Viavi Solutions Inc (VIAV) 2013 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the fourth-quarter 2013 JDSU earnings conference call. My name is Philip, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

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, Miss Cherryl Valenzuela, Director of Investor Relations. Please proceed, ma'am.

Thank you, Philip, and welcome, everyone, to JDSU's fiscal 2013 fourth-quarter and fiscal year-end earnings call.

Joining me today are Tom Waechter, CEO, and Rex Jackson, CFO. Alan Lowe, President and GM of CCOP, will join us for Q&A. I'd like to remind you that this call will include forward-looking statements about the Company's future financial performance. These 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 our most recent filings with the SEC, particularly the risk factor section in part one, item 1-A, of our current report on 8-K filed December 14, 2012. The forward-looking statements, including guidance, provided during this call are valid only as of today.

JDSU undertakes no obligation to update these statements. Please also note that all results are non-GAAP unless otherwise stated. We include a detailed reconciliation of these non-GAAP results to our GAAP results, as well as a discussion of their usefulness and limitations, in today's earnings press release. The release, plus our supplementary slides and historical financial tables, are available on our website. Finally, we are recording this call today and will make the recording available promptly on our website.

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

Thank you, Cherryl.

I am pleased and encouraged by JDSU's overall continued execution in fiscal Q4. We delivered revenue of $421.3 million, gross margin of 46.1%, operating margin of 7.2%, and EPS of $0.13. During the quarter, we navigated through market challenges and performed to plan in communications test and measurement and OS&P. We grew revenue significantly in newer markets such as gesture recognition and cloud Datacom products. Softer demand for telecom products led to less than our expected sequential growth in CCOP.

Bookings for Q4 were strong, with book-to-bill ratios above 1 for each of our three segments. Book-to-bill was well above 1 for our network-related businesses. CCOP recorded its highest level of bookings since we combined the optical communications and lasers businesses in late 2008, and saw its largest Datacom booking in the last 10 years.

CommTest reported its highest bookings in the last 10 quarters, with particular strength from a Tier One North American carrier. We anticipate most of these bookings will be converted to revenue by the end of calendar 2013. We also continued healthy cash generation. Our net cash balance at the end of June was approximately $516 million. We generated $57.1 million of cash from operations in Q4, bringing the total for fiscal 2013 to $187.8 million. This is nearly $70 million more than the $119.1 million generated in fiscal 2012, on comparable revenue. At the same time, our continuing investments in innovation led to a record 65% of combined CommTest and optical communications revenue, derived from products less than two years old. This includes products such as new and redesigned laser diodes for gesture recognition, Datacom pluggables, solutions supporting increased capacity and faster connectivity for fixed and mobile communications, and a few others I will discuss shortly.

Fiscal Q4 was the ninth consecutive quarter with new product revenue over our target of 50%. We believe we continue to win share in a number of our key markets. Our emphasis on collaborative innovation is driving tight alignment between our product portfolio and our customers' spending priorities, and enabling us to claim leadership in both core and adjacent markets. Highlights of our latest product initiatives include the following. Our communications test and measurement portfolio continues to evolve towards higher growth markets. We are pleased with the market reception and performance of our location intelligence business that we formed with the March acquisition of Arieso. In its first full quarter at JDSU, this group added five new customers and reported record bookings in fiscal Q4. Our ethernet business grew 37% sequentially, with more than 75% of revenue from new products. For the full year, we believe our ethernet business gained share, led by strength in North American Metro markets.

We extended our leadership in 100G with record revenue in June, which included growing demand for 100G optical transport solutions in China and EMEA. Our media access and content business saw 27% sequential revenue growth in Q4 and significant market share gains in both the cable and telco access markets. Significant Q4 wins in Latin America and North America, as well as new businesses in EMEA, were driven by IPTV expansion, supported by new product for DSL vectoring and continued growth of DOCSIS 3.0. In our network visibility and control business, we added five new customers for PacketPortal in Q4, bringing the total number of customers to 21, with 46 trials completed and in progress. We booked our first $1 million order for PacketPortal in Q4, and closed our first order for a Tier One North American service provider in recent weeks. As we stated in our last earnings call, though the adoption cycle for PacketPortal is lengthy, we expect significant revenue growth in Fiscal year '14.

Next, in optical communications, our focus upon growing our business in Datacom and cloud is paying dividends. In addition to receiving our largest customer booking in this space this quarter, we have shipped samples of our industry-leading CFP2 100G product and expect to begin production in our second fiscal quarter. 100G coherent line-side component demand is also strong, and our modulators have been qualified by many customers who manufacture their own 100G coherent line cards. We also are making good progress on next-generation coherent receivers and narrow line with lasers.

The adoption of our TrueFlex ROADMs and line cards continues on plan, and we believe we have a considerable lead over our competition on these products. We have been receiving pull-in requests to ramp our TrueFlex twin, one by 20 faster than our original plan, so we are accelerating our capacity builds to meet our customers' requests. These TrueFlex ROADMs and optical channel monitors will be shipped as both line cards and stand-alone modules for those customers who prefer to develop their own line cards. Revenue is expected to ramp in the current September quarter. Tunable XFP plus revenue tripled sequentially off a low base. Customer interest in this product remains strong, and we expect revenue to further accelerate once we launch a one by five watt variant to the complement our current two watt offering. We are shipping samples of our 1.5 watt variant now, and expect to launch this product in the next few months.

Moving to our core anti-counterfeiting market. I am pleased to note the continued adoption of our optically variable magnetic pigment product by central banks around the world. 43 countries now incorporate Spark as this product brand is known, in their banknote designs today, up from 38 last quarter. As discussed on previous calls, we've been working to focus our business on product lines capable of delivering long-term growth and profitability, consistent with our business model. Toward that end, in June, we announced our intention to exit certain OSP product lines associated with our thin film coatings business. Those that primarily serve the office automation, custom display and solar markets.

We chose to exit these product lines, which represented $6.2 million of revenue in fiscal Q4, because they no longer met our financial or strategic objectives. We intend to exit these product lines in a phased process between now and the end of the calendar year. Once complete, this will result in a 28% reduction in headcount and a 33% reduction in manufacturing footprint for OSP. This will also enable the OSP leadership team to better focus its efforts on pursuing growth opportunities for the business.

Now turning to two major adjacencies, beginning with lasers. Fiber laser revenue grew to $4.3 million in Q4, from $3.8 million in March. We expect a more sizable ramp when our next-generation fiber laser, with advanced features and market-leading cutting speeds, begins shipping. At the same time, we are making solid progress on our next-generation of higher-power Q series solid state lasers, and have shipped 80 units to our customers. We have received excellent customer feedback on these initial deliveries.

Finally, gesture recognition. While we are not disclosing revenue at the request of our primary customer, gesture recognition was a significant contributor to our top line during fiscal Q4. Most of the revenue came from laser diodes used in a new gaming platform for an existing customer. Market demand for optical filters is also growing. LeapMotion, our second gesture recognition customer, started shipping their personal computing device in late July, which includes specialized optical filters designed and produced by OSP.

With that, I will now hand the call over to Rex.

Thank you, Tom.

JDSU has consolidated fourth-quarter revenue of $421.3 million, was sequentially up 3.9% from March, at the low end of our guidance due to less than expected telecom revenue from CCOP, as Tom noted earlier. Year-over-year, revenue was down 2.9%. The Americas accounted for $204.5 million, or 48% of total revenue, while EMEA contributed $86.8 million or 21%, and Asia-Pacific, approximately $130 million or 31%. Asia Pacific results benefited from gesture recognition while EMEA slipped due to sequentially lower demand for CommTest and OSP products in the quarter. Gross margin of 46.1% increased from 45.9% in March and 45.3% last year. The sequential improvement was due to higher revenue, while the annual increase was driven by four points of better margin from optical communications.

Operating expenses were $163.9 million, up $5.5 million sequentially, due mostly to the addition of a resale, yielding operating margin of 7.2%, up from 6.8% sequentially and down from 8.8% year-on-year. Net income for the quarter was $30.4 million or $0.13 per share, up from March's $24.1 million and $0.10 per share, and down from $35.4 million or $0.15 per share last year.

For the fiscal year, revenue was approximately $1.68 billion and gross margin was 46.5%, fairly even with fiscal 2012. Operating margin of 8.7% and net income of $131.8 million, or $0.55 per share were down from 9.3% and $137.5 million, or $0.59 per share, in fiscal 2012. Please note our Q4 non-GAAP results exclude, among other items, amortization of acquired technology and other intangibles of $18.5 million, a $14.9 million charge for stock-based compensation, restructuring charges totaling $12.9 million, and a $111.6 million net tax benefit from the releases of deferred tax evaluation allowances for certain foreign jurisdictions. Including the noted items, fiscal Q4 GAAP net income was $92.5 million or $0.38 per share, which compares to a net loss of $28 million or $0.12 per share in the prior quarter, and a net loss of $22.2 million or $0.10 per share in the prior year. For the full fiscal year, GAAP net income was $57 million or $0.24 per share, compared to a net loss of $55.6 million or $0.24 per share in fiscal 2012.

Moving to the segments, CommTest delivered revenue of $189.8 million, up 9% sequentially due to better performance in North America. While global carrier spending has been restrained, CommTest is investing in gaining traction in emerging growth areas such as cloud, Ethernet, and 100G and LTE-driven mobility. Continuing its focus on new wireless and software products, CommTest generated approximately 40% of its fiscal 2013 revenue from wireless products.

Gross margin improved to 60.1% in June compared to 59.1% in March. This slight increase was lower than anticipated due to additional inventory charges and other transitional expenses associated with our move to a more outsourced model and to competitive pricing pressure in a portion of our field test instruments business. These factors delayed by a quarter are expected recovery in CommTest overall gross margin. Excluding the resale, gross margin for our organic portfolio was 61%, in June.

Operating expenses increased sequentially, primarily related to the addition of a resale. This resulted in operating margin of 9.5%, compared to 7.5% in March, and 13.3% last year. The integration of our resale is progressing, and we are pleased with the bookings performance in the business' first full quarter with us. As expected, most of Arieso's potential revenue in the quarter was deferred, and it incurred a $5.7 million operating loss. We expect to continue increasing revenue in future quarters.

Turning to CCOP, which consist our optical communications and lasers businesses. In Q4, CCOP delivered revenue of $182.3 million, a sequential improvement, but below the expected range, due primarily to lower than expected telecom revenue, and a 1.5% decline from the year-ago period. Q4 gross margin was 30.9%, compared to 31.8% in the prior quarter and 27.8% in the prior year. Likewise, operating margin of 10% was down from 10.7% sequentially, but up from 8.5% year-on-year, due to operational improvements and the shift in new products. Book-to-bill for optical communications and lasers was above 1.

Within the segment, optical communications revenue was $154.1 million, up slightly, sequentially. Customer VMI pulls were lighter than expected and declined to 35% of optical revenue versus 42% in March. Optical products in VMI are substantially all in telecom transport and transmission. Total ROADM revenue was flat sequentially at 21% of optical revenue, while total combined tunable XFP and XFP plus revenue was up 5% from the March quarter, and 14% of total optical revenue.

Two product areas which grew in the quarter were laser diodes used in gesture recognition and pluggables, including those used for datacom applications. Optical communications gross margin declined to 28.2% from 29% last quarter, due primarily to an increase in excess and obsolete inventory reserve, who continued to be substantially improved from last year's 24.5% due to improved yields and other operational improvements and a higher mix of new products. Q4 sequential ASP decline in fiscal Q4 was 2.4%, on the lower end of the typical 2% to 4% range. Lasers contributed $28.2 million of revenue versus $26.3 million last quarter, mainly due to higher solid state and fiber laser revenues. Gross margin declined sequentially to 45.3%, due to product mix.

Next, our OSP segment delivered revenue of $49.2 million, down less than expected from March. Sequentially lower demand for security pigments, due to customary -- customer inventory rebalancing, was partially offset by growth in consumer electronics and industrial markets, including gesture recognition. Gross margin decreased to 49.2% from 50.1%, due to lower revenue and mix, while operating margin remained within the target range and better than guidance at 35%, as the segment effectively managed costs. Moving to cash in our balance sheet, I would like to highlight two additional metrics to complement what Tom shared earlier. For fiscal Q4, capital expenditures were $18.4 million. We also paid off our outstanding convertible debt during the quarter. Headcount as of year-end was approximately 4,900.

Now, to our Q1 guidance. As Tom indicated, we are very good bookings in Q4, which have given us good coverage at this point in Q1. However, current trends in EMEA and China, and the overall environment, suggest we should continue to be cautious with our outlook. Looking forward, in CommTest, we expect seasonally lower revenue and consequent operating margin, but an improved gross margin. In CCOP, we expect higher data telecom -- datacom and gesture recognition revenue and for lasers to be approximately flat. And for OSP, we expect slightly higher revenue, but a small decline in margins, as we wind down portions of the business Tom mentioned earlier.

Specifically, then, on a sequential basis, for CommTest, we expect revenue to decrease approximately 5% to 10%. For CCOP, we expect revenue to increase approximately 5% to 10%. For OSP, we expect revenue to increase 2% to 8%. We expect our operating expenses to increase $2 million to $4 million sequentially, reflecting, primarily, continuing investments in R&D.

Now looking at the operating margins for the segments, we expect CommTest operating margin to be 7% to 9%, CCOP operating margin to be 10% to 12%, and OSP operating margin to be 33% to 35%. We expect net expense for taxes, interest and other income to be approximately $4 million to $6 million. We expect our share count for calculating EPS to be approximately 243 million shares. We expect capital equipment purchases to be approximately 4% of revenue. Taking into consideration the factors above, we expect first-quarter revenue to be between $410 million and $430 million, and our non-GAAP operating margin to be between 7% and 9%.

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

Thanks, Rex.

I'm pleased with the progress we continue to make on our strategic priorities, despite the market headwinds we faced in fiscal 2013. We saw a steady flow of innovation as new products were 60% of network-related revenue in the fiscal year. Innovation not only strengthens our leadership in markets we serve. It also unlocks new high-growth opportunities such as consumer electronics for gesture recognition, data center expansion, and cloud-based networking. We grew our TAM meaningfully by expanding our presence in these and other emerging markets.

We complemented JDSU product innovation with two acquisitions this fiscal year, which added RF test and location intelligence solutions to our wireless product offerings. These acquisitions also expanded our presence and customer base in Asia-Pacific and EMEA. We continue to build our operating leverage. Over the last 12 months, JDSU has significantly improved its manufacturing supply chain and IT footprint through consolidation and outsourcing. We also undertook a broad, thoughtful review of our product portfolio across all three segments, and pruned product lines which were not accretive to our financial and strategic goals. We expect to see the full benefits of these activities in fiscal 2014.

Finally moving forward, we will refer to our CommTest business segment by a new name, Network and Service Enablement. This name reflects the evolution of our product portfolio, one that includes but goes beyond communications test instruments by offering enhanced visibility across the network and up and down the stack, including service and application performance. Network and service enablement more accurately reflects the value we bring to our customers to help them address intense competition, unpredictable bandwidth demand, the proliferation of connected devices and applications, in an unprecedented period of technology change and complexity.

Operator, we will now take questions.

(Operator Instructions)

Kent Schofield, Goldman Sachs.

I'd like to dive into what I think you are calling now network enablement, on the CommTest side of things. It looks like with the guidance, you are guiding to what would be the first year-on-year growth in an extended period of time during the September quarter. So I was wondering if you could look back over the last year or two, in terms of some of those declines, and what's driven that. And then, what do you think will bring you to growth on the year-on-year basis in the September quarter?

Yes, Kent. I think, primarily, if I look back, a lot of it's been the change in technology that's been going on. And as we mentioned in our last earnings call, the legacy technologies and products have been dropping off very quickly and we are starting to see the newer technologies really start to ramp. So I think part of that was that lag in investment between the legacy dropping off and the ramp of the new products, such as things like LTE deployment, 100 GB, et cetera.

I think we've also positioned ourselves better for those high-growth areas, both the regional play, whether it be China or some of the other high-growth regions, but also the markets around mobility and providing more visibility and control in the markets for the network operators. So I think that organic development, also the recent acquisitions, have really helped us to align well where the growth is coming, and we see that continuing for a period of time, now.

Is the 40% number that you gave for the wireless side of things, is that a good proxy to look at the legacy versus the new? Or is there more to that number? Just trying to get a sense for where we're at, in terms of that legacy as a percentage of the revenues, so that we can get comfort that we won't see another leg down from that legacy-type deployment.

Yes, as we announced last time -- last quarter, we had pruned out some low-speed wire line types of instruments. So, I think that was probably the -- we will continue ongoing basis pruning, but that was probably the larger bit of the legacy product still remaining. There are products that aren't in the wireless space that I would consider new generation of products for us, including some of the field instruments, where we are actually adding more software content, things like StrataSync, so they can be connected to the cloud, et cetera. So the 40% for mobility is some of the newer products, but we still have other products in the remaining 60% that I would consider high-growth and have moved beyond the legacy type of products.

All right.

Mark Sue, RBC Capital Markets.

Gentlemen, if I could balance your conservative guidance with what seems to be very strong bookings and overall strengthening trends in orders, is some of that related to timing? Is it -- some of it related to the lag between orders and revenue recognition? And does the pattern of the order trends imply a sharp ramp by the time we get to the end of the calendar year? Just a sense that the bookings order balance between that and your conservative revenue guidance?

Yes, I think, Mark, it's a little bit of each one of those. We did say that the larger bookings that we brought in from individual customers, we believe will -- most of that will ship out by the end of the calendar year. So some of that spreads over multiple quarters, which is not typically the situation, as we look in the past. So that's one item, there. I think, with more software-related revenue, and especially the acquisition of Arieso, we do see timing issues. So there is a delay between the time we ship the product or the software out to the customer and when we will actually realize the revenue for the products.

That's helpful. Tom, if we do get a seasonal flush this year, some years we do, some years we don't, that would actually all be added to that, I would imagine. And maybe any early indications of how you might feel for that?

Yes, I don't think any of the large orders that we received this past quarter are related to any kind of budget flush. It's way too early for that.

Right.

If we do see any budget flush in the December quarter, that should be incremental to what we've already received, as far as bookings.

Got it. One quick one. Just the review of CPAC versus what you are working, or with CFP2 and, subsequently, with CFP4. And then lastly just on gaming. I guess we have a sense of historic units for XBox and Kinect sales. Yet, if I think of how the gaming world has changed because of consumptions of smartphones and tablets, maybe how we should think about framing the opportunity for JDSU this second time around?

This is Alan. Thanks for the question. I can't specifically comment about any of our customers' proprietary designs. But what I can say is that we believe that our CFP2 offering and the feedback we've been getting from our early shipments to our customers is going to be first to market, lowest power consumption, and highest performance.

So we are very excited about competing in the open market with that product, and then following on next year with our CFP4 offering. And then subsequent to that the QSFP28 offering. So we are pretty excited about the whole road map we have on high-speed Datacom going forward, and have an entire suite of products.

The critical thing there is that the PTOSA and ROSA, which are the optical elements in those CFP2/4 and QSFP28, we designed for the smallest form factor and smallest power consumption requirement of the QSFP28. So we won't be needing to do a lot of redesigning of the optics part of those modules as we go forward, and we think that will give us a competitive advantage for time to market. As for the gesture recognition question, we really can't comment too much about any specific products in the market, but what we did say at our analyst day, which is valid, is that we believe that our content on this generation of product versus the prior generation of product, would be more than 2 times the revenue per unit shipped.

Helpful.

Does that answer your question?

It did. Good luck.

Patrick Newton, Stifel.

One housekeeping question before I jump in. I'm sorry if I missed this in the prepared remarks. But how much did Arieso contribute to the June quarter results? And how much have you baked into the September quarter guide?

We didn't break out specific revenue from Arieso, but we did say it was small, because of the -- initially bringing it inside of JDSU. We had a healthy bookings, as we mentioned, and we had approximately $5 million of operating expenses associated with the quarter. We didn't provide any specifics in the September quarter, as far as revenue.

Okay. And jumping into the questions, on the optical communications side. With the strength in Datacom, I'd love to get your thoughts on, is this momentum and record bookings sustainable? You talked about having a good product road map with the CFP2 and also CFP4, but would love your thoughts on the market aspect. And could you provide us with Datacom as a percentage of your optical revenue? And then, dovetailing off what you said, Alan, that your CFP4 is not going to require a redesign of the optics portion, that would imply just an electrical redesign. Is it fair to say, then, that the launch of that could be a Fiscal '15 type of product?

Absolutely. I think it's gating by the electronics and the chipstens and tape out of that specific component that goes into that CFP4. As far as your question about the length and duration of the strength of Datacom, I think it's here to stay for quite some time, given the growth in the cloud and the enterprise and the data centers that we see visibility to, both directly from those players, as well as through our NEM customers who are forecasting strong demand for quite some time. So I think it's sustainable. I don't know if it's sustainable at the rate we had the bookings over the last quarter, but certainly at this point in time, it's -- the horizon is certainly longer than we can see on Telecom.

And the percentage of revenue contribution?

Percentage of revenue, 15% to 20%, is that -- accurate?

Of optics?

Of optics, yes.

And just one last one, if I can squeeze it in, Tom. I'm curious, on the fiber laser side of your Business, you seem very confident about your next-generation fiber laser increasing cutting speeds and maybe making up for some of the shortcomings of this current generation. How comfortable are you with your relationship with Amada and how sustainable that business is? And the reason I ask is, in a conference presentation today, the largest supplier of fiber lasers commented that -- or implied that they think they will have Amada as a cutting customer in a year or so. I'd love your thoughts on that relationship.

Maybe I will start to answer and then turn it over to Alan, who is even closer to it than I am, obviously. But no, I think from the top level down, and Amada down to the engineering level, we have very good relationships. It's been a relationship -- or a partnership that's been going for over four years now. And I think on both sides, we are very pleased with the relationship. One of the indications is that we haven't gone beyond Amada to sell these products up to this point, because we really think it's a strong relationship and there's lots of opportunities and go forward opportunity with Amada.

From my perspective, we have a good relationship and I would expect that to continue. We obviously need to continue to earn their business, and we plan to do that. I will turn it over to Alan if he has any additional comments.

Yes. I think, as we progress forward with our road map on fiber lasers, that the focus is really to drive beam quality laser diode cost and overall system cost. And we think that we've addressed each of those variables with our next generation of laser that's under development and being tested. So, we are pretty excited about that, and so is Amada. We are going to continue to support them, and they are supporting us. So, the partnership is very unique and one that's special and very key to JDSU and Amada.

Great. Good luck.

Amitabh Passi, UBS.

First question just had to do with the P&L. OpEx, you continue to guide that higher. I think given, if I normalize for Arieso, year-over-year, on flatter sales, it looks like OpEx is up $6 million. Just trying to understand, what should we expect from the OpEx trajectory over the next two to three quarters?

I think that the main drivers are that are yes, Arieso, which was about $1.2 million in the stub of Q3, and was between $5 million and $6 million operating loss in Q4. Going forward, we are increasing our investments in R&D a meaningful amount in both CCOP and NSE. So, I think that you should take the uptick that you see going into Q1 and hang onto that for the fiscal year.

So, should we assume an incremental $2 million to $4 million for the next two to three to four quarters?

I don't think it increases like that the rest of the year. I think you should put it in and hang on to it.

Tom, just a quick one for you. Any updated thoughts, in terms of both the weakness in EMEA? It sounded like your Business had flat-lined there for a few quarters. It seemed like you saw another down-tick. Just trying to understand the dynamics there. And what we can expect out of China over the next couple of quarters?

I think as far as EMEA, we did see as -- if you look at percentage of revenue, as Europe was a smaller percentage and dropped down. So, I think it was related to one or two particular customers. I don't see that as a trend. I think that will pull back up this next quarter, as far as EMEA or Europe is concerned, specifically. I think as far as China, we are starting to see some activity around the 100G and the building out of the 200,000-plus base stations for TDLT.

So we are starting to see that activity. We haven't seen a lot of orders yet. But that activity is moving, and those players in China have -- customers have continued to commit to getting those deployed in this calendar year. Whether that's doable or not, we will have to see, but that's the intention. So we would anticipate that picking up as we go forward through this fiscal year.

And again, I think with the increase of the technology and the need for more testing and validation type of capabilities and solutions, that plays well for us in that market. I think the Optical Components business, we've done very well in that market in the past in the build out of 100G in the backbone, et cetera, should be very meaningful to JDSU.

Just one final one. It's a clarification. You said CCOP had its highest bookings since late 2008. Just excluding Gesture, would you still say bookings were at a record level?

No.

Okay.

James Kisner, Jefferies.

Just wanted to focus a little bit on the Telecom shortfall. It looks like you were expecting not quite perhaps $10 million more in revenue. But just wondering, what specific areas that you saw weakness? Were there specific applications? I presume 100 GB coherent was strong. Is it possible you saw a little mini correction in some area? Could you give us more color on that Telecom softness?

This is Alan, James. I think, when we gave guidance for Q4, we had expected our VMI pulls from some of our customers to be stronger than they actually ended up being. And to give you some color on that, I'd say mostly on the legacy 10G, 40G componentry and modules. But as you saw from the script, our tunable XFP revenue was actually up quarter-on-quarter. So I think we are seeing a faster tail off in the legacy modulators, tunable lasers and modules, as well as some softness in some of the legacy amplifiers that would go along with some of those product deployments.

Okay. That's interesting. So what you mean is that XFP and XFP plus together were up sequentially, right? Because it's 21% together and XFP plus tripled, so XFP declined sequentially, correct?

I would say it's probably down to flattish, yes.

Just wondering, is XFP, just as a quick follow-up, is that a -- is XFP maturing? Are you seeing share loss there? Do you expect that business to grow again? Or should we try to look at this block of XFP and XFP plus together and say maybe that is going to continue to grow sequentially over the long run? How do we think about that? And just as one other follow-up, and before I pass, is just that the gross margin impact on optic communications from this inventory obsolescence, this 28.2%. Is that something that rolls off sequentially, and how big was it? That's it.

I think you can consider tunable XFP and as XFP plus as one chunk. And we expect that to grow, especially as the cost of these products go down through the last three years of us really having leadership in the market. I think we've come down the learning curve and cost curves significantly. I think the other thing that Tom mentioned, is our 1.5 watt tunable XFP plus. When we get down to 1.5 watt, we will be taking traditional DWDM SFP plus slots, and as we drive the cost down, I think we will continue to take more and more share from those fixed wavelength or DWDM SFP plus spots. And there's a lot of racks out there using SFP plus DWDMs.

I think, overall, that market space will continue to grow as we introduce new products and get new design wins. Are we seeing more competitors? I think it's the same one-point-something competitors that we've seen over the last couple of quarters. But again, I think our leadership and our experience in the field and in our factories has given us, certainly, a competitive cost advantage that we can continue to drive our costs down and continue to maintain market share.

Troy Jensen, Piper.

A quick clarification. You said 15% to 20% of the sales were Datacom. Is that OCCOP? Or was that of the optical com bucket?

Optical com.

Optical com. Okay. Can you help us out with what other products outside of CFP and CFP2 are you classifying as Datacom [produce]?

All the SR short reach VCSEL-based products, things like our QSFP plus, 40 GB Datacom products, 10 GB, 40 GB short reach, 40 GB, more intermediate reach, stuff that, in the short reach, that either is within the data center or data center to data center.

(multiple speakers) Perfect.

(multiple speakers) And 80-kilometer we consider Telecom.

Maybe a question for Tom or Rex. Historically, you guys have had some margin initiatives, here. Streamlining, contract manufacturers, and reducing supply chain stuff. So just curious to know if most of that heavy lifting is behind you? And now to get the margins up is going to be ramping the revenues? Or is there more to do on the COG side?

Yes, I think we will continue to work on the COG side. But I think most of the heavy lifting is behind us. A we mentioned in a number of the businesses, we have some pretty heavy E&O charges this past quarter. We don't expect those to go forward at that level. Mix will continue to work in our favor, as we go forward, especially with more software revenues. So it's really a combination of that mix continuing to improve, and less of what we've done, as far as cleanup around outsourcing or manufacturing and the impact that has had on some of our inventory charges over the last couple of quarters.

I think those are the main -- probably the main activities that would impact the gross margins, going forward. (multiple speakers) The historic -- the stuff we've been doing over the last year or two, I would describe as more event-based. Working on the supply chain, working on consolidating CM's. We do have opportunity going forward from an operational standpoint, to narrow variances, improve yields, and those sorts of things. But you should expect those to be a process as opposed to an event. But that plus mix will really drive the gross margins.

Okay. One last question for Tom. I think Fiscal year '13, you probably did fewer acquisitions than we've seen you do historically. And you -- correct if I'm wrong there, but you plan on being more acquisitive in the coming fiscal year?

We did two within the fiscal year. So that's probably about the normal pace, I would say two to three in the fiscal year, of the size acquisitions we've done. So looking out, it's hard to project the timing, always, but that's probably about the run rate we would -- you anticipate as we go forward.

All right, got you. Good luck in the second half, gentlemen.

Alex Henderson, Needham & Company.

Two questions to start. The first one is, can you just give us a little bit more granularity on what the implications of the staff reductions on OSP is, and how that plays out through the revenue? I think you said $6 million reduction, but you've got it sequentially growing 2% to 8%, so I'm trying to reconcile that. Does that change the margin perspective on that business? 33% reduction in headcount seems like a pretty big swat to overhead. How do we think about the margins recovering there and the timing of the revenue fallout impacting that?

Alex, it was 28% headcount reduction and 33% on the footprint. So, that will happen between now and the end of the calendar year. We are going through some lifetime buy situations with our customers right now, and we will accommodate those lifetime buys through the end of December. So you can think of it as a phase-down through the end of December. There will be some lifetime buys that -- those products typically have lower gross margin. So as we get through those lifetime buys, we will have some negative impact on the gross margin. Once we get through December, and we've completed the lifetime buys, and we've gone through the reductions as far as headcount and footprint, then you would anticipate -- we would anticipate the gross margins and operating margins to come up.

Just so I got clarity on that. So the revenues stay up until the lifetime buys are completed, then they fall off in the first half at the same time that you get the margin benefit of the staff reductions and footprint reductions? Is that the timing?

That's correct. And we said this past quarter, that was equivalent to about $6 million of revenue from those products.

Okay. And then the second one, I think that you said there was some inventory write-down that was larger than expected in the quarter. Can you talk about just what that was?

There's a little bit of a hit in CCOP, which was small and not of notice, as far as the particulars are concerned. I would call that ordinary course of business. We have been very focused in CommTest, now NSE, and working through the supply chain consolidation that we mentioned earlier, working on pruning some of our legacy businesses. And that does cause us to take some additional charges from a E&O perspective. But I do think that that is substantially behind us after this quarter.

Simon Leopold, Raymond James.

Just a couple of things I wanted to touch on. One was the Test and Measurement business was in line with our expectations this quarter, and up nicely sequentially. And I think matched your expectations. But, in light of a number of your competitors presenting negative results or pre-announcing, what do you attribute the relative health of your test and measurement? Is it the mix of wireless, or some other factors that you could highlight?

I think it is this move more to a heavier play in wireless and more software content in our products, even with the instruments products, even the wire line instruments products. So, I think we are moving faster than at least one or two of our competitors in that area, and again, we believe we've taken market share as a result of that. So, I think that's what's really helped us to differentiate ourselves in these past couple of quarters, and will enable us to do that, also, going forward.

Okay. Do you have the ability to call out what portion of revenue would be related to 40G and 100G coherent?

I don't think we've broken that down specifically. No. To answer to your question, we don't.

Okay. How about ROADMs in the quarter? And I'd like to not just get a perspective on what's happening in the quarter, but maybe from a longer-term trend in that. I would believe if there's an increase in optical spending in Metro, rather than long-haul, that you might see a little bit more of a pickup in ROADMs. So if you could comment on what's going on both near and longer-term on your ROADM products?

Yes. I think the -- what I will call legacy ROADMs are continuing to have a long lifecycle. And I think you can take that and have a steady run rate business. And then you can add to that our TrueFlex products that we started ramping last quarter and then will dramatically ramp this quarter, will be additive to that. So, those, at least our first one, which is our Twin 1x20, is more at the core. And as Rex or Tom indicated earlier, we've been getting lots of pull-in requests, as that product has been very well accepted by the NEMs, as well as the service providers. And so they are taking it to market earlier.

So I think you can take the combination and look at them separately and say, legacy ROADMs is pretty solid, and you can put these on top of it. And then as we introduce the entire line of TrueFlex products, I think we'll see incremental business, as we take share from our competitors, as well as, as you indicated, as they go more and more to the Metro and edge of the network.

And what other products, and what is the timeline? I assume lower port counts would be coming?

Both lower port counts, as well as, you can imagine, instead of a 1x20 Twin, the lower port count twin, and as well as a TrueFlex standard 1x9 for those that want the flexibility of our TrueFlex products at where they put today in the Metro or the network. But I think the 1x20 twin and the lower port count twin is really something differentiated, and one that will take market share from our competitors.

(Operator Instructions)

Suba Subrahmanyan, The Juda Group.

I have two questions. First, if you could just comment on big picture. There is somewhat of a disconnect we're seeing between your customers and the component vendors. Initially it was limited to maybe a couple of the US customers in 100G, but more recently, we seem to be seeing a broader uptick for the optical transport vendors. Is that a matter of timing? And if you could talk about what is driving the growth expectations going into September?

So, are you specifically talking about transport? Or just 100 GB in general? Or -- I'm not --

I'm talking about DWDM transport in general for your customers. They seem to be seeing revenue growth while some of the component vendors have not seen it yet.

I think it's more of a timing issue. And if you recall, over the last, say, three quarters, we transitioned some major customers to VMI. And I think, until those customers get comfortable, that we are actually going to have VMI inventory in the VMI hub. They maintain a level of inventory for comfort level. And now, as we have proven that we will fill those VMI hubs, I think there is more -- less of a reliance of safety stock on their end. And I think we are still seeing that work its way out last quarter.

And I think that's why we saw optical VMI inventory -- optical VMI revenue go from 42% to 35%. I think that's behind us now, and we will see more of a consumption-based revenue going forward, and that's why we've guided as we did. The up 5% to 10% by the December quarter.

Ian Ing, Lazard.

As you grow your Datacom business, what's your view on pricing? Or what QSFP and CFP products, just given -- normal? Or are you getting some help from a few suppliers, but lots of sustained demands?

There's always pressure on pricing. I think it's incumbent upon us to continue to drive our cost yields and supply chain to be more efficient to keep up with those never-ending customer demands for lower prices. So, I don't think we are seeing any change in behavior or expectations, with respect to Datacom price reductions. And in fact, given the strong demand, I think you might see less of an emphasis on price reductions as much as the technology introductions of a CFP2, which might take a spot of a CFP, where the power consumption and cost is quite high. A CFP2 will be introduced at a lower power consumption and a lower price-point, and you will see a migration from CFP to CFP2 and then to CFP4 or QSFP28.

Dmitry Netis, William Blair.

In light of that 5% to 10% guide for the next quarter, in the CCOP business, can you give us a sense -- you said Datacom is going to be up. Will Telecom also be up? Is that -- how should we think about the mix between the Telecom/Datacom for the next quarter?

At this point in time, our current outlook is that both Datacom and Telecom will grow in the September quarter.

Okay. Great. And the other question I would have is on PacketPortal. I think you added five customers this quarter. What percentage of revenue -- I don't know if you are disclosing this. But if you could give some indication of where the revenue is today and where you think that might be going? I think you have presented us with the TAM opportunity for that product, but just trying to get a sense of the timing or the actual revenue recognition in PacketPortal?

Sure. In FY '13, it was a small revenue number. But we said at our analyst day in February, for FY '14, we expected $10 million to $15 million of revenue generated from PacketPortal. And again, because it's all software product, there is some delay in revenue recognition. But that's what we expected in FY '14. We -- as I mentioned on the call, here, we did book our first $1 million order, and we booked a smaller order with -- the first time with tier one operator in North America. So, we are really starting to hit the milestones as far as starting to see that build for what we expect to do on revenue in FY '14.

Michael Genovese, MKM Partners.

My follow-up question -- or clarification question is on gesture. Can you give us an idea if the increments for the September quarter -- growth from June to September is going to be roughly the same size as the incremental from March to June? Or if it will be more or less growth driven by Gesture?

And then my question is on the optical Telecom business. I actually -- you sound pretty cautious about the market trends in optical Telecom, and most of your customers and competitors, I think, recently have started to sound much better. And they are talking about the macro as a positive headwind -- or sorry, tailwind rather than headwind. You still sound like the Telecom is more of a headwind from a macro perspective. And I'm wondering if you can just comment on share specifically on Telecom components? Do think that there's any share shifts happening in Telecom components?

Maybe I will talk to Gesture and then turn it over to Alan on optical Telecom. So we did say we saw a nice ramp in the June quarter on Gesture. We expect to continue to grow, but we won't see that same level of ramp as we saw from March to June, as we go from June to September. So it will be a healthy quarter, but not as large a jump as we saw from March to June.

Yes, as far as the macro tailwinds, I think the big question in my mind is, when does China really fully deploy? And we've been talking about it for three quarters now. And it still hasn't been anything meaningful from a percentage compared to what the numbers say they're going to be.

So I would say, though, that a lot of our competitors are growing dramatically in Datacom. And we saw that, similarly, with our bookings last quarter. So we are expecting Datacom to continue to grow. Again, as I stated just a minute ago, Telecom is going to grow. And if the VMI pulls come through stronger than we expect, then Telecom will grow more than we expect, or at the high-end of our guidance. But at this point in time, the guidance that we've given is where we think we are going to end up.

Richard Shannon, Craig-Hallum.

Just a question on Gesture recognition. It sounds like the customer pipeline is starting to fill here. You talked about another customer, LeapMotion. Wonder if you could tell us how it's feeling beyond the September quarter? Maybe give us a sense of how many customer you might expect shipping in December? And also any thoughts in other markets, like TVs or maybe even handsets?

And then just finally on Gesture. Do you expect seasonality? What you see for seasonality in December? Is that typically going to be up or down in a cycle like we are seeing this year?

This is Alan. As we said in the past, we have, active, four customers, of which one we have launched this quarter, and LeapMotion that we had talked about. We have two other customers that are very active that won't impact this calendar year, but we expect them to impact calendar year '14. And those are both in the personal computer space, as well as the home entertainment or television space. But again, those will impact, really, some point in time in calendar '14.

As far as the seasonality, as we saw in the first generation of product that we had, there was a steep tail off after the December quarter and during the December quarter. And I think it will all depend upon how successful that product is in the market. Right now, we certainly don't want to be any reason for our customer not meeting any of their demand. So we are going to be ready to meet their demand, and we will update you on our next earnings call as to what we think that will look like. I truly hope that it's a highly successful product and that we won't see a huge seasonal problem. But I think, typically, we do see some downturn due to the seasonality.

Ladies and gentlemen, this will conclude our question-and-answer portion of today's conference. I would now turn the call over to Tom Waechter, for closing remarks.

Thank you, operator. As our call concludes, I'd like to thank our employees, business partners, and long-term shareholders for your interest and your continued support of JDSU. Have a great evening.

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