in total cash and investments. Also, net inventories sequentially declined $17.6 million to $174.5 million. Finally, during the quarter we repurchased $14 million of outstanding convertible debt. And, subsequent to quarter end we retired an additional $50 million of debt.

As a reminder, the outstanding debt balance was reclassified to a current liability and is due in May 2013. Headcount as of June 30, 2012 was 4,934. Now, to our Q1 guidance. Based on our current visibility, we expect a normal seasonality in CommTest demand and we expect the current macroeconomic environment to continue to impact our customers.

Therefore, on a sequential basis, for CommTest we expect a seasonal revenue decline of 9% to 14%. For CCOP, we expect revenue to be up 3% to 7%. For OST we expect revenue to be up 2% to 5%. And, for hologram, we expect revenue to be flat.

The company's operating expenses are expected to increase by $1 million to $2 million, primarily driven by investments in R&D, given the current product investment cycle. Now, looking at the operating margins for the segments, CommTest operating margin is expected to be between 8% and 10.5%.

CCOP operating margin is expected to be in the range of 9.5% to 11%. OST operating margin is expected to be approximately 36%. Hologram operating margin is expected to be breakeven. Taxes, interest, and other income are expected to result in a net expense of approximately $5 million. Share count for calculating EPS is expected to be approximately 237 million shares.

Capital equipment purchases will be approximately 4% of revenue. Taking into consideration the factors above, as well as the historical September quarter segment revenue mix which includes more CCOP and less CommTest as a percentage of total revenue, we expect first quarter revenue to be between $415 million and $435 million. And, our non-GAAP operating margin to be between 6.5% and 8.5%. I will now turn the call back to Tom.

Thanks, Dave. Looking ahead to fiscal 2013, I am encouraged by the performance of the business, despite continued macroeconomic uncertainty and limited visibility. Although demand drivers continue to increase significantly, we expect global carrier CapEx spending to be up only moderately as they continue to be cautious for the balance of calendar year 2012, driven by lingering economic concerns in Europe and other regions.

We are encouraged by the sequential revenue growth we saw in Optical Communications and CommTest in fiscal Q4, particularly in areas such as plant side pluggables and field instruments. This indicates increased market penetration. Our investments in innovation and leaner operations are driving resiliency in our top line and profitability in the midst of market uncertainty.

Our focus on network related innovation was again recognized by both customers and third parties in fiscal Q4. Notably, in May our Optical Communications group received a strategic supplier of the year award from Siena. CommTest also won multiple industry awards, two of which recognized PacketPortal for breakthrough innovation.

We are excited about the momentum from our numerous differentiated products in our core businesses. And, the opportunities for accelerated growth in adjacent markets like fiber lasers and gesture recognition. Market share gains are becoming more evident.

As we enter fiscal 2013, our priorities will continue to center on collaborative innovation with our customers, strategic acquisitions, global expansion, lean scalable business models, partnering with our strategic suppliers, and a commitment to our employees. Operator, we'll now take questions.

(Operator Instructions)

Kevin Dennean, Citi.

Great. Thanks, very much. Congratulations on a very solid quarter in a tough environment. And Dave, good luck in your next endeavor. Quick housekeeping question.

You mentioned expectations for only modest carrier CapEx increase in the back half of the year. EMEA's a clear risk. But, are you expecting fairly tepid trends in North America and Asia-Pac also?

Yes, I think North America, we -- the carriers still have a pretty big number out there as far as their CapEx spend. So, we think -- we're not giving guidance out into the December quarter. But, that could be reasonably healthy, if their numbers continue to hold out there. Asia, China has seen a little bit of a slowdown. But, I think we are finding throughout Asia a pretty strong environment for us. So, that should be reasonable going out through this quarter.

Okay. Great. And then, you mentioned in the optical -- in the communications part of CCOP, strength in 40G and 100G components. Can you give us a little bit more color on this?

Are you seeing that demand for that product set accelerating quarter-over-quarter? Is it relatively balanced across your customer base or somewhat more concentrated? And, just how large a portion of your -- of CCOP is 40G and 100G now?

Hi, Kevin, this is Alan. The 40G and 100G components go to our customers who have vertically integrated capability in line cards. And, we're seeing rapid growth of those customers as well as additional customers behind them as they introduce their 40 and 100G. As far as splitting out the revenue, we don't normally do that. But, it is becoming a larger part of our business.

Patrick Newton, Stifel Nicolaus.

Hey, thank you. Hello, Tom, Dave and Allen. Thank you for taking my questions. I guess, I want to jump in on the T&M side, mainly focusing on the guidance, obviously a very solid quarter there.

But, I guess for Tom, could you walk us through the puts and takes, I guess, either by geography or maybe by field test relative to service assurance that is driving this sequential decline. Because it appears a little bit aggressive relative to normal seasonality. I'm trying to get a sense of macro relative to conservatism.

And then, I guess for Dave, if we could talk about the consolidation of your T&M supply chain. If I take the midpoint of the expected sequential revenue decline for September and then I apply normal seasonality -- I'm sorry seasonality in December, it would appear that you would approach your targeted revenue for your operating model. And, I guess in this scenario, do you think you'll have the structure in place to achieve this model?

Patrick, on the -- as far as the September quarter, as you know it is a seasonally down quarter for CommTest in particular. We see a similar pattern. It's not out of range for what we would normally see in previous years. There were a few acquisitions in that time frame in a couple of the previous years that may throw the numbers off. But, when you back those out, it's pretty normal.

I'd say, the concerns always are North America as there's a number of vacations going on in the customer base, as well as Europe. We've got the vacation period but also continued, I think, weakness in Europe. So, that probably makes that situation a little bit worse. It is pretty much across the business, although I'd say field instruments which was strong for us last quarter is probably likely to see the larger decrease in this coming September quarter.

Yes, and Patrick, on the supply chain side of T&M, you're right, we get the $215 million level. And, I think hitting the 64% to 66% range for the gross margin is obviously very reachable. Couple of things, obviously the inventory charge activity and the mix of the products as you get that large, we think there will be more software content, those will help quite a bit.

With that range of -- even if we're like 64.7%, roughly, of a gross margin number, the OpEx could grow another $4 million. Which you would expect it to grow some with the variable comp structure, et cetera, as the revenue would reach that kind of a level. And, if you look at the quarter we just finished, we went from $178 million to $196 million and we grew the OpEx by $4 million.

So, going $196 million to $215 million, growing another $4 million would seem in line from that perspective. So, I think it's -- that's why we believe we'll have the structure in place. And, it will be a matter of whether the demand is there.

All right. That's very helpful. And, I guess sticking to the target model theme, if we look at Optical Communications, I think you said in your prepared remarks that you will have the structure in place by December.

If I take the current revenue level, I think it implies more than 100% contribution margin on incremental revenue to hit that target. So, can you walk us through the steps that remain in order to get that structure in place? And, I'm sure that inventory's declining played a role in that in the current quarter. But, that would be helpful.

I think also if you looked at the slides we sent out on Slide 11, it could help quite a bit. Because we note, one, that the laser revenue as a percentage of the total would have to be 20% of the revenue. Laser's right -- sitting around that $30 million mark. And, we'd have to be around $42 million. That has much better gross margins than the Optics.

And then, key is for the Optical revenues to have a margin of about 32.5%. And, that will be driven obviously by the product mix and products like the Tunable XFPs, SFP Pluses which we only have really one, maybe one competitor, last quarter for example we shipped about seven to eight times more than our nearest competitor.

So, those types of products will help get that gross margin up closer to the low 30%s which we need in order to make that model. So, it's about structurally being there, from an OpEx stand point, having the portfolio available. And then, the real question will be is how does the mix come out when the orders come in.

All right. Thank you. Good luck, Dave.

Thank you.

James Kisner, Jeffries & Company.

All right, thank you for taking my question. So, I guess the first question just relates to CapEx. There's been some comments recently from analysts today on a slowing in North America. I just want to confirm that you guys have not seen a recent slowing in North America from a CapEx perspective.

Well, actually, as we've said even last year and then Tom mentioned, when we go through the seasonal adjustment North America from a dollar standpoint actually comes down more than Europe or Asia. It's just that Europe as a percentage standpoint usually is a higher percentage decline.

And so, we're seeing more of what I'll call the typical range. That said, I haven't seen the carriers state that they're adjusting their plans on CapEx spending for the second half from what they said on their most recent calls. I did see that article today, but I'm not sure where the support was for the numbers that came out in that article.

Okay, that's great. So, turning gears to just recognition, which you haven't really talked about as much in recent quarters. But, I was wondering if you can give us any color at all on this new opportunity other than what you said? Is it, for example, is this product a new product category for the customer that you're selling into?

This is Alan. Thanks for the question. It's a different customer and it is a new application for that customer.

A TV, perhaps?

I'm sorry?

Is it a TV?

I can't get into that, but you can imagine it's something other than gaming that we've been involved with.

And, when would you expect --.

It's related to home entertainment.

It's a home entertainment application.

A home entertainment application, okay. Any sense for when the revenues from that -- you said next 12 to 18 months, but that's pretty broad. Is that a similar size opportunity as the last opportunity? When might that flow through for revenue magnitude? Any kind of comments around that that you could provide.

It's really hard to tell the magnitude because I don't know how successful they're going to be at going to market. But, I can say that we are engaged with not just this one home entertainment application, but other applications that will be coming to market in that same time frame. So, we're trying to spread our opportunities amongst multiple customers and place our bets so that if any of them are successful, we'll be successful.

Amitabh Passi, UBS.

Hi, thank you. My first question just had to do -- clarifying the operating margin guidance for CommTest. I'm still l a little confused.

I think you guided revenues down 9% to 14%, operating margins down 400 basis points sequentially compared to last year where revenues were down 12% and margins down less than 200 basis points. Just trying to understand why we're seeing more negative leverage with the guidance in CommTest.

I think it has more to do with the mix that we have and the investment cycle that we're currently in. If I remember last year for CommTest the OpEx came down quite a bit from the Q4 to Q1. And, this quarter the numbers we provided don't have that same adjustment to the OpEx.

Okay. And then, just as a follow-up, can you help us quantify what the impact was from the inventory related charges in CommTest? And then, maybe just the impact of the under absorption in CCOP?

Yes. So, in the CommTest area those charges were greater than 1 gross margin point for both CommTest and for CCOP.

All right. Thanks.

Kent Schofield, Goldman Sachs.

Great, thank you. Can you give us a little bit more color on the share gains that you talked about? And, how sustainable you think those are going forward?

Yes. So, I think on the CommTest side, the ones that were apparent were in the field instruments area, we saw the biggest share gain. And, we think based on the new products and some additional software solutions that we're layering across the top of the instrument, we think we have some real competitive advantages there. I think I'll let Alan speak specifically about the CCOP.

Yes, we believe that we gained significant share last quarter when most of our customers -- our competitors aren't really growing or forecasting the growth that we are having. And, with 8 of our 10 top customers growing, we believe it's sustainable not just from the customers that we have a large share at, but we're gaining significant share at customers that we have smaller share at.

Great. Thank you.

Mark Sue, RBC Capital Markets.

Thank you. Was hoping if you could share with us your working assumption on how we should think of seasonality of the CommTest business following the bip near term. In some years, the December quarter we get a flush, some years we don't. And, perhaps how the product portfolio is now split between wireless and wireline?

Yes, I think as far as the numbers that are out there associated with the CapEx, based on what we're seeing as far as the seasonal decline in September, as Dave mentioned earlier, if the network operators, specifically in North America, don't pull their CapEx numbers off the table or reduce them, then you would expect the following quarter to be pretty healthy if you just run through the numbers.

That would be pretty healthy for us. I think as far as wireless and wireline, those products that we support mobility with are running 40% of our total revenue for CommTest. And, that would include the backhaul.

Got it. Is PacketPortal and PacketInsight, is that for both wireless and wireline?

Yes, they can be used in both the wireless environment and wireline environment.

Okay, got it. And then, in Optical, it now seems that the segment might grow three quarters in a row. Is it onward and forward from here -- maybe if you could just give your thoughts on industry lead times for optical components? And, just the thought if the strength can continue for optical.

Yes, well, as we said in our introductory comments, our bookings have reached, last quarter, a six quarter high. So, we're believing that that will maintain our growth both in this quarter. And, if CapEx, as Tom indicated, continues to grow, we believe it will grow in the December quarter. I think -- I didn't hear the beginning of your question.

Just wondering if it feels like with lead times where they are --.

Lead times, okay.

Yes.

Lead times, it depends on the products. Things like Tunable XFP, lead times we got down relatively short last quarter. But, those are starting to stretch out a little bit as demand for those products increases. And so, it really depends on whether or not our customers are forecasting the product to be needed or not. But, overall, average lead times are down over the last few quarters as we've been really trying to work on flexibility models to meet our customers' demand.

Got it. And, lastly, Dave, will you miss us as much as we will miss you?

He fell off his chair.

Thank you, and good luck, gentlemen.

Thank you.

Simon Leopold, Raymond James.

Yes, hi, guys. This is George [Scapopalis] in for Simon Leopold. Thanks for taking my questions. So, first of all, can you give us some color on the CommTest sales? Especially if you could break down wireless versus optical. And, if you cannot give us a number, at least you can give us some color on how these subsegments perform and how you expect seasonality within these subsegments to shape up for the remainder of the year?

Okay. So, I think your question was primarily around CommTest, correct?

Sure.

So, I think as I mentioned earlier, wireless is running, including backhaul tests and solutions, running about 40% of our revenues. So, about -- split about 40% wireless, about 60% wireline. And then, I think as far as any subsegments, we really don't typically get into breakdowns any further, further down than just looking at wireline and wireless.

Okay. Then, for the year, the Tunable SFP Plus, you mentioned that basically you've had about five to six times more revenue than your nearest competitor. Can you comment on the revenue opportunity for this product, based on your current market sizing? And also, are you displacing fixed wave length SFP Plus with products?

I think Dave said it was seven to eight times our nearest competitor.

That's even better.

Yes, Tunable SFP Plus we've been saying over the last few quarters on the earnings call that we would be releasing it this summer and we are. We think it's significant incremental market to Tunable XFP Plus initially. And, we are replacing significant amounts of fixed wavelength VWDM XFPs with both Tunable XFP today as well as Tunable SFP Plus in the future.

So, we're pretty excited about the lead time we have and the time to market advantage we have on our competitors with regard to Tunable SFP Plus. And, many of our customers are designing, or have designed, cards that incorporate Tunable SFP Plus into their chassis. We think it's a great opportunity and one that we're just at the very beginning of.

Okay, so the last question I have is about ROADMs. It seems that this quarter you had an up tick after four quarters of decline. And, your major competitor basically has reported stable ROADM sales for the last two, three quarters. Wonder if this is a result of customer migration to flexible grid ROADMs? So, what are you hearing from your customers, what feel to you get with respect to gaining back market share when your TrueFlex product hits the market?

It's hard for us to understand what our competitors are saying sometimes? Because they stopped giving the specific revenue for ROADMs. But, I think the last trajectory that they talked about was that they were reducing ROADM revenue. But, I think we really focus on where we're going to provide value to our customers and allow our customers to win.

We don't think that there's any real deployment of colorless, directionless, and contentionless networks today. And, we believe that we are in the design slots for those networks as they get deployed in 2013. We're pretty excited where we are with our TrueFlex product line. And, we've won design slots at the blade level with those products today. And, we're working with our customers to bring those to market in the next few quarters.

Thanks, guys. Good luck.

Thank you.

Ehud Gelblum, Morgan Stanley.

Hi, guys, thanks, I appreciate it. Dave, we will definitely miss you. First, a clarification. You said on this GenComm acquisition today that it was -- you were doing over $7.5 million in revenue but that it was a much bigger business outside of that.

Did you give what all the revenue was for GenComm and how much you will be taking on? I guess the $7.5 million becomes a wash with the rest of it, I guess, as incremental?

We didn't give any numbers specific to the rest of the opportunities. A couple aspects, we were the prime distributor for the majority of the GenComm products, except for what was sold within country for GenComm. We also see the opportunity to leverage some of our other products going forward.

And, to develop some additional capabilities between the base station test and what we're doing on the backhaul. We think that will be a significant competitive advantage. There's some synergies there we would expect in future sales. We will have a margin pickup based on now owning the business directly and not reselling.

Okay. I'm still confused. What's the incremental revenue you'll be picking up?

We didn't say. We said that what we did with them this last fiscal year, 2012, was $7.5 million. Which was the majority of their sales. But, we didn't say what the balance was.

So, if we're thinking that their total sales were $10 million, then that's relatively in line?

We didn't give that other number.

We have to know something or other. Otherwise how could we possibly model it and know how to -- you're guiding to a certain number. Obviously, that's next quarter. This doesn't close for a little while.

We have to know what it looks like when it comes in. Would it be too far off-base to assume $10 million or $11 million, in which case the incremental is $4 million a quarter? Then it would be, like you're saying, somewhat irrelevant. Just give us something to go on.

That's probably a reasonable range.

Okay, appreciate it. Now, on the gross margin issue on the Optical Com, I think -- originally I think the guidance was for it to go up this quarter and it came down. Was that due to the mix of the different products within Optical Comm that caused that?

And, do -- can you go over gross margin puts and takes possibly between the Tunable XFPs, the super transfer plays, the ROADMs? And, how, assuming mix was the issue, how that turned into the gross margin it did? And, what you're expecting for next quarter?

This is Dave. As I noted, just the inventory charges, because we depleted inventory versus running the fabs, that was worth more than a point of margin in itself. So, that would have had the gross margin for CCOP and for Optics higher. And then, the mix, more favorable mix of Tunable XFPs et cetera would have made that margin even higher.

Alex Henderson, Needham.

Sorry to cut you off there, Ehud. Dave, I'm sorry to hear you're leaving. I really enjoyed working with you. And, one last comment. I almost never congratulate people on a good quarter, but you guys really pulled a great quarter out considering the conditions you're in.

Thank you.

A couple of quick questions here on some of the products. One, could you talk about your intentions around narrow line with coherent lasers? Do you have any expectation of being able to get into that? And, can you clarify what you meant by what you were selling into the 40 gig and 100 gig, because I didn't really follow what you said in the call?

Sure, Alex. We have a product road map that includes various narrow line with lasers to come out in relatively a few quarters. Really trying to catch up with some competitors, frankly. So, we're behind them in the narrow line width lasers.

So, we're depending on some of our competitors initially as we introduce our 40 gig and 100 gig modules. As far as our components that address the 40 gig and 100 gig market, those are primarily, today, high volume products in the modulators for coherent, 40 gig and 100 gig, as wells as the coherent receivers.

Modulators and receivers are the primary piece of that business. You made the comment that they were being built into other boards. I was a little confused by that. Are you selling these to OEMs who are building into the boards, is that what you mean?

We're selling these primarily into the network equipment manufacturers who put them into their system.

Just want to make sure I was clear on that. The second one, on the laser side, you said that your solid state laser business had, quote, a significantly positive book-to-bill. Can you give us a little bit more clarity on how that plays? We should be expecting that to play out over a couple of quarters? Or will that be one quarter to get that book-to-bill number delivered? What's the delivery time on that?

Some of the larger orders were for over multiple quarters. So, we would build up capacity in anticipation of their demand. So, I would say that that's helping our Q1 as well as Q2.

So, a couple of quarters to get to the realization. And then, on the fiber laser, $2.5 million down from '10. I know that '10 was a pipeline fill a little bit. How do you see that -- the recovery shape there?

We believe it's going to be up in Q1. Whether or not -- it shouldn't get back up to that Q3 level. But, we anticipate as more and more of our customers adopt the fiber laser in their tools, that that business will continue to grow in calendar 2013.

Subu Subramanian, the tudor group.

Thank you, two questions. First question is on the Optical market. If you look at the bigger picture, how much of this would you -- your strength would you look at as share gain? And, specifically, was hoping you could talk about on the pluggable side in the LAN/SAN market versus how much of it you think is slightly better end market and you're seeing it because of particular customer mix?

Well, I think it's a combination of both. I mean, if you recall, probably over the last two to three years we put major emphasis on growing our pluggable client side portfolio. And, those products have been coming out to market, we're winning new design slots at customers where we have had very little to no footprint.

So, we believe that we're going to continue to grow share in the pluggable business and take share from our competitors at major, major customers. That's number one. As far as whether we're winning because our customers are winning, I believe we have the broadest customer base.

And, we believe we enable our customers, together, through collaborative innovation to win. So, I think it's a combination of both. Our customers are winning, but we do have a broad footprint. And, 8 of our 10 leading customers grew our business last quarter. So, we think it's a combination of both.

In the pluggable LAN/SAN it's fair to say that there's one customer that's fairly binary if you were a preferred supplier or not, are there opportunities at that one large customer as well?

We don't talk about specific customers, but yes.

And, a question on CommTest. If you look at the $215 million number you need to be at to hit the operating model versus this quarter, the guidance for September in the mid-$170 million, that would imply a 20% plus uptick. You've seen that in years where there's been a good year-end CapEx flush. But, is it fair to say, Tom, that this year you're not expecting a typical carrier flush, you're expecting it to be somewhat more moderate?

Again, we don't give guidance out into the December quarter. But, if the CapEx numbers hold up, there is pent-up demand. And, that could translate into a healthy situation in that quarter. But, we have to see how the numbers hold up over time.

I think also, if you look at what's been happening in the Optical space, the carriers have been buying, building out that infrastructure. So, that usually leads -- what follows from there is in the purchases of the instruments for the test area.

If you take what AT&T and Verizon said they will spend in the second half, it certainly leads to the fact that we should have -- you would think a budget flush of what I'll say normal ranges. Last year it was low because it was mostly driven by cable. But, it's implied, unless they change their expected CapEx for the second half, you would expect there to be a normal budget flush for sure.

Understood. Thank you. Dave, thank you for all the help and good luck.

Thanks.

This concludes the question-and-answer portion for today. I would now like to turn the call back to Tom Waechter for 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, very much. This concludes today's conference. Thank you, again, for your participation. You may now disconnect. Have a great evening.