Viavi Solutions Inc (VIAV) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2014 JDSU earnings conference call. My name is Britney, and I will be the operator for today.

(Operator Instructions)

At this time, I would now like to turn the conference over to your host for today, Bill Ong. Please proceed.

Thank you Britney. Welcome to JDSU's fiscal second quarter 2014 earnings call.

My name is Bill Ong, JDSU's new Senior Director of Investor Relations. Joining me on today's call is Tom Waechter, CEO; and Rex Jackson, CFO. We also have David Heard, President and General Manager of our Network and Service Enablement business unit; and Alan Lowe, President and General Manager of our Communications and Commercial Optical Products business unit during the Q&A session.

Please note this call will include some 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 our current expectations. We encourage you to look at our most recent is filings with the SEC, particularly the risk factors in part 1, item 1a of our annual report on Form 10-K filed with the SEC on August 23, 2013. The forward-looking statements include guidance we will provide during this call valid only as of today. JDSU undertakes no obligation to update these statements.

Please note also that unless otherwise stated, all results are non-GAAP which excludes, among other items, amortization of acquired technology and other intangibles, stock-based compensation and restructuring charges. We include a detailed reconciliation of these non-GAAP results as well as a discussion of the usefulness and limitations in today's earnings press release. The release plus our supplementary slides and assorted financial tables are available on our website.

Finally, we are recording this call today and will make the recording available by 6 PM Pacific time this evening on our website. I would now like to turn the call over to Tom.

Thank you, Bill. Bill joined JDSU two months ago after 17 years as a Wall Street analyst, preceded by 12 years of semiconductor industry experience, first as engineer, then in finance and Investor Relations. As our new head of IR, he will be working with many of you in the coming months at various investor events and at an analyst day event we are planning for the fall.

Welcome, Bill. We're pleased to have you on the JDSU team.

I am pleased with our fiscal second quarter 2014 financial results. With revenue at $447.6 million, gross margin of 48.5%, operating margin of 11%, and EPS of $0.19, both revenue and operating income exceeded our guidance for the quarter.

The quarter's top line reflects a stronger than expected finish in NSE despite no budget flush, a solid performance by our optical security and performance products segment, and results from CCP just below the low end of our guidance range. Better top-line performance, operational improvement and favorable mix improved our gross margin for the second best quarter in the last several years and yielded a strong bottom line.

As I mentioned last quarter, a number of key trends continued to drive our business. The first is the global need for significantly increased bandwidth and network intelligence to support ever-increasing network traffic and complexity.

On the network expansion front, CCOP's core optical business continued to benefit from NEM demand tied to additional deployment and upgrades by service providers. NSE's best performing areas were fiber and transport, both supporting carrier capacity increases.

In the Americas, we continued to see the buildout of 100 G and mobile broadband driving LTE deployment. Carrier spending was uneven in calendar 2013 due to industry consolidation as well as the time required to work through architectural and technical decisions to address new technologies like small cells, software defined networks and network function virtualization. EMEA continued to be more cautious in spending, but after China's slow start in 2013, we have seen increased activity in their 100 G, 4G LTE buildout that should benefit JDSU in calendar 2014.

We continue to see strong datacom market demand, particularly in the data center and cloud segment, as Internet and cloud service providers expand their infrastructure. Datacom was healthy for CCOP's 10 G and 40 G portfolio in the first half of FY14 and is expected to continue being an area of growth for CCOP as we expand our product offerings for this space and penetrate new accounts. In addition to driving network expansion, carrier service providers and enterprises are also striving to address increasing network complexity caused by greater traffic, an ever-increasing array of applications, the demand for higher speeds, and security and reliability challenges.

Providing solutions to these challenges is central to NSE's service enablement strategy. During Q2, we agreed to acquire Network Instruments, a leading developer and provider of enterprise network and application performance management solutions for global 2000 companies, adding to our service enablement portfolio. The transaction which closed on January 6 provides a competitive position in the application's aware performance management network and opens opportunities for NSE's existing products and services in Network Instruments' enterprise sales channel.

NSE is also continuing to gain traction with its service enablement software portfolio, which includes PacketPortal and PacketInsight. In December, we completed this portfolio by acquiring Trendium, a mobile assurance software provider and JDSU partner supporting 4G LTE networks.

This month, we won a $10 million plus tender from one of the top five mobile operators in the world for our new JDSU Trendium solution and expect to see associated bookings this quarter. We are very pleased with this first multi million-dollar award for these advanced solution and look forward to accelerating our service enablement business in calendar 2014.

As we turn to the commercial laser industry, the high-powered fiber laser market is a significant opportunity for us, with an estimated TAM of $1.6 billion, and a $420 million SAM by 2015. High-speed laser cutting and laser welding are still early and growing market opportunities for JDSU.

During Q2, with our key partner [Modda], we released our second-generation fiber laser. We also released our proprietary beam shaping capability which provides a flexibility to cut both thick and thin metals by changing the beam configuration electronically.

This capability provides customers significant savings in time and cost and improved productivity versus CO2 or other fiber tools. Our second-generation fiber laser accounted for approximately half of our fiber laser revenue in Q2, and we're working hard to increase our production of this product to meet the demand.

As many of you know, our target business model for CCOP assumes a 20% revenue contribution from our laser business. To advance our solid-state laser product lines, we also announced today that we have acquired Time-Bandwidth Products, a Zurich-based provider of high-powered ultrafast lasers.

Use of ultrafast lasers for micromachining applications is being driven by increasing use at consumer electronics and connected devices globally. With the addition of Time-Bandwidth, we now have a broader portfolio in the micromachining market which compliments our Q-series solid-state family of products.

A third major area for us is anti-counterfeiting, which is accounts for approximately 65% of OSP's revenue. OSP's focus on developing and manufacturing overt technologies used principally by consumers to visually authenticate bank notes and other secure documents gives it a SAM of approximately $450 million in a market with an overall TAM of approximately $3 billion.

OSP's flagship anti-counterfeiting technology optically variable pigment, or OVP, has been adopted by central banks issuing bank notes for more than 110 countries around the world. Additionally, OSP's optically variable magnetic pigment, OVMP, is continuing to add its market wins with 47 countries now incorporating OVMP in their bank note design, up from 44 last quarter.

Looking forward, high-growth economies such as China represent opportunities for growth in calendar 2014 and beyond. Additionally, we expect to formally launch our newest anti-counterfeiting product, our ChromaGuard bank note security thread substrate, with our lead customer this quarter, confirming our commitment to developing new solutions for this market.

Turning to gesture recognition, this technology continues to receive a lot of attention in gaming, computing, home entertainment, and mobility as demonstrated at the recent Consumer Electronics trade show where a number of leading industry players announced new products and applications. JDSU has established itself as a key supplier of proprietary components sporting this trend, including supporting the Kinect system in Microsoft's new Xbox 1 gaming account console with optical technology that enables the console to provide highly precise 3-D imaging capabilities. We continue to work with customers on other applications with expected revenue opportunities in computing by the second half of calendar 2014, and in-home entertainment in calendar 2015.

Overall, we are pleased with our diverse and expanding technology portfolio and see attractive opportunities for growth this year across our three business segments. I will now turn the call over to Rex to discuss our quarterly results.

Thank you, Tom. JDSU's fiscal second quarter 2014 revenue was $447.6 million, up 4.3% from Q1 and up 4.2% from the second quarter of last year.

Geographically, the Americas accounted for $213.8 million, up 7.3% sequentially; EMEA for $104.8 million, essentially flat; Asia Pacific for $129 million, up 2.5%. Geographic sales mix was 47.8% for the Americas, 23.4% for EMEA, and 28.8% for Asia Pacific.

Gross margin was 48.5%, up 220 basis points from Q1 and up 50 basis points from a year ago, our best since Q2 of FY11. Gross margins improved across all three business units with the largest contribution coming from NSE.

Operating expenses at $168 million were up 3% sequentially from $163.1 million, reflecting primarily annual labor rate increases and higher variable compensation. Operating margin was 11%, 270 basis points above Q1 but slightly below a year ago due primarily to increased investments in R&D and NSE and CCOP and incremental expenses from the Arieso acquisition.

Net income was $45.3 million, up 50% from Q1 on higher revenues and better margins and up 7.1% from a year ago on better revenue. EPS was $0.19 versus $0.13 in Q1 and $0.18 a year ago.

Turning to the segments, NSE's revenue of $195 million was up 13.4% sequentially and exceeded our guidance. NSe's book to bill ratio was just below 1, substantially improved from the first quarter. The revenue strength was driven by good bookings activity late in the quarter and our increased booked/efficiency due to improved order execution and collaboration with our outsource manufacturers.

Though we had anticipated some budget flush from cable operators, we did not receive any meaningful budget flush during the quarter. NSE achieved a near record gross margin at 64.4%, up 230 basis points from Q1 and reflecting a combination of higher revenues, improved operations, and better mix.

Operating margin at 14.7% improved 740 basis points over Q1, reflecting the significant leverage in NSE's business, about $175 million in revenues, better gross margins and continued operating expense management. New products defined as those products less than two years old represented 60% of revenue consistent with Q1.

As Tom alluded to earlier, NSE has been investing consistently in maintaining and advancing its long-standing leadership in field test instruments to enable the network. This network enablement part of NSE is the clear leader in a $2.8 billion SAM growing at approximately 4% per year. At approximately 80% of NSE's total revenue, the network enablement portfolio is hardware centric, book/ship, carrier-dependent and cash-positive and currently drives NSE's profitability.

More recently, NSE has invested significant R&D and capital resources in software solutions to allow operators to manage increasing network complexity. These service enablement solutions address a SAM of nearly $3 billion growing at approximately 11% to 12% per year and include PacketPortal, PacketInsight, and our Arieso, Trendium and Network Instruments acquisitions.

Service enablement currently represents approximately 20% of NSE's total revenue, but because we have been investing significant R&D resources in product development and sales resources in opening up new software solutions opportunities, it is not yet accretive to NSE's business model. However, if we are successful with our initiatives in service enablement, we believe the gross and operating margins for this portion of the business can be superior to the current NSE business model we published. Given the differences between our network enablement and service enablement product portfolios in terms of revenue, time to revenue, revenue models, R&D investment levels, margins, current place in their business lifecycles, and to enable investors and analysts to better understand NSE, we're planning to break NSE's financial results out on the basis of these two portfolios later this calendar year.

Moving on to CCOP, CCOP revenue of $198 million was down 3.2% from Q1 and slightly below the low end of our guidance range. Optical communications revenue of $174.5 million was down 1% sequentially, reflecting the anticipated seasonal dropoff in gesture recognition revenue, partially offset by increased telecom business. Commercial laser revenue of $23.5 million was down as expected 17.3% sequentially due to softer semiconductor sector demand and the transition from Gen1 to Gen2 over fiber laser products.

CCOP and optical communications book-to-bill ratio was below 1. Laser book to bill was above 1, reflecting increased demand for the Gen2 fiber laser.

Gross margin at 32.3% improved 30 basis points from Q1, reflecting favorable product mix and operational improvements despite sequentially lower revenue. Optical communications gross margin at 30% improved 50 basis points over Q1 while laser's gross margin at 49.4% improved by 190 basis points.

Operating margin at 12.1% declined by 120 basis points versus Q1 and reached the low end of guidance of 12% to 14%. Decline was impacted by lower revenue and increased R&D investment.

New products less than two years old represented 65% of revenue, down slightly from Q1's 68%. Average selling prices in the optical communications business declined about 3% sequentially, in line with our expectations.

Demand for 100 G line side telecom components was strong in the quarter, representing 26% of our telecom transmission revenue. Our Tru-Flex ROADM revenue doubled, and our tuneable XFP and SFP Plus product revenue grew by more than 14% sequentially. Amplifier revenue increased 10% and provides a good leading indicator for continued transmission product growth for tunable XFP and SFP Plus as the buildout for more metro and edge 10 G application.

Moving on to OSP, OSP revenue of $54.6 million was up 4% from Q1 and within our guidance range. Sequential revenue growth was driven by higher last time buy activity of approximately $9 million which offset an expected decline in gesture recognition. Anti-counterfeiting sales remain flat.

OSP's book-to-bill ratio was above 1. Gross margin at 50.5% improved 60 basis points versus 49.9% in the prior quarter, driven by both higher revenue levels and better factory utilization. Operating margin of 37.5% improved by 110 basis points and exceeded our guidance range.

Turning to our balance sheet, we maintained a strong net cash position at $571.1 million as of the end of December 2013. We delivered positive operating cash flow for the 29th consecutive quarter at $55.4 million versus $29.5 million in Q1, driven by higher sales and better margin performance.

Capital expenditures for the quarter were $31.9 million, higher than expected due to the $14.7 million purchase of our largest fabrication facility in California which protects our significant capital investment for this facility, reflects our long-term commitment to the site and provides operational flexibility and cost savings. Depreciation and amortization was $30.5 million.

Now for guidance. We expect fiscal third quarter revenue to be $420 million to $440 million, and non-GAAP operating margin to be 6% to 8%.

The Network Instruments acquisition closed earlier this month. We expect it will contribute approximately $7.5 million in revenue in Q3, lower than its recent run rate due to the loss of substantially all preexisting deferred revenue under purchase accounting rules.

For Network Instruments, this step typically represents approximately 25% to 30% of its quarterly revenue. Network Instruments comes to JDSU with strong momentum with record shipments in its December 2013 quarter. We expect Network Instruments to be accretive to NSE's gross margins the quarter and to NSE's operating income and business model target late this calendar year.

As Tom mentioned, our Trendium solution combined with other JDSU offerings recently won a large tender with a major mobile operator that is expected to translate into bookings this quarter, but there's no material revenue included in this guidance from this win due to the timing of delivery and revenue recognition roles. Trendium is not expected to add incremental operating expenses to Q3 since we are absorbing its costs into our existing operations. We expect Time-Bandwidth to contribute less than $2 million in revenue in Q3 and to be approximately neutral to earnings.

At the segment levels, we expect NSE revenues to be $175 million to $185 million, CCOP revenue to be $195 million to $205 million, and OSP to be $49 million to $51 million. Operating margins for NSE are anticipated to be 5% to 7%, CCOP 10% to 12%, OSP 34% to 36%. Please refer to the supplementary slide deck for other fiscal third quarter 2014 financial metrics guidance.

Starting with NSE entering a typically seasonally lower fiscal third quarter with a last six months book-to-bill ratio below parity, revenue is expected to decline sequentially. Operating margin will be impacted by lower revenues and by M&A related operating expenses, while associated revenues will lag somewhat as NSE builds backlog and corresponding revenue recognition.

In CCOP, the sequential decline reflects an expected decline in gesture revenue offset by expected improvement in telecom, datacom, and commercial lasers. Fiscal third quarter optical communications ASPs are expected to decline at the higher end of or slightly above our typical quarterly target range of 2% to 4% as a large portion of our annual pricing negotiations take effect in the first calendar quarter. However, we expect our full-year fiscal 2014 pricing decline to be within our typical annual range of 10% to 14%.

In OSP as we announced in June 2013, we are exiting certain legacy product lines associated with the cutting business which serves the office automation, custom display end markets. We're expecting to receive approximately $8 million in last-time customer buys in the third quarter, up from our initial estimate and offsetting a sequential decline in our anti-counterfeiting business tied to short-term softness in overall demand.

Last time buys in the fiscal fourth quarter are expected to be approximately $1 million. We expect organic revenue from our existing customers to substantially make up the difference as we complete this exit. I will now turn the call back over to Tom.

Thanks, Rex. In NSE, both organic and inorganic investments made in the last few years are now taking shape, enabling and supporting an even faster, higher capacity and more intelligent network. Our portfolio provides our carrier and enterprise customers both network hardware and software assurance solutions to meet the insatiable demand for reliable, high-quality broadband content. We are very pleased with NSE's execution in evolving and adding to its solution base, the line with customers need and market trends.

In CCOP, we see healthy demand for our 100 G product and are working to increase production capacity on these products. We're excited about the early success of our tuneable and Tru-Flex product lines and pleased with our penetration into the datacom market with our 10 G and 40 G products. As we said, early response to our Gen2 fiber laser has been very positive, and we have additional opportunities later in calendar 2014 for gesture recognition.

We are optimistic that OSP's long-term demand drivers in the anti-counterfeiting security pigments market will drive growth in that business. We continue to see adoption of our OVMP technology by central banks globally, are now releasing our thread solution and continue to leverage OSP's optical coating technology in new applications in consumer electronics, government, and healthcare markets, offering growth opportunities in calendar 2015 and beyond.

Before we turn the call to Q&A, I would like to thank our employees, business partners, and shareholders for your interest and continued support of JDSU. Bill.

Thank you, Tom. So I would like to ask everyone to limit their discussion to one question and one follow-up so that everyone may have a chance. Britney, let's begin the Q&A session.

(Operator Instructions)

And your first question comes from the line of Amitabh Passi with UBS.

Looks like optics is going to trend back up again in the March quarter almost $20 million year-over-year. How long do you think you will continue to be in this investment mode, and when can we actually start to see the fruits of your M&A strategy as well as the investments you will be making in the business?

Good question. I think we are seeing benefit of a number of those R&D investments, especially around the service enablement and also the new products we rolled out like Tru-Flex, ROADM, and the new tuneable product. We're definitely seeing that traction.

I think with the really dramatic changes we're seeing in the technology out in especially in the network space, we really have accelerated our investments. I think in talking directly with our customers, we're very well aligned with their future needs. Think it's a little bit exaggerated with the investments we've had in PacketPortal, which we are now starting to see some good milestones in that area, and also with the revenue recognition timing on the Arieso products and acquisition.

So I think now that we have added Network Instruments, that has increased our operating expenses somewhat as we go into next quarter. I would expect that now to start flattening out, and we'd start seeing in the few quarters out the flow-through of the associated revenue.

And then, Tom, just as follow-up, I didn't hear you guys talk much about China, or maybe I missed it. Would love to get your thoughts. How do we think about the potential opportunity for you in China this year across both your major business segments, CCOP and NSE?

I think I will start and then ask Alan to talk about CCOP, and David on NSE, but overall, we are encouraged by what we see in China. They are building out the LTE base stations.

That's actually happening. We're seeing the associated 100 G backbone happening, so we do believe where it was very lumpy in calendar 2013, we're actually starting to see that flow through. I will ask Alan to give more specifics and then David on his business.

So we're starting to see and have seen revenues realized in Q2 and ramping in Q3 with respect to the 100 G core buildout as well as the optical interconnects between the radio base stations and the metro edge of the network. So that's happening now. I think if you look at and try to size it, it's really hard to say because who knows how fast the deployments will happen.

I think on the current course and speed, we could see incremental revenues on a quarterly basis of $5 million to $10 million in the calendar year, and I think that the question is do we have capacity. We still are having some capacity constraints in order to ramp up some of our 100 gig product today that are becoming more and more a percentage of our business, as Rex said in the script. David?

Yes, I think Alan hit on the head. As we talked in the first quarter earnings call about us seeing that delay shift in mobility overall, particularly in China, 100 gig is definitely off to the races.

We've seen our initial lab deployments of 100 gig along with Alan. We're beginning to see that flow in the field. We will see that in Q3 and Q4.

Based on China's historical use of test and measurement tools, they typically would put labor in, and I think that's got everybody confused. Cheap labor in place of high-tech tools.

That was okay when you had 2G and 3G technology, but with labor rates moving at 20% high churn and now LTE technology, we're beginning to see that grow. So we expect to see that begin to hit us in Q4.

We've got some great design wins. We've got some MOU s signed with the strategic carriers there; we're very well positioned with local production, local R&D. As we look to next year for the network enablement portion of our business, I think I'm kind of with Alan.

I think together when Alan and I were talking about it, we could see $15 million together a quarter between CCOP and NSE in the early phases. And we are in the very early innings in China.

You have 1.1 billion subscribers and nobody on LTE yet. So this game is going to go into extra innings, and we're very early.

Just to clarify --

Does that answer your question?

Yes, does it. The $15 million combined between CCOP and NSE, is that a fiscal 4Q/1Q phenomenon, or do you think it takes longer to get to that $15 million?

I think when we look at over the year, I think we're looking at it on an average basis. You will you have ebb and flow based on --.

We're giving you a rough area of sizing. I think it's been difficult for everybody to size it, but that's kind of our wet finger number. It will ebb and flow.

Could it accelerate beyond that? Sure.

Could it go a bit slower? Yes. But I think long term, the trends are right, we're well positioned.

Okay, thank you. I will jump back in queue.

Thanks.

And your next question comes from the line of Mark Sue with RBC Markets.

This is Ameet Prabhu on behalf of Mark Sue. My question is focused on test and measurement. The positive trends in the business were still flat year over year, recognizing the lumpy nature of the business.

Would you say bookings late in the quarter, are they sustainable heading into further 2014? And I understand you don't want to provide annual guidance, but what would you think it will take for us to sort of get back to the $210 million, $215 million run rate? Thanks.

Yes, thanks. As far as the general environment, we do think it's improving across -- primarily across the various regions. So we think there is a tide that's rising.

It's, again, hard to predict quarter to quarter, but we do believe that's happening, and we should see that continue to improve. David, do you want to talk specifically about the level of bookings and kind of that trend?

Yes, sure. While you've got it correct, you certainly don't want to provide annual -- I think we had such a slow start in the industry, I think you saw that. And we even took share in that period to the first half bookings. That's why you see a bit of muted guidance.

I think based on the bookings pace we saw in our Q2, our current contemplative pace that we've seen already this quarter, I think we're reloading the backlog, getting the design wins, loading up on bookings and the service enablement business that will pay off quarters down the road. So you're seeing a crossing of the chasm in terms of the OpEx gap.

The good news is the bookings that we're taking and the cash flow that we're rolling in, A, healthy, and B, down the road, lead to accretive margins for the business. We have a lot of operating leverage on the top side to get. Did that answer your question?

It did, thank you. Also, sort of given the recent challenges in the NSE business, one approach would have been to narrow the focus; the other was to amass scale, and JDSU is obviously focused on the latter.

Sort of a broad fragmented market, lots of competitors, some of them subscale, and potentially even distressed. Do you see additional opportunities out there that you think could you draw up for any area of business that probably need in the portfolio that need reinforcing, or are we mostly done at this point? Thanks.

Go ahead, David.

Sorry, Tom. I was going say, we're very focused on our customers and their needs. While we're never done with the portfolio, I think we've added some really substantial things to our portfolio of late.

Made our instruments in network enablement much more mobilely focused with the rollout of LTE that we're in early innings on. With bringing Trendium into the business, it adds an increasing market for big data LTE assurance that gets us 10 times performance scale in a market where we were positioned to bid in the 2G, 3G declined. So I think we're very excited about that rolling forward.

As you look at Arieso, we had record bookings in Q2. Again, the revenues trail. But in that location intelligence business and service enablement again, we feel tremendously comfortable that that's a big portion of what the carriers are looking for.

Lastly, we have now diversified into the enterprise and moved up the stack in application performance that has big applicability, not just in enterprise but in the carrier world. It's quite a lot to swallow.

I think our customers are very pleased with the portfolio approach. We're seeing, one, those products drag in each other with a total solution. But we're always keeping our eyes open because we're very close to our customers in these deployments.

Thank you, and good luck gentlemen.

Thank you.

And your next question comes from the line of Patrick Newton with Stifel. Please proceed.

Thank you for taking my question. I guess my first question, or actually a clarification from Rex.

I missed some of the data you provided. You gave us quite a bit of items to chew on.

One is, I heard that your Gen2 fiber laser was half of fiber laser revenue, but I didn't hear the fiber laser revenue number. Two is, did you provide your ROADM revenue for the quarter?

And then I think lastly, did I hear you say correctly that 100 G was 26% of optical revenue? So just those clarifications first before I jump into the questions.

The fiber laser revenue, I did not give it but would be happy to. It was $2.3 million for the quarter, and the Gen2 was just under half of that.

And then you asked about 100 G, and you asked about ROADM revenue. ROADMs, we did not give a number. Alan?

On the 100 G, we broke that out as far as transmission data rates are concerned, because when we saw ROADM, it could be a 10 G ROADM or a 100 G ROADM, or 40 G ROADM, so 26% of our transmission products were 100 G. That probably reflects on the rest of the business as well, but it's hard to tell.

On ROADMs, we didn't give specific revenue but did say that our Tru-Flex revenue, maybe we did or didn't say, but our Tru-Flex revenue tripled in Q1 and then doubled again in Q2. So we're really encouraged with the position on that. That's still in the early stages as well.

Okay, great, thank you for the details. Jumping into my questions, Tom or Alan, you did discuss continued momentum with datacom, and the expectation of growth over the coming quarters from a combination of new products and customers in that market. Could you discuss your level of visibility in the segment, your confidence and continued momentum, and then is your growth more predicated on the share gains and new products, or is the general market expansion enough to continue to drive growth for you?

Yes, I think our visibility is pretty good, and I would say that we are growing faster than the market in the first half of FY14, but I think the market is growing at much faster rates than telecom. So we're pretty excited about our existing product line and our existing customer base where we think we're gaining share.

I think the second thing is that we're introducing many new products both at 40 G and 100 G that we expect to gain new slots and new customers as a result of these new leading edge products that will further accelerate our market share gains on the datacom business. So it's a very keen focus that we've had for the last three years. It is paying off, excited about the portfolio and the customer base today.

All right. Then just one -- I guess one geographic question, Tom.

The strength in North American business being up 7% sequentially seems to be significant better performance than some of your peers. Were there any segments or product lines that drove that up side?

I would say we mostly saw fiber, growth, and transmission growth on the NSE side, so very consistent with what Alan is seeing on his optical components, building out that infrastructure. We think the next move is out to the edge of the network. So North American, specifically the US, that's where we saw.

Thank you for taking my questions.

Thanks.

And your next question comes from the line of James Kisner with Jefferies.

Yes, I just wanted to clarify something you said about the up side in NSE being driven by your increased book/ship efficiency. I was hoping you could quantify that to some degree and also give us more color on what exactly that means. Thanks.

I think on the NSE side, we've continued to improve our operational efficiency. So the ability to because and ship quickly, we saw that really come to full fruition this past quarter, and we've been building on that quarter after quarter. But with the December quarter end back end loaded, the holidays, et cetera, and all the bad weather that was being experienced, we felt the execution was very good by the operations team, and we believe that's going to continue in that vein.

So does that mean that your lead times have shortened significantly? Are you able to clear some backlog? Could you just give me a little bit more on what you meant here?

We depend a lot on book and ship during the quarter as we normally do. So it's ability really to get in that and turn it the around quickly. So in essence, it would reflect on reduced lead times or cycle times.

Okay. One last follow-up. Just on the outlook, you said that $15 million a quarter could be kind of an average for China as they come on-line with LTE.

I'm just wondering there any kind of obvious places, like say North America -- we have deployed LTE broadly -- that perhaps there could be an offset to some degree? Just wondering if there are any regions that you might expect would moderate or slow from a test perspective in 2014. Thanks.

We're not envisioning any real slowdown. Even in North America there's still a lot of network fill that happened in LTE.

There's been a lot of infrastructure buildout, but not a lot of 4G users on the network. We think that's going to expand.

So primarily see expansion across the globe. David, any other specifics around that?

I just think real quick, I think we saw that slow and pause that we talked about in our fiscal Q1, and so actually with the advent of rolling in the small cell architecture and folks looking to connect via fiber and ethernet, we don't see a slowdown in the US in EMEA or in Latin America, at least based on our current pipelines and projects with customers.

Thank you.

And your next question comes from the line of Mark McKechnie with Evercore.

Thanks. Bill, welcome to the crowd here; a couple questions.

One, you beat a sub-seasonal bar for revenues. Sounds like bookings in NSE at the end of the quarter. Can you talk about what geographies and customers may have driven that rush at the end of the quarter, or the strong bookings?

And on the seasonality front, would you expect a more normal type year next year, or this year with the budget flush? And I have a quick follow-up on the 100-gig side.

David, you want to address the order inflow toward the end of the quarter?

Sure. I think that Tom's comment on reduced lead time and operating efficiency, I think the bookings came in as we saw them; they came in a bit later than we would like. Just a slow start to our fiscal year based on the trends we talked about with the service operators.

No budget flush. We called, there was no budget flush in the year.

I would tell you that I see operators releasing their budgets a bit earlier than normal based on that starvation in the first half of the year. In terms of my contemplated guidance towards Q2 next year and budget flush, no comment.

Okay, that's helpful. And then on the 100 gig component side, you had a lot of commentary there. But I don't know if you can give a broader overview on the geographic pull globally.

You did mention some potential tightness that could hold up your business in China. I wanted to know, do you think -- where's the tightness?

Is it with your production capacity? Is it with your supply chain? Where would you see tightness, and how long would it be -- would it take to loosen that up?

Yes, this is Alan. Thanks for the question. I think the demand from 100 G are primarily from the customers of ours who manufacture their own line cards or modules for 100 G, which is the vast majority of the business today in deployment for 100 G.

I wouldn't say it's any one particular. We're seeing strength across the board, and as you talk to the nems, you can figure out which ones are having more strength than others, so I can't really comment specifically on individual customers. But I will say that it is a global phenomenon, and that's driven some tightness, as you say, and I will just give you one example.

On our modulators, I think we've been constrained over the last couple of quarters, and just takes time for us to order equipment, bring it on-line, train people, and we've been hiring and training people and ramping the volume production. In fact, we've delayed the transition from the US based manufacturing to Asia as a result of it because demand has been so strong.

So this is 100% controlled by JDSU, one of our facilities here in the US that is getting more and more attention as the demands continue to strengthen, and the outlook continues to look like it's, as David said, in the very early innings of an extra inning game. So that's our focus. I think you will see an uptick in our ability to respond to those customers, but I would say that we will be in a constrained environment through the balance of the fiscal year at a minimum.

And your pricing there, I've got imagine your price on the 100 gig, when Rex talked about the sequential declines a little bit more, I'm assuming he's not referring to the 100 gig, or are you getting some good price bargaining in that environment?

Well, I mean, I think we're in the business to make our customers happy and sell a portfolio of products, so we typically look at our pricing as a package with our customers, and our customers have expectation for how that package looks going forward. And so as Rex said, we saw 3% reduction in the December quarter, which is pretty typical, and then we will see over our typical 2% to 4% in the March quarter, but as we look back over time, the March quarter is typically on that high end.

So I would say it's nothing out of the norm. Where we give the price reduction is less relevant than what that absolute number is, and so I think as our customers ask us for price reductions, we try to give them what they want where they wanted it. And at the end of the day, we focus on overall gross margins and how to maximize that while at the same time meeting our customers' requirements.

That's great. Thanks, gents.

Thanks.

And your next question comes from the line of Joseph Wolf with Barclays. Please proceed.

Thanks. I just wanted to hear if I heard correctly on the CCOP book to bill being less than 1 ex lasers. If you take gesture out of there, could you talk about the bookings in telecom and datacom? Any color on geographies or vertical markets where you're seeing better or weaker performance in datacom would be helpful.

Let me look at some of the numbers. The laser's book to bill was higher than 1, and the rest of the business was lower than 1, making overall CCOP less than 1.

Frankly I don't have what book to bill looks like by region. We did see strong growth in both Asia and North America, but to be honest, I don't know if we saw that similar booking strength in Europe.

We knew gesture was going down, so bookings were lower. We expect revenue this quarter on gesture to be down more than $10 million. So with respect to our guidance as we go forward, we're expecting the rest of those three parts of our business to strengthen, datacom, telecom, and lasers, and that's where we ended up with our guidance.

Okay. And then I guess just on the variability, as you integrate the acquisitions on the NSE side of the business with the operating margin, I know you've got the target to get back to $210 million, but if you get back to the $195 million level where you've also had some variation, where would the current business be in terms of operating margin?

On the NSE business when we get over $175 million a quarter, we see significant drop-through, and I think you can see it if you go back the last few quarters, see that significant drop through to the bottom line. We're estimating it's $0.50 to $0.60 on the incremental dollar. It depends on the mix, but probably a good average.

So I think the model in our mind is working, the gross margins are probably at or should do at least where we're at on the model, probably a little bit better based on the mix of the operational improvements, and as the volume picks up. It's really, I think getting through this period of heavier spend on R&D, because of the technology shifts, and then bringing in some of these new businesses where we have a timing issue with the revenue to offset some of the additional OpEx, and I think David gave earlier a sense of the timing, when that starts kicking in.

Okay. So the new business should all fit together with that same model you had in place?

The newer business that we're bringing --

or should be even better?

The newer business we're bringing in is tending to be on the service enablement side and more software, so it typically is above our average today, or the model we said. So that should, as we're able to recognize the revenue, that will bring the model up.

Great. Thank you.

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

Thank you. First, I wanted to see if we could maybe get a little bit of context around some particular markets in terms of, let's call it typical sizing, not necessarily for the quarter. What I'm trying to get a sense of is how much revenue do you typically get from China, the cable TV vertical, and data centers, and then I've got a follow-up after that if you can give us those numbers.

Yes. We have not broken out in those verticals in the past and really don't intend to. We will give general guidelines as far as what we're seeing in China as we talked about some incremental revenue based on 100 G buildout and TD LTE, but we don't give specifics by those regions as far as what the absolute revenue is.

Anything you could give in terms of quantification so that obviously these are areas where you're getting some good growth trends, and I'm really trying to figure out what the baseline is.

I think if you look at our overall business, Asia was a little bit over 29% of our total revenue in China; 28% to 29% in China is the major part of that, so that may give you a better sense of the magnitude of that business coming out of China.

Okay. Let's try to shift gears then. In terms of how well your business is correlated to operator telco CapEx, we're seeing some interesting trends, particularly on the back of Time Warner reporting today.

It looks like cable TV operators are growing their capital spending nicely whereas the North American traditional telcos may be a little slower. China, probably pretty good.

Europe, some good spending trends in wireless in particular, maybe not everywhere else. If you could give us some sense of how you view the correlation of your businesses to global CapEx, that would be helpful.

I think the CapEx as it is increasing definitely benefits us, but really it's how you're aligned with that Capex. Because in total aggregate dollars, the size of those budgets what they spend in our space is fairly small.

It's really being aligned with where those operators are spending, cable operators, teleco, and what we believe now is what we're seeing is we're better and better aligned through what we've been doing organically and inorganically, and that's starting to show up in our models as well. For us, it's do they spend more? That's helpful.

But it's really where they're spending it. We think our alignment is very good, probably better than we've ever been as we're moving forward now.

Thank you.

And your next question comes from the line of Kent Schofield with Goldman Sachs.

First off, a clarification. Rex, I think you mentioned giving us some more granularity on the NSE business at some point. Should we be thinking about that in FY14 or the first half of FY15?

The most likely timing would be as we're exiting FY14 going into FY15.

Okay. And sort of in line with that question, as we've kind of closed out 2013, you've obviously made a lot of changes in the NSE business through acquisitions, product pruning, growth of wireless, software push, everything else. Can you talk a little bit about as we look over the last year or two and going through that process, do you feel like at this point you're well positioned in terms of aligning to some of those Capex trends that you were talking about specifically in the NSE business?

Yes, I do believe that. Dave will get in some more specifics, but if I just look at it, and what we've been doing, I'd say the traditional side of the business with the instrumentation we've added a lot more software content and a lot more capabilities to help the operators to really manage their networks and reduce truck rolls, and as a result, we believe we've taken market share there and will continue to do that.

Then by adding the service enablement side, I think it even makes the hardware stickier as we give them full end-to-end solutions. I'm not saying we're 100% built out, but if you look at us against our competition, we believe we have the most robust end-to-end solution.

As we're seeing as our customers are going to more virtualization in their networks, more of the advanced technology, they really want that one provider to give them the visibility in the end-to-end solutions. I think the transition if I look over the last three years in NSE has been fantastic, going from really a core wireline instruments company to adding mobility, adding a lot more software content now, big focus on network visibility.

I believe it's not 100% done, but we've got the vast majority of it behind us, both what we've needed to develop organically, the acquisition, and I think the transition that David has taken his team through in order to make sure the skill sets are right for some of those products and capabilities that we added. David, additional comments?

I think you covered it well. I think that it's important to recognize both in that network enablement business and the service enablement business, we designed this over the last two to three years with the whole thought of SDN, software defined networks and network functional virtualization in mind. And the larger customers in the world, guys like AT&T issuing their domain 2.0, it's a must-have as they spec in products to handle a cloud application driven mobile world.

So I think we're a lot better invested in the portfolio. As Tom said, we've improved our operational turns by over 2.5, which means when we've outsourced the model, when we get cost reduction into these new technologies, we can flow it in to continue to invest and take share, which is what we're doing.

Thank you.

And your next question comes from the line of Dave Kang with B. Riley. Please proceed.

Thank you. Good afternoon. First of all, I was wondering I can get gesture recognition numbers. I believe it was $21 million in first quarter.

What was it in second quarter? Did I hear correctly that it is going to be down $10 million in third quarter?

Yes, we don't give specific numbers with respect to the actual dollars shipped, just because our customers don't want us to do that, and they've been pretty clear about that. Giving relative numbers is okay, so as I said, we expect in our fiscal Q3 to have gesture be down a little bit north of $10 million, but with the strength we're seeing in ROADMs and tuneables and datacom products, and lasers, we expect to be able to make that up in the other part of the CCOP, and that's where we ended up in guidance.

So if gesture does go down $10 million third quarter, then it will become almost negligible then?

No. As we expected, this will be the low point. After the holiday season, we expect it to go down in the March quarter.

As it was down in the December quarter as well. But we expect that to then pick back up, starting in the rest of the year.

So sounds like September will be the peak quarter ago again in the seasonally speaking. Should we expect kind of similar number in this year's September quarter versus last year?

I think the difference this year is that we are working with multiple customers on multiple applications. So the timing of those initial ramps will really depend upon when we start seeing a broad proliferation of gesture recognition on computers, on mobile devices, and on TVs that we believe are coming within this year, specifically on computers.

So the timing of that makes it unclear, but I would say typically for gaming application, you would expect the September quarter to be the peak. But given we are working on several applications, we're open to kind of smooth that out over time.

Got it. Just a couple more if I could. Telcom optics bookings were up 60% in first quarter. What was that number in second quarter?

And moving on to NSE, what is the mix between wireless and wireline? And within wireless, what is the mix between 4G versus 3G and below? And how should we expect in terms of growth rate for 4G and the tapering of 3G and below?

Yes, I will take the telecom bookings. We don't really break out the specifics. I thought it was relevant in Q1 because it was such a strong booking quarter, but I don't think there's anything that's note worthy in the bookings for telecom versus datacom in the Q2 time period.

Got it. And then NSE question?

David, do you want to address the mix between wireline and wireless?

Sure. As you look at our total portfolio, we're still looking at roughly 40% of the portfolio on wireless. To your question of 2G/3G, the 2G and 3G technologies have really been falling off. The good news is given we've been doing most of our investments in mobile over the last two to three years, most of our investments have been in LTE technologies.

I think the most notable shift for us is our legacy assurance business of 2G/3G, you will see that in competitors declining at the -- the market is declining 16% to 18%. By doing Trendium and having big data LTE next generation assurance, you are going to see that grow up in the 20%s in terms of a percentage basis with a lot of need being pulled from the carriers as they scale their LTE networks.

Got it. Helpful. Thank you.

And we have a follow-up question from the line of Mark McKechnie with Evercore.

Quick one for Rex. I'm not sure, can you give some direction, if you haven't already, on gross margin for March? Thank you.

I would expect the overall gross margin to be a little bit lighter than it was this quarter. We don't give the specific number, but you can back into it with the other information that we give you. But I would expects to be as a company slightly down.

Great. Okay, thanks.

And there are no further questions in the queue at this time.

Great. Well, thank you so much, Britney. JDS will be participating at the following events.

We're going to be at the Stifel Technology conference in San Francisco on February 10, the Goldman Sachs Technology conference on February 13, Raymond James in Orlando on March 5. The OSC Trade Show in San Francisco on March 11, the Piper Jaffray conference in New York City on March 12, and the Cowen & Company network communications forum in New York City on March 13. So thank you very much everyone.

Ladies and gentlemen, that concludes the presentation for today's conference. You may now all disconnect, and have a wonderful day.