Viavi Solutions Inc (VIAV) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2015 JDSU earnings conference call. My name is Alex and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Mr. Bill Ong, Senior Director of Investor Relations. Please proceed.

Thank you, Alex, and welcome to JDSU's fiscal second-quarter 2015 earnings call. My name is Bill Ong, Senior Director of Investor Relations. Joining me on today's call is Tom Waechter, CEO, and Rex Jackson, CFO. Alan Lowe, President of our Communications and Commercial Optical Products business segment, CCOP, and CEO-designate of SpinCo, will also join us for the Q&A.

Please note this call will include forward-looking statements about the Company's financial performance and plans to separate the business into two independent publicly traded companies. These statements are subject to risk and uncertainties that could cause actual results to differ materially from current expectations. We encourage you to review our most recent 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 26, 2014, and our Quarterly Report on Form 10-Q filed on November 4, 2014.

The forward-looking statements including guidance we provide during this call are valid only as of today. JDSU undertakes no obligation to update these statements. Please also note 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; as well as certain costs incurred as we prepare for and execute the separation.

We include a reconciliation of these non-GAAP results to our GAAP financials, as well as a discussion of their usefulness and limitations, in today's earnings press release. The release of our supplemental slides and historical financial tables are available on our website. Finally, we are recording today's call and will make the recording available by 6 p.m. Pacific Time this evening on the website.

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

Thanks, Bill. And welcome to those joining the call today. I will begin with our quarterly results. Book-to-bill was greater than 1 for JDSU, with only our Optical Security and Performance products, or OSP business segment, below 1. Revenue was within our guidance range at $437.1 million. And healthy gross margins, combined with strong cost controls, resulted in operating margin at 9.9%, in the top half of our guidance, and midpoint EPS of $0.15.

Our tax expense increased by $1.9 million sequentially, due to geographic mix, as higher profits were generated in higher tax-based regions, which had approximately a penny EPS impact on the quarter. Both CCOP and OSP performed slightly better than expected, bolstered by record revenue levels in datacom and fiber lasers. CCOP exceeded operating margin guidance at 12.8%. OSP experienced increased demand for bank note anti-counterfeiting pigment, returning as expected to $50 million in revenue per quarter, partially replacing the $9 million of revenue from last time by products discontinued last year.

The NE business segment was challenged by lower demand for North American carriers, while growth in mobility and next-generation service enablement products did not fully offset the decline from legacy assurance products. The NE and SE book-to-bill exceeded 1, even though a $12 million mobile assurance analytics order in SE booked one day after the quarter closed.

We achieved these results while concurrently executing on our committed separation plans. We are on track to complete the separation by the calendar third quarter this year, and to execute on $50 million of cost reductions once restructuring is complete. The estimated cash requirements for the separation remain $75 million to $100 million.

We met with numerous shareholders last quarter, and they resoundingly agreed with our strategy to separate into two companies. SpinCo, as a standalone company, will have greater focus and agility to respond to the rapid changes and opportunities in the optical components and commercial laser markets. As a public company, it will also have the currency to further optimize its business and facilitate industry consolidation that many expect could occur in the future.

For NewCo, the separation will allow us to more quickly and effectively continue our transformation of our hardware-centric NSE portfolio, with investments in virtualization and new software solutions, that give service providers, enterprises, and cloud operators unmatched end-to-end network application visibility and insight.

I'll now turn the call over to Rex.

Thank you, Tom. Consistent with prior earnings calls, we have a supplemental earnings slide deck posted on JDSU.com supporting today's commentary. JDSU's fiscal second-quarter 2015 revenue of $437.1 million was at the lower end of our guidance range of $433 million to $457 million. Gross margin at 49.1% improved 60 basis points from a year ago. The gains in each business segment reflecting continued operational discipline, favorable product mix from SE, strength in commercial lasers, and OSP's last-time-buy product exit last year.

Second-quarter revenue was down 2.3% from year-ago levels. However, excluding approximately $25 million of 3D sensing and last-time-buy revenues from last year's second quarter, our core network laser and anti-counterfeiting businesses' combined revenue grew 3.5% year-on-year.

Operating expenses at $171.6 million declined 0.8% sequentially from $173 million on continuing expense controls. Operating margin at 9.9% exceeded our guidance midpoint on improved gross margin and expense controls, but was below last year's operating margin of 11%, principally due to higher R&D investments. Our EPS at $0.15 was at our guidance midpoint, and exceeded last quarter's $0.14, but was down from last year's $0.19, due to lower revenue, higher operating expenses, and higher income tax and other in the current period.

On the balance sheet, total cash at $867.6 million remains strong. Operating cash flow was $16.6 million, down from a year ago at $54.4 million, due principally to lower collections in the quarter and higher payables entering the quarter.

As Tom indicated, we are on track for a planned separation. The management teams for both companies have been established, and the teams are working towards setting up SpinCo and its own systems by the planned separation date. We plan to file a Form 10 Registration Statement for SpinCo and to announce the new branding for both companies later this quarter.

SpinCo is expected to be adequately capitalized and carry no long-term debt at separation. We continue to plan to utilize our net operating loss carryforwards in the execution of the separation to yield an effective SpinCo tax rate of less than 10% for at least the first three to five years after the split.

We remain on track to execute net $50 million in annual cost reductions. As we have said previously, our goal is to take substantially all associated charges in fiscal 2015. We continue to expect about one-third of the savings to occur in COGS and the balance in operating expenses.

CCOP's book-to-bill ratio was at 1. Optical Communications was just below 1, while commercial lasers was above 1. CCOP revenue of $207.1 million was up 4.6% from the second quarter of last year, above the midpoint of our guidance range of $200 million to $210 million. Optical Communications revenue of $167.1 million declined 4.2% from a year ago, reflecting lower 3D sensing revenue of approximately $14 million, partially offset by higher telecom and record datacom revenues.

The Optical Component pricing decline was 3.1% quarter-on-quarter, consistent with our expectations. We continue to expect ASP decline through FY15 to be 10% to 14% year-on-year. Commercial laser revenue reached $40 million, up 70.2% from a year ago, marking its third consecutive quarter with revenue of $40 million or higher, driven by strength from Gen2 fiber lasers. Fiber laser revenue was at a record $14.9 million, up 20.1% from the prior quarter.

CCOP's gross margin at 33.4% increased 110 basis points from a year ago, reflecting primarily higher commercial laser mix. Optical Communications gross margin at 29% declined 100 basis points from a year ago, reflecting primarily a product mix shift from the decline in 3D sensing revenue. Commercial lasers gross margin reached record levels of 51.8%, and rose by 240 basis points compared to last year, and by 110 basis points compared to the prior quarter record on higher volume levels and favorable product mix.

Operating margin at 12.8% increased by 70 basis points from a year ago and exceeded the guidance range of 10.5% to 12.5%, due to higher revenue and favorable product mix from lasers. Fiscal Q2 sales mix was 73% telecom, 21% datacom, and 6% consumer and other versus a year ago at 69%, 17%, and 14%. The shifts reflect datacom growth of 16.4% year-on-year and 17.2%, sequentially, driven by new products and design wins, notably in our 100G CFP2 and CFP4 product lines, and the substantial reduction year-on-year of 3D sensing revenue.

Higher-speed transmission, defined as 40G and 100G, continues to grow and represents about 49% of overall transmission revenue versus a year ago at 43%, with its revenue growing 30.3% from last year. Telecom revenue grew 0.7% year-on-year, but declined 3.1% sequentially, due to calendar year-end customer inventory management.

For fiscal Q3 guidance, we expect CCOP revenue to be $195 million, plus or minus $5 million, and operating margin to be 9.5%, plus or minus 1 percentage point. Our below-target operating margin guidance reflects expected lower laser revenue, and in turn, a lower CCOP gross margin. Our CCOP revenue midpoint guidance at $195 million versus $194.6 million in Q3 last year reflects increased revenue from Optical Communications replacing approximately $8 million of lower 3D sensing revenue from a year ago.

We saw strong bookings in the submarine product line in calendar 2014, including the December quarter, as we added a new customer to our submarine business. We continue to expect new transoceanic cable infrastructure build to translate into new network deployments where the cables terminate, which should favorably impact our Optical Communications portfolio in the future.

Commercial lasers is expected to be down sequentially, reflecting seasonally softer micro-machining sales, as well as lighter fiber laser revenue due to near-term product mix shifts in demand from 4 kilowatt to 2 kilowatt lasers. We expect growth in commercial lasers to return, however, later in the calendar year.

Moving to network enablement and service enablement, as a reference point, overall NSE revenue at $179.4 million was down 8% from last year's $195 million, reflecting both weaker carrier spending and no budget flush in the historically stronger December quarter. NSE gross margin at 66.3% expanded 190 basis points versus last year, reflecting contributions from service enablement, including our enterprise product lines from the Network Instruments acquisition.

NE and SE book-to-bill ratios were above 1. NE's revenue of $133.7 million declined 14.2% from a year ago and was below our guidance of $135 million to $145 million. The year-on-year revenue decline reflects a softer North American carrier spending environment that continues to be impacted by architectural planning and M&A distractions in our customer base. This is partially offset by year-on-year strength in mobility.

Gross margin at 65.3% improved 80 basis points from last year, primarily due to better mix. Operating margin at 16.8% declined 300 basis points year-on-year, and was below our guidance range of 19% to 21%, due to lower revenue and higher operating expenses. For SE, revenue reached $45.7 million, growing 16.6% year-on-year, although it was below our guidance range of $47.5 million to $52.5 million.

The year-on-year revenue increase was driven by new enterprise revenue as a result of the Network Instruments acquisition in early calendar 2014, but the guidance range miss was also driven by lower-than-expected revenue in this business line. Gross margin was a record 69.1%, up 510 basis points from last year, with a lower operating loss of 5.5% versus a guidance loss range of 8% to 12%. The better-than-expected operating margin reflects both higher software mix, lower allocations to sales expenses based on relative bookings between NE and SE, and controls and discretionary spending.

Moving on to OSP, revenue of $50.6 million was down 7.3% from a year ago, up 16.9% quarter-on-quarter, and just above the midpoint of our guidance range of $49 million to $51 million. The year-on-year revenue decline reflects our FY14 exit of lower margin thin-film coating businesses, which contributed approximately $9 million in Q2 of last year.

We were particularly pleased with OSP's return to its $50 million per quarter run rate just six months after discontinuing these legacy product lines. OSP revenue reflects growth in our anti-counterfeiting business as well as a slight increase in government business.

Consumer electronics, including 3D sensing, did not have a meaningful impact on this quarter's results, but OSP remains engaged with its customers in the development of next-generation designs. OSP's book-to-bill ratio was below 1.25. Gross margin at 52.6% improved 210 basis points versus a year ago on lower revenue levels, which reflects the benefits of our product exits last year. Operating margin at 37.2% declined by 30 basis points from a year ago on lower revenue, and it was just below our guidance midpoint.

Looking forward to Q3, network enablement revenue is expected to be $128 million, plus or minus $5 million, with an operating margin of 16%, plus or minus 1 percentage point. Service enablement revenue is expected to be $45 million, plus or minus $2.5 million, with an operating margin loss of 18%, plus or minus 2 percentage points. The increased operating margin loss principally reflects our expectation of proportionally much higher bookings in SE than NE this quarter, and thus a higher sales expense allocation.

We expect the NE market to remain challenging as carrier spending in the March quarter typically is seasonally weaker, as customers evaluate spending plans for the new year. SE revenue is expected to grow year-on-year, and at its midpoint of $45 million, growth would be 24% from a year-ago levels, driven by enterprise and mobility. As SE continues to ramp, cost allocation is expected to remain volatile, given that it is tied to bookings.

We will continue to be more useful to model NE and SE separately in revenue and gross margin, but to combine them again for operating margin forecasting until SE reaches scale. We expect OSP revenue to be $50 million, plus or minus $1 million, with operating margin of 37%, plus or minus 1 percentage point.

I will now turn the call back over to Tom.

Thanks, Rex. We expect combined JDSU fiscal third-quarter revenue to be seasonally down from Q2 at $418 million, plus or minus $10 million, and non-GAAP operating margin to be 6.5%, plus or minus 1 percentage point. Our non-GAAP EPS guidance is $0.09, plus or minus $0.02. Our revenue midpoint of $418 million is flat versus last year. However, approximately $16 million in revenue from a year ago is attributed to the 3D sensing and OSP last-time-buys that are zeroed out this year. Therefore, the midpoint reflects year-on-year revenue growth of 4% from our core networking commercial lasers business.

While the March quarter is a seasonally weak quarter, there are encouraging macro trends that are expected to benefit our business in calendar 2015. Investment spending in the 100G Metro market appears likely to begin this year, while Web 2.0 providers are continuing to deploy significant capital in both 40G and 10G infrastructure upgrades.

In lasers, we recently announced a 2 kilowatt direct diode laser that is expected to replace many CO2 lasers used in sheet metal cutting. Additionally, our 6 kilowatt fiber laser product will enable us to expand our SAM opportunity in the welding market. Carrier spending remains unpredictable, reflecting the challenges carriers face in determining where to properly invest in the network.

We expect service enablement to continue to benefit from changes in network investment towards more software-driven solutions. And while enterprise spending is expected to be slow at the start of the new calendar year, given cautious surrounding macroeconomic concerns, longer-term, we expect it to be a growth driver for SE. In network enablement, we see strength in mobility and broadband access, including fiber, but are more cautious on Ethernet and storage network testing.

Demand for our OSP's anti-counterfeiting products remain solid. However, we expect some revenue volatility and lumpiness later in this fiscal year.

Calendar 2015 will be an exciting year for JDSU, as we prepare to launch SpinCo and NewCo as independent, more agile companies ready to capitalize on the opportunities of advanced optical network adoption, fiber supplanting CO2 industrial lasers, and network test tools evolving into advanced network assurance and analytics software solutions. We are committed to the execution of our growth plans, and as always, remain open to other strategic opportunities for enhancing shareholder value.

I'd 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 would like to ask everyone to limit discussion to one question and one follow-up. Alex, let's begin the question-and-answer session.

Mark Sue, RBC Capital Markets.

When we look at the pruning and the recomposition of the business, and where we've been and where we are going, the March quarter revenues are similar to what we've seen a year ago, recognizing that the composition is a little bit different. However, the operating margin improvement is actually -- actually, we are still back at similar operating margin levels; this, despite the headcount reductions we've seen at the Company.

So, I guess the thought is, can we see -- is there a lag effect in terms of the margin improvements? And how do we get comfort that we can actually get another incremental [$50 million] in savings post the split? If you can help us in terms of some metrics there, that would be great. Thank you.

Okay, sure. Thanks, Mark. I think as far as the business models that we put in front of the investor community at our Analyst Day in September, if I look at Q2, we are in those models for CCOP actually towards the higher end of the margins, in some cases, even though we are slightly below the revenue we put out there.

NE is in their model as well, right on the revenue and at the high-end of the gross margin range, and actually at the very top of the operating margin. And as Rex mentioned, SE, we are actually ahead of our profitability projection, and we had another strong gross margin quarter. And OSP is performing as planned, well within the model and doing well on the gross and operating margin.

So, I think we are where we planned to be on the margins. We are continuing to invest heavily in R&D, and so that continues to prevent us from dropping some of that gross margin improvement to the bottom line.

I think as far as the $50 million net savings that we are looking for as part of the -- as we divide the Company into two public companies, as we mentioned in the earnings script, we are on target for that. We will achieve that on an annualized basis once we get through all the restructuring. And, with time, we'll give more detail on some of those restructuring efforts. But that is on target. So we feel comfortable we are going to be able to get that net $50 million out of our expenses going forward.

Patrick Newton, Stifel Nicolaus.

Thank you for taking my questions. I guess on the first one, I wanted to touch base on and focus on NSE in the guidance there. I think, given the March quarter guidance has been an issue for the last few years, given later and later budget releases by some of your telecom customers, what's baked into your guidance for the timing of these budget releases? And is it fair to say that you've taken more of a conservative stance, given some of the timing challenges over the last few years?

Yes, I think, Patrick, on the network enablement side, we've probably been about where we've been in the past years, maybe a little bit more conservative because of what we are seeing with the larger service providers, as they are still going through some changes with their architecture and still some consolidation activities going on out there.

So I'd say it's to the same to slightly more conservative. I think on the SE side, we believe we'll continue to see a pretty hefty growth rate. Right now, we are probably running, on an annualized growth rate in that part of the business, between 18% and 20%, which is pretty healthy. We're going to pick it up even further, but it's a pretty healthy rate today.

Okay. And then I guess if we dig a little bit more on the NSE business, it seems like that was the biggest miss, both on the results and guidance relative to consensus. You had a couple of test peers that have indicated accelerating orders or discussed at least some budget flush that they saw in the month of December. You don't seem to have seen the same benefit.

I'm curious if that's a result of exposure to a large carrier that's actually cutting CapEx year-over-year and had abnormal seasonality in calendar 2014? Is it due to the continued bleed of the Network Solutions business, which you've talked about at your Analyst Day? Or is there -- can you talk about some of the puts and takes of the other performance?

Yes, definitely down and continuing to see the weakness with a couple of the larger carriers. One of the positive aspects of that, we did -- were able to win some additional business and to spread out our customer base a bit more in that operator space. But definitely not enough to offset the weakness of the larger carriers.

We do see the legacy service assurance continuing to drop off pretty quickly. We are having good success with our next-generation mobile assurance. But it's still in the early days, so it's not enough to offset that heavy drop-off of the legacy assurance business.

Alex Henderson, Needham.

I was hoping you could give us a little bit more color on how much you are reinvesting in the systems to support the spinoff? And when you're talking about net number, I assume that that -- those reinvestment and the costs associated with running those additional systems and added people that would be necessary to have the dual administrative roles, are part of -- taken into that net number. But it would be helpful if we had some gauge of when those additional costs kick in and the timing of it, as opposed to just looking at the net savings number.

Yes, Alex, this is Rex. So, we quoted earlier an incremental dollar figure of about $15 million as a cost dis-synergy to set up SpinCo as an independent public company. That's inclusive of basic additional headcount in places like finance but also corporate governance and other public company-related expenses. We currently expect that number to be south of $15 million.

If you look at that number and you add to it the other expenses that would be going over from NewCo over to SpinCo, we expect the net effect of that to be an improvement over what CCOP has allocated today. And you would see that kicking in after the spin. There are some incremental expenses that we are incurring today that we are putting into the spin bucket and taking out of our non-GAAP results.

So anyway, you'd see it -- it's going to come out of the gate looking like it's supposed to look. It's not a big phasing kind of thing. It will come out looking -- having the business model that it's supposed to have, with a better-than-current allocations expense base, as I just described.

Amitabh Passi, UBS.

I just wanted to clarify, if I look at the operating margin guidance year-over-year, it seems like one of the big deltas is in the CCOP subsegment. The others seem to be actually better year-over-year. So I just wanted to understand again why the CCOP guidance is lower? You might have alluded when you talked about softer laser revenue, but I wanted to clarify just the delta when we look at the March 2015 quarter over March 2014?

Yes, sure. This is Alan. I think if you look sequentially from the December to March quarter, the major drop is on lasers and on the top line, and associated gross margin is much higher on that. If you look at year-on-year, we've lost probably about $7 million to $8 million worth of gesture recognition topline. And that absorbs a lot of our fixed cost overhead in our fabs; whereas in the March quarter, we are actually expecting very little gesture revenue. So that's the main two drivers for the lower operating income from the March of fiscal 2014 to March of fiscal 2015.

Rod Hall, JPMorgan.

So I guess I first wanted to ask you guys if you've made any further progress on the balance sheet of CCOP? If you could give us any indication how much cash you intend to transfer over there at the spin? I know you're saying you won't put any long-term debt on, but how much cash?

And then, secondly, I had thought at the time of the spin that you had indicated that you would be able -- I had thought by now to be able to give us a little bit more detail on these $50 million of cost saves, like exactly where they are coming from? And so I'm wondering, is there any further color that you can give us on that? Or are you -- do you have that detail but you are just not ready to share it yet? I mean, can you just walk us through why, at this point, you're not ready to give us a little bit more on that? Thanks.

So the capitalization figure for CCOP will be something we put into the Form 10 that's going to get filed later this month. And so we just need to put the finishing touches on finalizing that number. So we are almost there, but it's a couple of weeks out before we are going to feel like we should do that.

As far as the $50 million is concerned, the breakdown we can give you is one-third COGS, two-third operating expenses; most of the charges will be in FY15. Some savings will begin falling through into the benefit of the P&L late this fiscal year. They really kick in, in earnest, in FY16. There is some additional savings that did accrue in FY17, and that's because it's tied to R&D programs. So we need to do some consolidations or site consolidations or other moves.

So, it's frontloaded in 2016, some in 2017, a little bit in 2015. I would tell you that we are in very good shape from the standpoint of most of the G&A-related savings. Those are very, very thoroughly baked, and we are close to finalized on changes that need to be made in the business units.

Kent Schofield, Goldman Sachs. Mr. Schofield, please proceed.

Kent, you might be on mute.

Troy Jensen, Piper Jaffray.

I guess my question to start off will be with Alan. Alan, can you talk about just telco demand in the second half for CCOP, kind of your conviction whether or not you see any of the evidence? And then also on that lines, can you talk about the timing of your 100G coherent CFP2 module and when you expect to ship those for samples?

When you say second half, do you mean second half of our fiscal year? Or second half of the calendar year?

Second half of the calendar year.

Okay. Yes, I think the headwinds are upon us today, and that's why our guidance is as it is. I do think that we'll start seeing some Metro deployments for lab work in the summertime, and real deployments coming really at the end of the calendar year in a meaningful way.

I do think, though, that it's still a question as to what is going to be the capital spending for the major carriers in North America? But everything that I can tell is, there's a tremendous amount of activity and a tremendous amount of pent-up demand that will have to be satisfied at some point in time.

As far as the 100 gig CFP2, I really don't see meaningful business revenue until calendar 2016. We'll be sampling customers and doing the qualification work between now and then. But there's a lot of work to be done on an analog CFP2 to tie it with the customer's DSP. So I think there's still a lot of design work that needs to happen, and a lot of integration work and testing that needs to happen at our customers.

Dmitry Netis, William Blair.

I wanted to ask you if you could update maybe your growth expectations for the Network Enablement and Service Enablement business units? What are you expecting there as you progress through the year? That's number one.

And maybe not just the year, but as you look out, what should be the growth rate in those two segments? Because it seems like we were just either waiting on the SE to ramp and NE has the CapEx issues, obviously, but -- what do you think, as you look into the pipeline, as you look at the carrier spending, as they tell you they will spend throughout the year and the projects that they are ramping, what that growth rate might look like?

And I apologize for being that specific. But also, the reason I'm asking these questions is, Verizon had just come up and gave us upgraded CapEx for the year. They are ramping the 100G Metro buildout. I'm curious to see if there's maybe a potential lead, and maybe a couple-quarter lead in how they buy the equipment to prepare for these buildouts. And I would assume that AT&T probably will follow, not to fall behind. So just give us a sense of what's going on, on the carrier spend and the growth rates there.

Okay. So I think for the Network Enablement business, we expect, on a normal basis, to be about a 4% CAGR. What we are expecting right now because of the carrier weakness, and I think the transition they are going through with the architectures, and some of the M&A consolidation activity we're going to see that flat, maybe slightly down. I wouldn't expect it up more than 1% or 2% on the upside for, I would say, the next two or three quarters.

The real growth activity is on the Service Enablement side. And as I said earlier, our CAGR right now is running at about 18% to 20%. Our goal is to increase that significantly. And I think with the new products, with the combination of our solutions that we are working on today, I think that's very doable.

We are also starting to see tractions in areas like China with their service enablement, where the solutions are getting to be pretty attractive to them with some of the complexities they are dealing with. We had some initial win opportunities there with our location intelligence business.

So, that's really the breakdown that I see. I think as far as the buildout of the 100G Metro, we will see some lab test activity, probably in the next couple of quarters. I think any major NSE activity pretty much will be out into the end of this calendar year, the beginning of next calendar year, based on what we think the deployment's going to happen.

James Kisner, Jefferies.

I was wondering if you -- I think you disclosed how did WS tunables trend quarter-over-quarter, or perhaps percent of revenue?

We didn't. I can tell you that ROADMs were up sequentially 15%. And I think we are extremely well-positioned with our TrueFlex ROADMs and Superblades for both the core network deployment and then Metro deployment that we expect to see in the second half of the year.

On tunables, it was fairly flat. I do think we saw growth -- significant growth in our tunable SFP+, and we believe we are by far the market leader on the tunable SFP plus as well.

Great. And just one follow up. On Europe and international, obviously, there's concerns about slowing. Have you seen any kind of push-outs or additional hesitation in orders, recognizing this is early in the year, but anything at all that might give you a little bit of pause in Europe or internationally?

Yes, why don't I talk about NSE and then turn it over to Alan for the CCOP side. That was part of the weakness. I mean, we tend to focus on the large NAM carriers, but we actually did see some weakness in the European carriers this past quarter.

Prior to that, I was pretty encouraged by seeing some pickup there. But we did see some softness, more than we had expected in European market for NSE. We'll have to watch how that progresses when we get into the next couple of quarters here.

Yes. And as far as CCOP is concerned, it's hard to tell where the product ends up in the telecom networks because we sell to NEMs all over the world, and they typically don't have a clear visibility as to what service providers they end up in. But I will say that we do expect and have seen China buildouts continue and we think that's going to go for quite some time.

All right, thank you.

Michael Genovese, MKM Partners.

You guys talked about industry consolidation or potential industry consolidation and optimal components, referencing that a couple of times on the call. Could you just talk about your thoughts on the timing or potential timing associated with that? And then also just kind of theoretically and generally the benefits that might come from a consolidation, and whether there would be different drivers on the datacom versus telecom side, how consolidation would benefit each of those businesses? Thanks.

Yes. Well, I mean, we typically don't talk about M&A and timing of M&A because until it's done, it's not done. I can talk about the theoretical benefit from my perspective on telecom and datacom. And from my perspective, I think we look at M&A either to fill out a product portfolio or to bolster something that we want to get larger footprint.

I do think that there is consolidation that has been happening and will continue to happen. The question is, will we participate or not after the spinout? And I think having the ability to be agile and act quickly and focus on what's important to CCOP and our customers will allow us to be able to take advantage of opportunities as they come up. But at this point, we are not able to talk about anything specifically.

Well, I guess just to follow-up, maybe with a different -- the way I look at it, the different market share characteristics of datacom versus telecom, I mean do you see that -- could you just talk about industry structure in those two different pieces? Do you look at them differently? Or do you see them as having similar dynamics?

Well, I look at them differently just because of the growth rates of the different telecoms is single-digit growth rates and datacom is growing high-teens to 20%. So I think from that perspective, we're focused on making sure organically we have the right products at the right time. And I think -- I'm very satisfied with our progress on our organic datacom business. and in fact what Rex touched on, a lot of our growth in this past quarter was on 100 gig CFP2 and what I believe to be the first to volume on CFP4.

And if you look back over the years, we've been more of a follower and now we really invested, and we believe we are the leader on 100 gig CFP4 and supplying customers samples already in QSFP 28 that our customer's feedback is quite positive. So I think our focus is going to be on organic first to market on datacom and telecom, and I think we're making good progress there. I think if an opportunity comes by in either telecom or datacom, we'll take a look at it and see if it fits in our portfolio, if there's a compelling reason to move forward.

(Operator Instructions) Kent Schofield, Goldman Sachs.

To follow up on the datacom side of things, do you think you've -- have you expanded your customer count there? Do you think you're taking more share at your current customers? Or do you think you are participating just kind of with market growth at this point?

I think all of the above. I think we've -- if you look at, say, 10 gig, I think we've expanded our presence in 10 gig at existing customers as well as new customers. But when you are first to market with a product like CFP4, you broaden your customer base as well, because they are hot to get that product and it really opens doors.

And before we had that, it was hard to open doors at new customers, because we weren't viewed as a leader in datacom. And I think that's changing. So I'd say it's a combination of both bigger footprint within existing customers as well as new customer additions. You know, we grew datacom 17% last quarter. So we are growing faster than the market.

And is it a similar thought process on -- with kind of the Web scale or the Web 2.0 guys as well?

Yes, very much so. I think the Web scale guys are really looking for the QSFP28. And as I said before, we are first to sample into a couple of Web scale guys as well as some NEMs that are giving us pretty positive feedback. I don't think they're going to be deploying CFP2's or CFP4's within the data center. They are really waiting for that smaller lower-power-consumption, lower-cost product that we'll be bringing out later this calendar year.

Okay. And then I think you -- earlier in the call, there was a reference to some OSP lumpiness later in the year. If I heard that correctly, what's driving that? Or what could drive that?

Yes, we said -- Kent, we talked about it later in this fiscal year. So, in fiscal 2015, we see, as we get to the end of the fiscal year, we are going to have -- see some lumpiness. It's really based on timing and of getting some of the new products, especially OVMP, out to market. And we're going to see some lumpiness in the timing as that is engaged in some new opportunities.

So we expect that to happen towards the end of this fiscal year. Don't believe that's a long-term type of effect.

Okay, so maybe just some pushout of revenues into FY16?

Yes, we drove to get back to the $50 million a quarter kind of run rate. We are there now. We could see pulling off of that a bit towards the end of the fiscal year, and then bringing that back up beyond there.

Okay. Thank you.

You're welcome.

Subu Subrahmanyan, The Juda Group.

I just wanted to understand, on this CCOP guide, Alan, if you could talk about -- you mentioned that commercial lasers is probably most of the downtick. It's about a $12 million downtick. So I'm just trying to understand if on a percentage basis, that sounds like a fairly large one for commercial lasers. If you could give us some more clarity on that?

And then on the NSE side, I just wanted to understand the first half of the year, Tom, I think you had earlier expected some rev rec benefits in early calendar 2015 from SE. Is that playing through the way you see it right now? And how much is that benefiting in the near-term? And then what is the slope decline for the legacy SE business? When does it stop being kind of a drag on overall SE revenue growth?

So, for the March quarter guidance for CCOP, commercial lasers is more than half of the reduction we expect. And it really comes from two-fold. One is, we've ramped up the fiber laser significantly, nearly $15 million of revenue last quarter. The pipeline is full. Their manufacturing facility is full. And so things are now more run rate business. So we expect a little bit of a pullback on the fiber laser business, as well as a mix shift from 4 kilowatt to 2 kilowatt.

I think with the introduction of the direct diode in the second half of the calendar year, as well as the 6 kilowatt coming around the same time, we'll see a continued pickup in that business. But back in the March quarter, we also see historically a drop-off of our micro-machine lasers. And we are expecting that to happen again in the March quarter of this year, where consumer electronics ramp-up is not happening yet. It usually picks up in the summertime in anticipation of the holidays.

And so, it's a combination of both the fiber laser and the micro-machine that we expect to be dropping, offset by higher datacom. And we are expecting some lower telecom in the March quarter as well.

Subu, I think as far as the deferred revenue, it was primarily around the location intelligence. And we said that we'd start seeing more of a drop-in as we got into the first fiscal quarter of 2016. I think we're on track for that. The big dependency is getting out and expanding our customer base, and that is happening. So I think we're on track for that to happen.

We did grow deferred slightly this last quarter-on-quarter . What's happening is we are seeing the deferred from more of the legacy products dropping off, and then it's starting to accelerate on the newer products. So I think we'll continue to see that for a while. We'll see growth in deferred, but there's a lot of moving parts in there with the legacy and the newer -- some of the newer products and solutions we are moving into.

I think as far as the -- I think your question on the other part was legacy service assurance. We've seen that drop as much as 15% to 20% kind of year-on-year, so it's a very significant drop. We'll continue to drop at that level. I'm not sure; it may flatten a little bit, but it's going to continue to be a drag on our revenue.

Our key there is really growing the next generation of the assurance and analytics. And again, we are getting very good traction there. I think it's a matter of timing on that.

And if I could follow-up on NE, Tom, given the US service provider spending this year seems to be down in (technical difficulty) that. Is any more or less directly correlated with that? I know you've talked about flattish, but I was wondering if there's potential for it to be down in calendar 2015 versus 2014?

Well, I think it's spotty. We've seen strength in places like fiber, mobility is part of that, is in NE. And we've seen good growth and mobility. We've seen access in Ethernet be down, and those are usually strong areas for us. We have very strong market share.

So as they start building out Metro, I suspect that will start helping us. And as I mentioned earlier, I expect to see some lab and production opportunities in that, as we get towards the end of this fiscal year into the next fiscal year, and then more of the field instruments and activity as we get into calendar 2016 for that.

So, that's -- we really -- would be beneficial if we saw Ethernet and the access part rebound, because those are important businesses for us. The other parts remain reasonably strong, especially mobility and fiber.

Thank you.

You're welcome.

Jorge Rivas, Craig-Hallum Capital Group.

Thank you for taking my question. First, I want to ask if you could share, as you have in the past, what was the growth rate for 100 gig modulators in the quarter? And whether you're cut out with capacity right now?

Yes. The 100 gig modulators grew by 14% sequentially. And we are still adding capacity and trying to stay up with the continued demand we expect, while we transition the backend assembly from our North America factory off to a contract manufacturer in Thailand, which really gets us more capacity as well. So, we are pretty bullish on the outlook for 100 gig modulators and expect that to continue to grow.

Okay. Thank you. And one last question. On the SE side, one competitor -- on the networking instruments side, networking instruments side, one major competitor had a pretty good quarter that was driven by enterprise. I think it grew 18% quarter-over-quarter. So, just wondering if you can provide more detail on what's going on with the enterprises specifically? Or what happened in the quarter and what do we expect for the rest of the year?

Yes, the -- I would say the Network Instruments or the enterprise side was not as strong this past quarter as we had anticipated it. So that was part of being lower in our range than we expected in our guidance range. I think the enterprise business remains healthy. I think we have a very good solution there. We did see some aggressive -- some aggression from some of our competitors out there in the market. But I think it's probably a timing issue.

We've also started to integrate further our PacketPortal capabilities with the Network Instruments, and I think that's also going to benefit us going forward. So, I think the market is still strong. We weren't as healthy as anticipated this last quarter in that business. I think we'll see that come back over the next few quarters.

Great. I'll jump out of line. Thank you.

And your last question is a follow-up question from the line of Amitabh Passi with UBS. Please proceed.

Thanks for squeezing me back in. Tom, just a couple of quick ones for you on NE and SE. I think at your Analyst Day, you spoke about SE potentially getting to breakeven by your fiscal fourth quarter. Is that still the goal? And for NE, could you actually get back to the 20% level you saw last year?

And then, Rex, just a couple of modeling questions for you. What should we expect for taxes and other expense as well as OpEx for next quarter?

Okay, well, I'll do the NE/SE and then Rex, do you want to do tax? So, for NE, actually, Amitabh, we did -- for Q2, we did hit 20.2% operating margin. So that was right towards the top end of the range we gave at Analyst Day of 17% to 21%. Our revenue was pretty much right on the $165 million -- slightly over -- it was $165.5 million.

So, I think that's very doable. We did, in Q1, hit profitability in SE, so we were really quite far ahead. This past quarter, we were at negative 5.5, better than what we had anticipated. I think the -- we said we'd be at least 8 percentage points negative. So we were much better there.

Again, I think part of the complexity for a while is going to be how we allocate the sales expenses between NE and SE. And it's -- when you have heavier bookings for that particular quarter in either NE or SE, they will attract a higher part of those operating expenses. So, it's going to be a little bit lumpy like that. But I think we are on track or even early on the SE profitability, if you take away the lumpiness of the bookings.

I think that was shown in Q1, where we were at 48.2% -- or $48.2 million revenue, 69.1% gross margin, and we hit 1.7% profit. So, I think it's doable.

And then the assumptions on tax and operating expenses for the interest, taxes and other, I would use $6 million. And then for OpEx, it's going to be between $173 million and $175 million.

Okay, thank you.

And there are no additional questions in queue at this time. I would now like to turn the call over to Bill Ong for closing remarks.

Thank you, Alex. We will be participating in a number of investor conferences and events this quarter, as listed on our supplemental earnings slide deck posted on the Company's website. This concludes our earnings call for today. Thank you, everyone.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.