Viavi Solutions Inc (VIAV) 2014 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q4 2014 JDSU earnings conference call. My name is Whitley and I will be your operator for today.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to your host for today Mr. Bill Ong, Senior Director of Investor Relations. Please proceed sir.

Thank you Whitley.

Welcome to JDSU's fiscal fourth-quarter and year-end 2014 earnings call. My name is Bill Ong, Senior Director of Investor Relations. Joining me on today's call are Tom Waechter, CEO, and Rex Jackson, CFO. David Heard, President of our Network and Service Enablement business unit, NSE, and Alan Lowe, President of our Communications and Commercial Optical Products business unit, CCOP, will join us for Q&A.

Please note this call will include forward-looking statements about the Company's 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 review our most recent filings with the SEC, specifically 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 including guidance that will be provided during this call are 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 to our GAAP financials as well as a discussion of their usefulness and limitations in today's earnings release. The release plus our supplemental slides and historical financial tables are available on our website. Finally, we are recording this call today and will make the recording available by 6:00 PM Pacific Time this evening on our website.

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

Thank you, Bill.

Our fiscal fourth-quarter 2014 revenue at $448.6 million exceeded the high end of our guidance range. Book-to-bill was greater than 1 for JDSU with both CCOP and Optical Security and Performance Products, or OSP, above 1, and NSE at parity on a strong quarter.

Gross margin at 50% is a 15-year record high for JDSU, and NSE's gross margin at 65.5% also achieved a new high. I was also encouraged to see both OSP and commercial lasers at approximately 50% at the gross margin line.

FY14 revenue grew 4% year on year to $1.74 billion in what turned out to be a challenging telecom spending period, mostly due to major architectural changes in play in the industry focused upon software-defined networks and network function virtualization and to significant industry consolidation.

The JDSU team achieved a number of key milestones in FY14. As just mentioned, gross margins improved, up 160 basis points year on year. We continued to innovate at a rapid pace with products less than two years old generating 61% of revenue for our network-related businesses. We continue to invest significant R&D in key product areas important to growth in FY15 and beyond in areas such as SDN, virtualization, enhanced security, and faster broadband access.

The Company generated $177 million of operating cash and repurchased $160 million, or 12.7 million shares of stock. We completed three acquisitions as part of our continuing strategy to diversify beyond our core telecom customer base and enter new growth markets such as enterprise and applications management. We established CCOP as a leader in the datacom market, and commercial lasers exceeded $40 million in quarterly revenue for the first time. I am pleased with these accomplishments which I believe position JDSU well for sustainable revenue growth and gross and operating margin expansion over the longer term.

As we look forward into FY15, we remain encouraged by the strength of key network demand drivers that bode well for our products and services supporting this customer base. Our network related businesses make up 75% to 80% of our total revenue.

According to market research firms, 12.5 billion devices were connected to the internet in 2010. This figure is expected to double by 2015 and to double again to 50 billion devices by 2020, creating enormous wired and wireless data traffic demand and massive network management challenges.

Network architectures, management solutions, and business models are evolving rapidly. This evolution creates opportunities for carriers, service providers, network equipment manufacturers, enterprise Web 2.0 players, and key enablers like JDSU to capitalize on these trends. We have transformed our CommTest business of 2010 into the Network and Service Enablement business of the future.

In network enablement, or NE, we have a strong focus on cloud-enabled field and lab instruments, hardware-centric solutions, and empowering workforce efficiency. Service enablement, or SE, consists of software-centric solutions and support that ensures the applications and services customers demand are delivered.

This year, NSE's network enablement business maintained its number-one position in field test instruments, gaining share and turning in strong performances in fiber, broadband access, and wireless network enablement solutions, all of which saw solid growth year on year. In service enablement, we have invested heavily to support our customers' moves to SDN and NFB technologies and to increase software content.

We saw bookings growth in next-generation mobile assurance and from the recently acquired enterprise focused network instruments business. As expected, SE legacy wireline and wireless assurance platform revenue declined as customers scaled back mature product lines and invested in leading-edge solutions.

CCOP's optical components business also turned in a good year, maintaining its number-one position in telecom and achieving further penetration in datacom, which was up approximately 28% year on year for FY14. Geographically, FY14 revenue from the Americas was essentially flat, as key US customer spending was restrained while carriers wrestled with major architectural decisions and consolidation activities.

European spending has lagged for several years, but bookings recovered somewhat in FY14 as EMEA revenues increased 8% year on year. Asia Pacific, notably China, continued to build out network infrastructure and invest in the latest technologies; our revenue in this region grew about 7% from a year ago.

Turning now to overt anti-counterfeiting, this is an important market for JDSU as we have a significant leadership position and operate in close partnership with our customer base. This past year we completed the pruning of low margin, nonstrategic products, representing approximately $24 million a year in annual revenue, which will enable the OSP leadership team to further increase its focus on the anti-counterfeiting market, as well as high-growth markets of optical coating, including consumer electronics.

We see healthy market demand for our optically variable magnetic pigment, OVMP, product as new banknote designs continue to adopt the security technology. OVMP is now featured in banknote designs for 51 countries, up from 48 last quarter and from 43 a year ago, with overall security pigments globally deployed in more than 110 countries.

In our commercial laser business, we ended the year with record revenue and gross margin of $40.7 million and 49.9% respectively. Commercial laser revenue for FY14 grew 5.9% year on year, with our fiscal Q4 growing 44.3% year on year, driven by the successful adoption at our Gen2 kilowatt fiber laser, as well as strengths from the semiconductor industry.

JDSU at Zurich, our Time-Bandwidth Products ultrafast lasers, also experienced increased demand. We are very excited about the market pull that has resulted from the combination of this innovative technology and JDSU's infrastructure and market reach. JDSU was an early enabler of gesture recognition, or 3D sensing technology in 2010, beginning with gaming consoles, and is recognized as a leader in this field through its expertise in laser diodes and optical filters, two critical elements for implementing the technology.

3D sensing turned in a strong FY14 following nominal revenue in FY13. Looking forward, we do not expect meaningful 3D sensing revenue over the next two quarters. However, as new applications for mobile devices, home entertainment, and personal computing are adopted, JDSU is well positioned to capture high-volume opportunities.

A major PC related customer is taking delivery of preproduction units of our 3D sensing offerings, and we are working closely with our other customers in consumer electronics as they look to develop their own uses for 3D sensing. While the market size, timing of deployment, and rate of adoption remain unclear, we believe these new applications represent a meaningful future business opportunity for JDSU.

At 4% revenue growth in FY14, JDSU did not see the robust top line we had expected entering the year. We did however expand gross margin significantly, with an exit rate of 50% due to strong acceptance of our new products and improved operational performance.

Cash flow from operations remained strong with 31 straight quarters of positive operating cash flow, contributing to a healthy balance sheet. We are confident that our investments will position us to meet our customers' future requirements and to further differentiate JDSU from our competitors. Although disruptive in the short term, we see the radical technology shifts taking place in the networks, rapid expansion of data centers, and a movement to the cloud as opportunities for growth as we enter into FY15.

I'll now turn the call over to Rex to go over the details on our quarterly and year-end results.

Thank you Tom. JDSU's fiscal fourth-quarter 2014 revenue was $448.6 million, up 7.3% from last quarter and up 6.5% year on year, and exceeded our revenue guidance range of $425 million to $445 million. Geographically the Americas accounted for $216.5 million, up 5.9% from last year, EMEA for $100.7 million, up 16%, and Asia Pacific for $131.4 million, up 1.1%. The geographic sales mix was 49% for the Americas, 22% for EMEA, and 29% for Asia-Pacific.

Gross margin at 50% was up 240 basis points from last quarter, and up 390 basis points from a year ago. All three business segments contributed to the improvement.

Operating expenses at $185.1 million were up 7.7% sequentially from $171.9 million, higher than our previous commentary and reflecting increased R&D investments in both NSE and CCOP strategic growth areas and higher sales commissions and bonuses. Our GAAP results include $20 million in restructuring expenses from Q4 plans adopted by NSE, CCOP, and shared services to reduce our operating expenses longer term. We anticipate future annualized cost savings of more than $30 million as a result of restructuring activities initiated in FY14.

Operating margin at 8.7% was at the high end of our guidance range of 7% to 9% on higher revenues and gross margin, up from Q3's 6.5%, and up year on year from 7.2%. Net income was $34.2 million, up 46.2% from our third quarter, again due to higher revenue and gross margin levels, and up 12.5% from a year ago. Similarly, EPS was $0.14 versus $0.10 last quarter and $0.13 a year ago.

For the year, revenue at $1.74 billion grew 4% from FY13 to $1.68 billion, while gross margin improved by 160 basis points to 48.1% versus 46.5% a year ago. Operating margin at 8.7% is flat year and year, while net income at $133.1 million, improved slightly from last year's $131.8 million, and non-GAAP EPS improved to $0.56 versus $0.55 a year ago, in all cases due to incremental operating expenses from acquisitions in FY14 and higher organic R&D investments that offset increased revenue and gross margin.

For the full fiscal year, GAAP net loss was $17.8 million, or an $0.08 per share loss, versus $57 million net income or $0.24 per share in FY13. The current period reflects $23.8 million in restructuring expenses in the absence of last year's Q4 $113 million tax benefit.

Turning to the segments, NSE's revenue of $209.1 million was up 10.2% from a year ago, and exceeded our guidance of $195 million to $205 million. NSE's book-to-bill ratio was approximately 1 to 1.

Gross margin at 65.5% improved 540 basis points from last year, reflecting continued operational improvements and better mix. Operating margin at 13.9% improved 440 basis points year on year, exceeding our guidance range of 11% to 13%. New products defined as those product less than two years old represented 60% of revenue versus 54% in Q3.

Moving into FY15, we have determined to break out NSE into two new reporting segments, NE and SE, to provide shareholders a better understanding of these businesses, which are very different in terms of size, maturity, margins, investment requirements, revenue timing, and business models. Network enablement is again principally our traditional communications test instrument business.

NE revenue for Q4 was $165.5 million, or 79% of NSE with strength in fiber, broadband access, and mobility test products, offset by weakness in storage network testing from a year-ago levels. Book-to-bill was approximately 1. As shown in the 2014 pro forma financials we are providing today, NE has consistently improved its gross margin in the last 12 months, with its operating margin reaching approximately 20%, the bottom of our published NSE business model range in Q2 and Q4. This reflects operational improvements and evolving product mix focused on customer needs and high-speed applications in mobility and product pruning. Recall, the NE market opportunity is about $2.7 billion with a 4% CAGR.

Service enablement consists of software-centric solutions that are embedded in the network and includes our Arieso network instruments and Trendium acquisitions, as well as our PacketPortal platform. In Q4, Se had a book-to-bill ratio of approximately 1, and generated $43.6 million in sales or 21% of NSE. Notable booking strength came from location intelligence and next generation mobile assurance.

Our enterprise performance management solutions from the network instruments acquisition were gross margin accretive in Q4 and are expected to be earnings accretive this quarter.

Looking forward, we expect to continue SE's forward progress in FY15 as new, higher margin business from R&D investments made in high-growth market segments, and from recent acquisitions replace our legacy service assurance businesses, enabling SE to have an expected zero to low-single digit operating margin as we exit FY Q4 of this year. We continue to believe SE as an attractive revenue and margin growth opportunity for JDSU in a $3.1 billion market with a 12% growth rate.

We continue to collaborate closely with many tier 1 customers in several NIM customers on PacketPortal. PacketPortal addresses the industry's need for new more cost-effective methods of gaining critical network visibility and intelligence at the edge of the network where most service impairment issues occur.

The significance of this technology has increased within our customer base, as they are faced with the reality of a multi-speed internet and the huge strain of traffic of big data running on their networks. As a disruptive solution, adoption will be gradual, but we are pleased with the feedback we continue to receive from existing and potential customers.

Moving onto CCOP, bookings were well above 1 to 1. Telecom, datacom, and lasers were above 1, with lasers posting a second consecutive record bookings quarter. Book-to-bill was substantially below 1 as expected in our 3D sensing products. CCOP revenue of $196.9 million was up 8% from the fourth quarter of last year, and above the midpoint of our guidance range of $190 million to $200 million.

Optical Communications revenue of $156.2 million rose 1.4% from a year ago, reflecting higher telecom and datacom revenue levels, and offsetting our expected 3D sensing revenue decline of approximately $12 million. The optical component pricing decline was approximately 2% quarter on quarter, which is at the low end of our typical 2% to 4% expectation.

Commercial laser revenue was a record $40.7 million, up 44.3% from a year ago and 31.7% from the prior quarter, driven by strength from both solid-state Q series lasers and Gen2 fiber lasers. The Q series is experiencing healthy demand in the semiconductor capital equipment sector, while our partner Amada continues to ramp our Gen2 fiber laser used for industrial cutting applications.

In Q4 our fiber laser revenue was $11 million, up 86.4% from the prior quarter. JDSU Zurich continues to gain traction with our ultrafast lasers, generating more than $2.5 million in the quarter. CCOP's gross margin at 33.3% increased to 250 basis points from a year ago, reflecting primarily higher commercial laser mix and favorable optical components mix along with operational improvements.

Optical Communications gross margin at 28.9% increased 70 basis points from a year ago, but was down 40 basis points from the prior quarter due to lower revenue. Commercial lasers gross margin reached record levels of 49.9%, and rose by 450 basis points versus last year, and by 100 basis points compared to the prior quarter.

Operating margin at 10.2% increased by 20 basis points from a year ago, on higher revenue and favorable product mix, but was at the low end of the guidance range of 10% to 12% due to higher operating expenses. New products less than two years old represented 57% of optical components revenue versus Q3 at 64%.

In an effort to better align our product reporting to end markets, going forward we are grouping the Optical Communications sales mix into three end markets: telecom, datacom, and consumer and other. The consumer and other grouping includes 3D sensing and industrial diode revenue. Fiscal Q4 sales mix for telecom was 74%, datacom was 17%, and consumer and other was 9%, versus a year ago's 70%, 16%, and 14% respectively. The telecom/datacom sales mix ratio has been about 80/20 for the past several quarters.

Datacom revenue grew 9.6% year on year, but fell 15.4% sequentially due to lumpy demand from a large Web 2.O customer. We expect our datacom revenue to rebound in the first half of 2015 as we recently secured a significant new share award at one of our larger customers.

Moving onto OSP, revenue of $42.6 million was down 13.4% from a year ago, down 16.6% quarter on quarter but above the midpoint of our guidance range of $41 million to $43 million. The quarter-on-quarter revenue decline reflects our exit of several lower-margin thin-film cutting businesses with last time buys in the quarter at $1 million versus an historical average of $6 million per quarter for these products, and lighter demand for our core anti-counterfeiting products.

OSP's book-to-bill ratio was well above 1 in the quarter. Gross margin at 50.7% improved 150 basis points versus a year ago, even on lower revenue levels as we exited the aforementioned lower-margin businesses. Historically we have achieved 50% gross margin levels at a $50 million or greater quarterly revenue run rate, so we are pleased we are now able to achieve 50% plus gross margins at a low $40 millions revenue rate and would thus expect margin expansion on higher sales. Operating margin at 33.3% declined 170 basis points from a year ago on modestly higher operating expenses, but significantly lower revenue levels, and was just above the midpoint of the guidance range of 32% to 34%.

Turning to our balance sheet, we maintained a strong cash position at $881.3 million, down from $926.2 million at the end of the March quarter. Operating cash flow at $50.2 million improved from the prior quarter's $42.5 million as we delivered our 31st consecutive quarter of positive cash flow. Capital expenditures for the quarter were $31.7 million, consistent with guidance, and primarily to support manufacturing capacity investments in both CCOP and OSP.

Depreciation and amortization was $34.7 million. From our $100 million stock repurchase plan announced on May 27, we purchased $60 million or 5.25 million shares in Q4 at an average price of $11.43 per share, with $55 million settling in the quarter. Looking forward to Q1, we expect fiscal first-quarter revenue to be $405 million to $425 million, and non-GAAP operating margin to be 6% to 8%. At our revenue mid point of $415 million, this reflects a 3.3% year-on-year decline from last year's $429 million.

Our first-quarter of FY15 estimate reflects year-on-year improvements in revenue from networking and laser end markets, which are more than offset by approximately $30 million of year-on-year revenue declines from lower 3D sensing sales and the absence of OSP revenue from the product lines we exited in FY14.

NE revenue is expected to be $120 million to $130 million, with an operating margin between 10% and 12%. SE revenue is expected to be $40 million to $45 million, with an operating margin loss between 7.5% and 4.5%. NE faces typical fiscal Q1 seasonality compounded by expected continuing customer indecision as they consider the transition to increased network virtualization and more software-centric solutions.

NE revenue from Q1 of FY14 was $145.1 million with an operating margin at 15.5%. The approximately 14% year-on-year decline at midpoint of the current range reflects primarily lighter North American tier 1 carrier spend. SE revenue in Q1 of FY14 was $26.8 million, a low top-line quarter that drove a more than 30% operating margin loss. The SE revenue guidance midpoint at $42.5 million reflects nearly 60% of year-on-year growth, which reflects investment in key areas such as enterprise and location intelligence and substantially narrows SE's operating loss.

We expect CCOP revenue to be $200 million to $210 million with operating margin between 12% and 14%; our CCOP revenue midpoint was $205 million versus $204.6 million in Q1 of last year. Flat year-on-year revenue change again reflects the expected $22 million lower year-on-year 3D sensing revenue, offset by the better performance of other CCOP product lines, especially our commercial lasers business. We expect OSP revenue to be $42 million to $44 million with operating margin between 34% and 36%; our OSP revenue midpoint is $43 million versus $52.5 million a year ago. The decline is largely from exiting low-margin product lines, but also reflects some continuing near-term softness in anti-counterfeiting demand.

We expect non-GAAP EPS to be $0.08 to $0.12. Please refer to the supplementary slide deck for other fiscal first-quarter 2015 financial metrics guidance posted on the JDSU website. I will now turn the call back over to Tom.

Thanks Rex.

Historically the September quarter is seasonally soft for the NE business. Moreover, the traditional test and measurement business has been particularly challenging for network test equipment providers during the past several years, especially in the last four orders and we expect these challenges to continue in the immediate future.

North American carriers have ratcheted down wireline spending while redeployed investments in wireless infrastructure have been tepid due to rapid changes in network technology architectures. Given our leadership position in many of these markets, we are also subject to the macroeconomic industry forces that have adversely impacted the NE business. However, these changes in technology validate our focus on identifying emerging technologies that have allowed us to meaningfully grow the SE business. As a result, as the industry becomes increasingly more focused on SDN and NFV technologies, we believe the service enablement business will play a larger role in supporting our service provider and enterprise customers to improve network service and application performance in FY15 and beyond.

In CCOP, optical component demand remained healthy with notable strength in datacom, 100G modulators, and China's infrastructure spend. Our Gen2 kilowatt fiber laser customer, Amada, is enthusiastic about this new generation of product, along with this differentiated variable cutting head, and continues to ramp their industrial metal cutting production as the industry accelerates its conversion from traditional CO2 lasers.

In OSP, we have repositioned the business to focus on higher-growth and higher-margin business opportunities. Looking ahead at FY15, with robust booking from incremental anti-counterfeiting businesses, we believe that OSP's revenue should return to the $50 million level by fiscal Q2, with corresponding margin improvement driven primarily by further adoption of our OVMP product for the banknote market. We're also expanding our development effort in consumer electronics with technologies targeting 3D sensing applications using our optical filters, as well as applications in the government and healthcare markets that can leverage our optical coating expertise.

We believe the addressable end markets that JDSU serves remain on track with a blended growth rate in the mid-to high-single digit percentage range in FY15, with typical seasonal quarterly variations. I would like to thank our employees, business partners, and shareholders for your interest and continued support of JDSU.

I'll turn the call over to Bill to begin the Q&A session.

Thank you Tom. I'd like to ask everyone to limit the discussion to one question and one follow up. Whitley, let's begin the question and answer session.

(Operator Instructions)

Michael Genovese, MKM Partners.

Great. Thanks very much. Tom, you seem to be indicating that the technology transitions have been hurting the NE business in the wireless market, could you just flesh that idea out more and tell us what you're referring to?

I think there's been a transition going on obviously in the wireless with the LTE and you got TDLTE in China, et cetera. And most of our play comes once the networks are actually installed and get equipment or subscribers across the equipment and get the capacity usage up. So that transition initially as 2G and 3G have dropped off significantly have created a bit of a lull in that spending we normally see out of those operators.

Okay. And can you comment specifically if you've seen any changes recently in the level of demand in NSE related to both the major cable merger? And then secondly, the major wireless merger that people thought were going to happen, and now it looks like it's not going to happen and that fall out. Have you seen a recent downward revision in 3Q because of this?

No.� I believe on the cable side our business has been real healthy, so I don't think up to this point we've really been impacted by what's been discussed as far as a merger out there. I think on the telco side with major North American operator we have seen some pullback as a result of both the architectural changes going on, and also the intended merger. So I think that has impacted the telco side of the business in North America.

Okay. And then final question for me. Looking at your guidance here and kind of plugging it through, it looks like there's a big sequential decrease in OpEx. And are those more accounting related things or is that coming from some underlying cost cutting going on?

It comes from a couple of impacts. One is just basic cost controls as we're trying to hold OpEx down for the first quarter, and you'll see slightly lower bonus and sales commission accruals as well because it's a lighter quarter.

Okay. But that sounds right to you? That idea that CapEx would be down say high single -- or sorry -- OpEx sort of high-single digit sequentially?

That's in dollars?

Yes.

That's -- maybe not quite that much, a little less than that, but yes, $5 million to $10 million.

Okay. Thank you.

Thank you.

Patrick Newton, Stifel.

Yes. Good afternoon, thank you for taking my questions. I guess jumping right into the NSE business, Alan or Tom, I think you talked about your more mature service assurance business declining in the quarter, I'm trying to get an understanding of where that business stands on an annualized revenue basis.

And then if we think about that from a gross margin contribution I think the thing that was kind of surprising on your breakout of NE and SE, is that your NE business is actually above the high end of your long-term gross margin target range, while SE is supposed to be the tailwind and should be the tailwind on a go forward basis. So can you give your sort of thoughts around what longer-term gross margin target could be looking like?

Okay. And so I think for the service enablement or service assurance business I should say, the legacy SS7 is definitely coming off pretty rapidly now. We really haven't split out the size of that revenue. We don't go down to that level, but it's -- it has been a significant or reasonable revenue level for us in the NSE business.

So we're expecting with the next generation of mobile assurance we believe that we have a unique platform that we've now brought to market, a combination of the Trendium acquisition and some of our other capabilities that we'll see some nice growth as that starts to trend up as new architecture is required.

I think as far as the gross margin levels between NE and SE, we do expect over time that the SE gross margins will be higher than NE. But we have seen a nice improvement in NE both through mix and operational improvement, so we want to continue that moving in the right direction as well. But SE, once we are more through the initial stages of some of this revenue recognition where we don't see the revenue, but you do -- some of the cost do drop into the cost of sales, that's causing some of that depressed level on the gross margins for SE.

I would suspect when we get out in time that the SE gross margins would be well above our average today, which we are at almost 66% this last quarter. I would expect SE would be up in the kind of mid-70%s plus range as far as gross margins as we get out past some of this initial revenue recognition timing, et cetera.

Okay. So I guess we could maybe look to your Analyst Day for an updated long-term target there?

We will do that. Yes. That's what we plan for across all of our businesses with the split out of NE/SE, the other two businesses, we're going to give you an update on our models. Those models all of them are about three years old now, so time to update.

Perfect. And then I guess shifting to the fiber laser, Alan I asked a very similar question last quarter. Very nice number on the $11 million revenue for the Gen2 fiber laser.

I'm curious though last time on your Gen1 you saw revenue ramp up to about $10 million a quarter on a sell-in basis, and then the sell through just wasn't all that exciting. As you sit here today, can you talk about how you feel about the Gen2 fiber laser ability to grow from here?

And then also in the past you talked about your ability to target customers outside of Amada. Is there a chance we could see a material ramp in customers outside of Amada in your FY15?

Yes. I think as far as peak revenue, I don't think we've seen it for sure on Gen2. The ramp and the adoption by our customer, the Gen2, has gone extremely much better than our Gen1, and therefore, the field deployment at their customers is going quite well and the sales guys are all excited at Amada.

So I think we are going to continue to see growth at Amada. We are focused on supporting them through this ramp as well as expanding our footprint within Amada, both in higher power lasers, as well as different applications within Amada. So that is what our focus is for FY15. I don't think you'll see meaningful revenue outside of Amada in 2015.

Great. Thank you for taking my questions. Good luck.

James Kisner, Jefferies.

I guess I just wanted to again look at the guidance a little bit and just understand perhaps gross margin and what you're assuming there. I mean, I'm also noting here that the optical component margin or communications margins was down quite a bit, is that all leverage or were there some mix issues there? Could you elaborate on your gross margin and that performance in the quarter?

Yes. Gross margin was down just slightly from Q3 on lower revenue. I have the numbers here. Just a second.

Gross margins were down by 40 basis points on a drop in revenue attributable to as Rex pointed out in his part of the script, datacom dropped by one of our large Web 2.0 customers, as well as the expected drop in gestures. So I don't think there's anything out of what we expected from a gross margin standpoint in Op Coms. I think going forward, we are expecting that to pick back up as revenue levels do increase.

Okay. So that's going to be up a little bit, so in general overall gross margin could be down here perhaps kind of 200 bips sequentially; is that a fair assumption perhaps?

Maybe a little bit more than that. Call it 1 point.

And just final question and I'll pass here. Just curious about the Optical Communications weakness; it was a little light versus our expectations. Are you guys seeing any impact here from your second sourcing on WSS and dual XFP. I'm just curious how those products performed and what the outlook is for those? Thanks.

Yes. I'll give you a couple of data points. One is our tunable XFP revenue grew 16% quarter-on-quarter. And so I think we are gaining share as a result of really -- and that includes our tunable XFP plus as well. So we've launched our second generation tunable XFP plus, and that's contributing to our growth in the tunable business.

I think kind of broader based, I would say that networks are being deployed with -- at the core at 100G and the spending at the service provider is really at the 100G core deployment as opposed to new greenfields. And so I think directionally we saw a drop in ROADM revenue, although I don't think we lost substantial share if any.

I will say that one of the areas of keen strength was the business of submarine cables. And our growth in submarine bookings. We had book-to-bill of over 3 to 1 in our submarine business and expect that to really contribute to the balance of our FY15 growth.

All right. Thank you.

Mark Sue, RBC Capital Markets.

Thank you. Tom, Maybe your thoughts on just the duration of the customer indecision at the moment and the impact of the consolidation. How long things might last beyond the near term; should we think about the fourth quarter? Should we think about lingering thoughts into the early part of next year? Just a duration please.

So we're obviously not giving guidance out past this next quarter. But I would say a couple of quarters is the likelihood that I would suspect we'll know more as we progress to this next quarter. But I would expect this couple quarters with this change in technology and then also making plans on potential acquisition.

Okay. That's helpful. And then Tom, if we step back and look at the industry, carrier consolidation is usually -- it's rarely a good thing for the vendors, and they consolidate so they have more purchasing power. JDSU has been able to deflect some of the pricing pressure by higher gross margin acquisitions and lower margin pruning.

As we see these big large acquisitions on the carrier side, are there considerations kind of looking at the business and say we need more scale here? We don't really need to be in this business -- to look at it from an aggregate profit contribution point of view, so that when you look at it you say, look, the industry's changing, maybe the Company's -- should we compose its assets? Or to ask simply, does JDSU assume it can be in so many businesses?

Yes. It's a question we always review and ask ourselves. I think the actual consolidation in the carrier space won't have a huge impact on looking at the composition of our portfolio of businesses.

But it does I think give us some opportunities with this consolidation to continue to move up the food chain and offer some of these higher end solutions, and that's what we're doing. And part of the restructuring charges that you saw this quarter are really addressing some of that mix change and things we need to do to get out of certain areas and more focus into other areas that we think will benefit our future growth. So we've taken some of those charges this past quarter as we prepare for that.

That's helpful. Thank you. And good luck gentlemen.

Thanks Mark.

Simon Leopold, Raymond James.

Great. Thank you. Just wanted to check on a couple things.

One, I appreciate the new segmentation, particularly around the network service enablement. It's helpful. I want to try to get a sense of the guidance of how much of this is reflective of kind of lumpiness? And how much of the implied decline of the network enablement sequentially is related to consolidation versus the bigger picture trend you've talked about of the mix shift towards the more software-centric business?

And as a follow-up, if you could provide some comments on the longer-term, meaning calendar 2015, your thoughts on the 100 gig market. Thank you.

Okay. David Heard, do you want to take the first part of that?

Sure, I think it's a good question.

So I think we finished Q4 in the NE reasonably strong, as carriers and especially the North American carriers, we brought in about $5 million to $7 million more than anticipated as evidence from the guidance range. And I think as we look at the summer and we look at the carriers looking at how they're going to test their networks for SDN and NFV, we are seeing one particular in the US that's doing that and looking at some M&A. And so the timing of that impact I think is just creating some choppiness in that NE market.

What we've done over the last two years is really try to focus the fundamentals on where that change isn't going to have an impact. So we've increased our investments in LTE-based station test, fiber, which continues to grow year-over-year, and that wide broadband access.

And so I think overall we still see that as a $2.7 billion market that's going to grow in that 3% to 4% range continuously. And over the last year we've continued to take share in that space. And in Q4 we actually have had some organic growth go as a result of our investments.

To the second part of your question, I think absolutely that the $3 billion plus market that Tom referenced in his prepared remarks -- that's where we see the carriers going and that's where we see consolidation and the enterprise all moving up the stack. And that's why we're putting -- we are continuing to invest our R&D resources because that's all in line with where virtualized networks are going, where software is defining the network. Did I answer your question there?

You did. That's helpful. And then the other one was the longer-term kind of calendar 2015 thoughts on 100 gig market, particularly as metro ramps.

Yes. This is Alan. Good question.

I think we're still seeing strong demand that outstrips our capacity for what I'll call the long haul 100 gig market, and we expect that to continue through calendar 2015. We do see that getting into the regional area metro probably more late calendar 2015 as the costs and volumes and power consumption needs to really go down to keep up with the competitive market of say our tunable XFP.

So I think from a JDSU perspective, on the carrier side, modulators are going to continue to grow. We just transferred back-end production to a CM in Asia, so we are expecting to continue to grow our modulator business for 100G. We are starting to ramp now our narrow linewidth laser for 100G, and we expect that to really continue to take off.

And then as we look at the data center market, that's still predominantly 10G and 40G, and we expect 100G while it's small to grow dramatically through calendar 2015 and 2016 in a meaningful way at the data center.

Thank you very much.

Thank you.

Alex Henderson, Needham & Company.

Thanks. Just a couple of quick clarifications.

I think the one comment you made was that your datacom Web 2.0 customer had a fall off in the quarter. Are you implying that that's a temporary one quarter thing and that that datacom Web 2.0 players likely are going to come back on track? I missed the context around it. I was wondering if you could clarify it.

I think the main comment is that we see lumpy demand because of the nature of the buildout of the data centers themselves. So we think this will be kind of a repeat pattern where we'll see the lumpiness, but we don't see the business itself is going away.

Yes. And then I think what we're trying to do is to expand our footprint within those Web 2.0 customers so that the lumpiness at any one customer is not as painful as we saw it last quarter. And we are making good progress on that front.

So are you expecting still growth out of the Web 2.0 players in terms of their aggregate spending as well as your share within it?

Absolutely.

Okay. And then can you outline where you are in terms of the Arieso revenue recognition process? And the PacketPortal progress metrics that you guys have been promising to talk about in terms of whether it's been included in some of the RFPs by the major network operators? And where you are in getting the OEMs to sign up to carry it?

And similarly with the network instruments. Where are you in the integration and dilution from that?

Okay. Rex will take the first part on the rev rec timing, and David will talk about the business itself.

So the timing on the -- this applies actually both to Arieso and also to a product set which includes our Trendium acquisition earlier this year. Currently we are assuming that bookings in those two areas take about three to six months to turn to initial revenue, and when you get to initial revenue it is recognized ratably after that.

So there's not a significant inflection that we are anticipating. Though later in this year, we are expecting to get -- later this fiscal year, we are expecting to get to what they call VSOE on one or more products, and that would contribute to greater strength in the back half of the year.

So could you just give us some sense of what we're not recognizing in revenues that are -- you are absorbing costs on still? I mean there must be some scaling of this thing to give us some sense of what it would look like.

Yes. I think we're having -- we've got two things going on right now. There's the SE business which you can now see on a broken-out basis includes both the newer growth opportunities that we are investing heavily in. But also includes some legacy assurance products that are rolling off. So you've got -- you're basically replacing older revenue with new higher-quality revenue going forward.

So our goal this year is to build a meaningful backlog, and then of course deferred revenue on the balance sheet through this fiscal year and really hit our stride in SE in FY16. There is a comment in the script that we're looking to breakeven or better on the SE business late this year and that's still the planned record.

And then just one other question. On the pricing out of China kind you talk a bit about the magnitude of the price delta between what you're selling in other geographies and in China? And if that's a higher rate of growth area, is there any impact on margins as a result of that shift?

No. I'd say when there's an allocation decision to be made and 100 gig is where we are seeing a lot of the main growth across all regions, pricing becomes a lot more friendly. So 100 gig modulators -- there's not much if any price difference regardless of where we sell it.

And then there's also specification differences that then come into play, so I wouldn't say there's a radical difference on those types of products. I think if you looked at a pluggable product for a SIPRI base station, that's probably pretty ugly because there's a lot of people competing for that business, and that's one that we've historically stayed away from.

Okay. Thank you.

David, you want to comment on the PacketPortal milestone?

Yes. Sure. Good question Alex.

I think we talked about a couple milestones. One, continuing to see tier 1 included in RFPs, which that has continued. In the quarter we've had another tier 1 service provider certify PacketPortal as their solution of choice going forward as they face the challenges of SDN and NFV, I think that's great. But obviously you then have to scale that.

In addition to the tier 1, we also have NEM certification from our first major NEM partner. So we are progressing on those fronts and continue to believe that that is going to be a great solution for SDN and NFV and are aiming to offset the dilution of that investment that we've talked about in prior periods still by the close of our fiscal year.

Thank you so much.

Those results are included in the SE results and we'll further get through them in our analyst day.

Great. Thanks.

Amitabh Passi, UBS.

Hi. Thank you. Tom, my question again was around NSE.

We had two years of declines in 2012 and 2013. Barely grew in 2014, and we are starting to hear again down 2.5%. I understand the pressures in NE, but even if I look at SE over the last three quarters plus the guidance we're basically hovering around $40 million a quarter. So trying to understand, can NE in aggregate even grow FY15, or should we just plan for another year of declines in overall sales?

We do plan on NSE growing. We did say that in general the SE part we believe the market will grow 10% to 13%, and we think will grow at least as well as the market. And NE although we are going through a period right now with the North American operators, we did see demand pick up as we said in Europe in the EMEA, and we're seeing some pickup in Asia.

We do think that the operators will get through this period. As I mentioned, I think it's a couple quarters they'll know for sure, but that would be my best estimate right now. So we'd expect somewhat around the market growth rate to be about 4% for the NE business. And again we do believe we are taking market share there.

So we should be able to grow at least with the market plus again we believe we are growing market share because of the additional software content for the NE products. But also the combination of NE and SE we believe position us very well with the operators.

Okay. And then just to follow-up for Rex.

Rex, just on the OpEx line, revenues of 6% 6.5% year over year, OpEx is up almost 13%. And even if I look at it sequentially, there's basically no leverage in the model. So just trying to understand some of the OpEx gyrations, both in fiscal 4Q and then obviously in fiscal 1Q it's coming down, do we get to a slightly more smooth trajectory?

So I think there's a couple things going on there. Obviously it is up meaningfully year-over-year. As you look out into 2015 I think you should assume an increase in operating expenses that's commensurate with the top line.

There's not a lot of leverage and there might be even a bit of non-leverage in the FY15 outlook. But they're going to move very close to each other.

Okay. Thanks.

Okay.

Kent Schofield, Goldman Sachs.

Great. Thank you. Thank you for the granularity on the CCOP business around the different business lines there. Just as we think about modeling those, are there significant gross margin differences that we should keep in mind?

And is one business more susceptible to changes around for example the lumpiness that you referred to in datacom? Meaning does it see a bigger impact or less impact as again as we think about modeling those three lines?

Are you talking within CCOP?

Yes. So yes. Think about telecom, datacom consumer. And just kind of the gross margin differentials there and kind of the lumpiness how that impacts those three lines.

I think it depends a lot about which product within each of those groups, meaning a pluggable product for radio base station where there is seven competitors, gross margins are typically much lower than a 100G modulator. And both of those are in -- well, one in datacom and one in telecom, but if you looked at CFP2 margins, I'd say those are higher.

So as we look forward, we are really focused on generating revenue from products less than two years old higher than 50% to be able to continue that gross margin improvement. So I wouldn't say that you can make a general statement about datacom or telecom or other being radically different in gross margin. It's the products within and where we have good strong products like tunable XFPs, those are margin products that are strong because of our long history of driving cost reductions and learning curve. And so I think if you threw it all into a blender, it's really hard to say. The blended rates are probably pretty equivalent.

Okay. And then as a follow-up, can you give us an update on China? In terms of how you seem to be progressing towards the $10 million to $15 million that you guys have discussed in the past?

Yes. We see probably the optical component side being a little bit stronger, because we roughly said $10 million of the incremental comes from optical components, and about $5 million from NSE. So I think on the path we are on right now and where we are seeing the spending, probably a little bit healthier in optical components and probably not as quick in NSE, although we think we are making good traction there.

So I think blended we come out about the same but it's going to be a little bit higher mix as we go through the last part of this calendar year from optical components and less than we expected in NSE.

Thank you.

You're welcome.

Dmitry Netis, William Blair.

Hi, yes. Thank you. On that last question, how long does this China buildout last? Do you guys have a sense of -- is this a couple quarters scenario, or is this could be kind of a few year type of buildout deployment model?

It's hard to judge, but we believe it's going to last at least through the end of the calendar year as far as the base station buildout. I would suspect with the numbers they put out there originally, it should last longer than that but we would see a path at least to the end of the calendar year. And then I think all the backbone buildout to support those base stations is really just pretty early stages, and that would go on longer as you start filling up capacity on the TD-LTE networks. And that drives back through the backbone.

So from my perspective it still in the pretty early stage although they buildout quite a few base stations, a smaller percentage of those have been actually turned up with volume on them. So I think there's quite a bit still to happen in China.

Great. I appreciate the color. And then my other question would be on VoLTE still kind of sticking to the wireless side.

One of your direct competitors actually talking about significant order flow with some major operators in Asia; where do you stand on that? What products do you have that target this market if any? And how do you kind of take that market on?

David, you want to comment on the VoLTE market and our product alignment?

Yes. Sure.

And revenue for that matter if you have it.

Yes. Good question. While we're not breaking it out by solution in terms of revenue, our next generation mobile assurance platform handles VoLTE, our base station test platform handles VoLTE, ran optimization, it's really a more delicate application that's going across the networks.

And so a substantial portion as we look at our mobile pipeline is people preparing their networks not just for the raw capacity, but delicacy of them putting VoLTE across the network. So we face up against those competitors, and players like Anritsu and others we've been taking share here recently.

To the question on China. It's multi-year. The Chinese are building out that network and as they add the capacity they're finding out the complexity they need.

We've had some early design wins there in the NSE market. But China tends to be very, very late in terms of the utilization of test, turn up, and optimization. That tends to get shorter and shorter as the technologies become more complex, and we are certainly there partnering with them in a multi-year buildout in China.

Thank you. And then just a quick one on the two operator customers that you had last quarter that didn't come in into revenue. Did you book these customers?

I think one order was a pretty significant one, around $8 million to $10 million which was slated for the metro project. Did that come in this quarter or was that extended out again?

Just to clarify your question, there was a next-generation mobile assurance, we did close two tier 1 players in Q4 as a result of our unique solution. And that pipeline continues to build and it will be included again in that SE guidance. But as Rex mentioned earlier, you're going to see for example we look year-over-year at Q1, we expect bookings to be up quarter-over-quarter in year one.

Those revenues tend to then happen in the back half of the year and the early half of the year following, depending on the quarter they're booked. They're anywhere from 6 months to 12 months lagging.

Yes. I thought there was an NE opportunity, which was a pretty significant one, somewhere in the order of a $8 million to $10 million last quarter, which didn't book or it didn't close for revenue last quarter. And I was just asking if you booked it or recognized it for revenue this quarter, and if not, when do you expect to get that?

Yes. I'm not sure the origin of your question. In Q3 we had some slowness in the metro market.

Yes. That's right.

And we were able if you look at the NE numbers that Rex broke out, we were very strong in NE, in fact some of the opportunity from Q1 actually pulled into Q4. So yes, we did see some significant strength in the NE market in Q4.

Okay. Great. Thank you.

You're welcome.

Thanks.

Subu Subrahmanyan, The Juda Group.

Thank you. I had two questions.

First on fourth quarter or I should say the December quarter for the carrier side, do you normally see some CapEx on test? And I'm wondering if you expect to see a strong fourth -- December quarter for test? Tom you had mentioned you think there could be a couple of quarters more of the impact of these transitions, I'm just curious how you think about seasonality in December?

And then also to verify kind of your comments on the mid to high-single digit growth. Similar question was asked earlier, but is that applicable, do you think the FY15 or given some of the transitions both on the carrier side and in your business side, is that more of a long-term view for market growth?

Yes. I think as far as the December quarter we do expect it to be a seasonally up quarter. So there will be that improved revenue and bookings based on seasonality.

I don't know that we can quantify that at this point. But we do believe it'll be seasonally up.

The comment on the mid to low-single digit growth for FY15. Yes, we believe that we are in that range as we look out through the fiscal year. Although we'll see some slowness in the Q1 seasonally, which is pretty normal but also on the NE side probably a bit softer than usual because of the consolidation and the architectural changes.

Mark McKechnie, Evercore.

Great. Thanks. And thanks for the segment detail on CCOP.

This might be for Rex or even Bill, but could you give the mix between telco, datacom, and consumer for the March quarter? I think you gave it for a year ago. But trying to figure out how that telco business trended quarter-on-quarter.

I mean, I think I recall last quarter you had a delay of 100 gig metro deployment that kind of slowed things down, and I want to get a sense for the status of that as well. Thanks.

Yes. I think you could probably back into it because the telecom/datacom mix was still approximately 80/20, so it would be reasonably consistent with Q4 at least from a mix perspective I would think. Alan, do you have any other thoughts on that?

Yes. I mean, I think while we saw 3D sensing drop as expected, we did see some strength offsetting that in our industrial diode business that is in that other category, so not a big shift overall between the two. But I think apples to apples, not much shift between the March quarter and the June quarter on the datacom versus telecom.

Rod Hall, JPMorgan.

Yes. Hey guys. Thanks for getting me in there, just a couple of quick questions.

I guess EMEA growth accelerated quite a bit at 16% in the quarter, do you think that that's a sustainable growth rate? And do you think growth continues to accelerate? I'm just wondering if you could comment on what you think happens in EMEA over the next few quarters.

And then I also wondered if you could -- there seem to be a lot of misperception in the market about the linkage between optical systems and 100 gig in particular. And some of the CapEx slowdown that we are seeing in North America in the second half of the year, which seems mostly linked to wireless. I'm wondering if you guys could comment on whether you think optical systems is affected at all by that, or do we see pretty normal seasonality through the calendar year on optical system spending in the US? Thanks.

I'll take the EMEA, and maybe ask David and Alan to comment on the optical systems 100G.

We think EMEA is definitely coming off the bottom, and we did see that approximately 8% growth year-on-year, so we are seeing improvement in EMEA. And more consistency I think of the order flow, whereas if I go back to last year it was very lumpy.

It seemed like they were just spending when they absolutely had to, now it seems like they're being a bit more proactive and building out the technology. So I think it's probably too early to call as a trend, but from what we've seen we do think we are going to continue to see some strengthening there in the EMEA.

As far as optical systems are concerned I think what we're seeing is a continued deployment of upgrades of existing networks from 10G and 40G to 100G. And less so the deployment of greenfields as network architecture is still being sorted out.

There was an interesting analysis by Ovum done about CDC architecture and flex grid stuff, and while carriers say they're willing to deploy it, there's only a small percentage of them deploying today. But at the end of this calendar year and into calendar 2015, the majority of those surveyed said that that was the time for the network deployments of colorless, directionless type networks. But today it's mostly the transmission over existing networks at 100G.

There are no further questions in queue. I'll now turn the call back over to Mr. Bill Ong for closing remarks.

Thank you Whitley. JDSU is participating at the following investor relations events, there are three Silicon Valley bus tours that are taking place at our corporate campus. MKM Partners on August 20, B. Riley on August 25, and RBC on August 27.

We are also hosting a 2014 Analyst Day event on September 11 here at our corporate campus in Milpitas, California. We hope to see many of you here. Thank you everyone.

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