Viavi Solutions Inc. (VIAV) Q3 2008 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the JDSU Fiscal 2008 Third Quarter Earnings Conference Call. My name is Karen and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. [Operator Instructions]. I would now like to turn the presentation over to your host for today's call Miss. Michelle Levine, Director of Investor Relations. Please proceed.

Thank you operator and welcome to the JDSU fiscal 2008 third quarter financial results conference call. Joining me on the calls today are Kevin Kennedy, Chief Executive Officer and Dave Vellequette, Chief Financial Officer. I would like to remind you that this call is likely to include forward-looking statements about the future financial performance of the Company. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from management's current expectation. We encourage you to look at the Company's most recent filings with the SEC, particularly the risk factor section of our report on Form 10-Q filed, February 7, 2008. The forward-looking statements including guidance provided during this call are valid only as of today's date April 30th, 2008 and JDSU undertakes no obligation to update these statements as we move through the quarter. Please note that all numbers are non-GAAP, unless otherwise stated. A detailed reconciliation of these non-GAAP results to our GAAP results, as well as a discussion of their usefulness and limitation is included in today's news release, announcing our results available on our website at www.jdsu.com. Finally, and as a reminder, this call is being recorded and will be available for replay in the Investor portion of our website, at www.jdsu.com/investors. I would now like turn the call over to Kevin.

Thanks, Michelle. Good afternoon. JDSU's fiscal Q3 results reflect continued year-over-year momentum in proving our financial model as well as evidence of the need for further work ahead to operate within the desired sustainable long-term financial targets. The summary of JDSU's fiscal third quarter 2008 non-GAAP results are as follows. Revenues for fiscal Q3 were $384.2 million and that's the lower end of our stated guidance range, mainly due to the impact of several large customers slowing purchases in the Test & Measurement segment. The decline in revenue consequently resulted in operating margins at the low end of our guidance at 4.1%. On a sequential basis the seasonal decline in revenue was 3.8% for the company. On a year-over-year basis, revenues for fiscal Q3 2008 grew 6.2%, when compared to fiscal Q3 2007. Year-to-date fiscal 2008 revenues of $1.14 billion have grown 9% compared to the same period in fiscal 2007. Test & Measurement represented 44% of total revenue, Optical Communications 35%, Advanced Optical Technologies 15% and Laser 6%. Gross margins for the quarter were 42.6%, down from 46.2% in fiscal Q2 and up from 37.6% in fiscal Q3 'O7. The sequential decline is mainly due to the mix between the segment and the product mix within the segment. Year-over-year all four businesses improved their gross margins. Operating margins for the quarter of 4.1% was up from less than 1% for the year ago period. All four business segments showed positive operating margins this quarter. JDSU's adjusted EBITDA as a percentage of revenue was 8.4%, compared to 4.9% for the year ago period. The company delivered non-GAAP net earnings per share of $0.14 for fiscal Q3 'O8, more than double that in fiscal Q3 'O7 at $0.06. The company was free cash flow positive for the fifth quarter in a row at approximately $31 million or slightly more than 8% of revenue. Balance sheet metrics continued to improve as reflected in our inventory levels and debt balance. Booked to bill for the company as a whole was greater than one, three out of four business segments had a booked to bill at one or greater. Slightly less than 50% of total revenues came from North America, showing strong geographic diversity. To summarize, year-over-year results evidence execution against the plan to achieve the previously discussed long-term financial model. The efficacy of the model was substantiated in the fiscal Q2, where we saw some over achievements due to seasonality, In fiscal Q3, we continue to make progress towards realizing our long-term model goals on a sustainable basis. Moving to results. Before discussing the segment report, I would like to reiterate that our strategy continues to be to execute as a company comprised of a portfolio of businesses with a focus on optical and broadband innovation. We embrace this view, such that a composite company will be better able to navigate fluctuations in any one constituent business. Today's results provide continued evidence in support of the strategy. In fiscal Q3, we continue to see favorable end market indicators for broadband services and network build out and we believe broadband capacity will continue to expand as higher data rates are delivered to the access edge, a company by video applications and high definitions network requirement. Now I'll provide more detail on the business segment. First, Communications Test & Measurement. Our third quarter fiscal 2008 Test & Measurement revenue, including revenue from the Westover Scientific acquisition was $169.3 million, down 14% sequentially as compared to the seasonally strong fiscal Q2. Book-to-bill was greater than one for the quarter. year-over-year revenues were relatively flat with only 1.1% growth. Revenues and bookings in fiscal Q3 were lower than the expected as we saw a small number of North America and European service providers in wireline and cable market delay certain product purchases to future quarters. Over the past two years the deal size in Test & Measurement has grown. Historically, the centriod of deal size was measured in the range of several hundred thousand dollars per deal, accompanied by several million dollar deals. in the most recent quarter, we pursued many deals in the single-digit million dollar range. While the advent of this trend, that is the increase in deal size generally in a number of larger deals, more specifically was a positive to the business potential and the positioning of JDSU's product portfolio. It can cause some revenue fluctuations if large projects are pushed to future quarters. This occurred in fiscal Q3 to four deals, each over a million dollar in size that we had expected to book and ship during the quarter. With this said overall Test & Measurement revenues in fiscal Q3 associated with the largest North America service providers remain solid as combined total revenues from these customers were flat from the fiscal Q2 level, although North America revenues in total were down sequentially given seasonality in ordering delays. Gross margins for the segment were again within our long-term range of 57% to 61%, but below the prior quarter's level due to lower volumes and product mix. Comparing year-to-date fiscal 2008 geographic diversity with year-to-date fiscal 2007, we note the following results and trends for our products. North America has declined by approximately by 10%. We believe a majority of this decline is due to the aggressive investments by cable last year. We do see wireline expanding, although we believe spending will continue to be focused on network build out based projects. We have seen strength in Latin America, where Greenfield build outs are increasing with year-to-date growth of over 100%. Europe has shown strength, growing at almost 30% year-to-date compared with the same period in fiscal 2007. Network build outs remain steady. Asia increased by 29% where we are seeing particular strength in India. Our CommTest business is broken down to three principal product business units. Each units product portfolio serves a different stage of network testing, enabling us to manage the ebbs and flow of our carrier build ups. First, lab and production, which supplies test equipment for development, system verification and production. On a year-over-year basis, this unit had the strongest performance of the three units. A significant driver of this growth is the transition to 40 gig, Net field services, which supplies both telecom and cable instruments to install and troubleshoot broadband triple play services. This is the largest unit in the segment in terms of revenue. Year-over-year this unit experienced growth as service providers continue to built out the access layer and offer to fiber to the home or FTTH as well as new services. We expect demand from field service test products to generally grow. Finally service assurance solutions, which ensure quality of services by providing end to end network test and monitoring, revenues declined here year-over-year. Service assurance as usually is the last type of testing that is performed once the network is built out and services and applications are made available. Therefore, we would expect this unit lag in growth as service providers are currently at the early stages of services deployment usage. For example, low single-digit percentages of U.S households are currently using high definition quality broadband delivered services. Highlight of the quarter include first, on the innovation front, we recently announced the latest generation of T-BERD optical tester. This is a multi-service application module. This device is a compact 10-gig multi-function tester for the installation of maintenance of carrier Ethernet and IP services. High bandwidth triple play services are driving new test needs and are the main cause of the rise of 10-gig circuits and the need for the new handheld Metro core testers. In February we announced two T-BERD MTSA 1000 editions. The industry's first field solution to combine for 4 gig and 10 gig fiber channel test support, with the traditional transfer test capability such us SONET/SDH and Ethernet OTM. In March, we introduced the industry's first 30 megahertz far end device for the UltraFed to its leading portfolio of triple play service testers, used to turn out and troubleshoot 30 megahertz VDSL-2, typically the last small technology in FTGX networks. On the acquisition front, on January 7th we announced the acquisition of Westover Scientific which provides fiber-optic inspection and cleaning solutions. This technology compliments JDSU's existing Fiber, Field And Lab, and Production test portfolio. Moving on to the CommTest business model, we believe that the annual growth rate for this market will continue to be in the 6% to 12% long-term range as carriers continue to invest in their networks to offer regional broadcast, video and high definitions services. Our efforts to improve the business model for CommTest are focused on reducing the fixed cost structure, given the seasonal nature of the business as well as improving cash flows. We remain focused on delivering gross margins for this segment from the 57% and 61% range on a sustainable basis at current revenue levels. We will continue to take action to reduce our cost structure and improve our gross margins which should result in improved operating margins. These actions include the following. First, product mix. We are improving the overall product mix as the percentage of products we resale fully reduces and the higher gross margins of JDSU's developed products increase. Second, we believe further gross margin improvements will be achieved as we reduce our fixed cost structure in manufacturing and finally, we will create a greater emphasis on hubbing our shared services and dispersed resources in concert with our RF [ph] upgrade. This investment will also focus on improving predictability. Next, Optical Communications, Optical Communications total revenue was $136.1 million in the third fiscal quarter compared to revenue of $129.7 million in the second quarter of fiscal 2008, representing almost a 5% sequential growth and a 10% year-over-year growth. All three business units in our Optical Communications segment saw a sequential growth. In general, we saw strength in telecom and some softness in enterprise or datacom. We saw booking strength in fiscal Q3 as total bookings increased from the second quarter level. This is the fourth consecutive quarter of increased bookings. Gross margins were negatively affected by product mix as relates to the following. First, the Optical Communications market continues to be very competitive. During this quarter, we saw our ASPs decline above our historical range of 2% to 4% per quarter due to shipments associated with specific customer orders, several specific customer orders. We expect that the sequential ASP reductions for fiscal Q4 will return to our historical range. Second, as a result of increased demand from customers we experienced supply constraints from several of our vendors as well as capacity constraints in our production capability. Third, a decrease of the mix of products manufactured in our own internal factories had negative impact on gross margins. As a result, overhead under absorption, incurred in several products lines which historically enjoyed very strong gross margins. With respect to our business units, we continue to have two business units with gross margins within our near term targeted range of 25% to 30%. The remaining business unit which operates out of the target range had improved gross margins for the third consecutive quarter. For the second quarter in a row, operating margins were positive at 4.6%. Although, down from the prior quarter due to higher ASP decline, product mix and slightly higher operating expenses. With regards to geographic mix, we saw a sequential growth in all three geographies. Additionally, over the last three quarters our revenue from network equipment manufacturers in Asia Pac has grown and continues to become a larger percentage of our overall business. The customer diversity remained about the same as our top 10 customers represented over 60% of the business. I will now provide additional commentary on the segments performance and strategy under three strategic principles of this group that is technology leadership, cost leadership and functional integration. First, technology leadership. For transport JDSU holds the market leadership position in the ROADM technology. We had a new milestone in Q3 as we shipped over 2500 ROADMs during the quarter, representing approximately 3% sequential growth. This is the highest volume shipped since as we began shipping the product. All ROADMs shipments have now surpassed over 20,000 units. Demand for ROADMs continues to exceed supply as bookings of ROADMs grew sequentially. However, capacity was put into place to be able to double our wavelength, switching ROADMs shipments by the end of the summer. We are starting to see a wider acceptance of ROADM technology outside of North America. In Q3, we begin shipping ROADMs for use in a European network. We see this as a favorable indication for this technology and positive for our opportunity in this market. Our focus on technology leadership was visible this quarter. During fiscal Q3 we announced the Mini WSS, the Nano and the Superblade. I will discuss these in more detail shortly. From the transmission front, our next generation 8 gig and 10 gig, SFP Plus products continue to gain momentum. In fiscal Q2 we saw a strong customer acceptance and traction. We over achieved our expected total shipments of these products at over 100,000 units in fiscal Q3. Products that saw a healthy double-digit sequential growth are as follows.tunables, datacom components driven by the growth of our 10 gig Tosa/Rosa, transceivers and transponders also in the 10 gig market. In addition, customer interest in our tunable XFP PIC product remains strong. With regard's to 100 gig at OFC, this past February we performed a live demonstration of 100 gigabit per second data rate connectivity using parallel optics. Finally Photonics we saw healthy double-digit growth for our undersea products where we are seeing more build outs taking place. We expect this area to continue to be a growing market for JDSU for some period. In summary, for technology leadership demand of our optical components continues to trend upward. Orders in telecom segment are particularly strong. At the close of fiscal Q2 JDSU maintains the number one market position for eight consecutive years according to Ovum-RHK. In fiscal Q3 we have experienced continued momentum in growth especially in ROADMs and optical amplifiers and transport, tunables and SFP Plus and VCSELs in the transmission area and undersea in photonics. We continue to believe that the annual long-term growth potential for this market continues to be in the 5% or 15% range fuelled by telecoms move to DWGM meshed architectures. Second strategic principal for Optical Communications is cost leadership. JDSU is implementing our own lean manufacturing initiatives which are designed to improve our strategic interlock with our customers. The result is a more integrated partnership with our customers over time. For JDSU our lean manufacturing initiatives have begun to and are expected to continue to result in improved production cycles, lower manufacturing overhead and labor, variance reductions, inventory reductions and build material localization. This quarter, inventory reductions continue to assist in year-over-year cash flow improvement. Finally, on functional integration, we recently introduced a number of our leading products at OFC this past February, including the new Superblade and the Nano WSS technology. Earlier in the quarter, we announced the availability of the Mini WSS technology. Increased use of voice, video and data applications among consumers has placed strains on network bandwidth, pushing the need for Agile Optical technology all the way from the core infrastructure to the outer edge of the networks. JDSU is at the forefront of developing technology to support these trends. The AON super transport blade is a single slot blade solution that delivers all major functions required for optical network transport. The new platform will integrate major transport functions that use to require multiple blade onto a single blade, dramatically reducing size, cost and parallel requirements for network equipment manufacturers and service providers. We also introduced the Agile Optical Network embedded operating system. This telecom grade application framework supports all of the applicable functions within JDSU's new AON Superblade allowing it to seamlessly integrate with the network equipment manufacturers and service providers networks. JDSU invented the first nano wave length selectable switch WSS technology. The Nano WSS includes technology extracted from the Mini WSS and will enable JDSU to develop denser and more highly integrated optical solution such as the AON Superblade. Mini WSS is half the size of a typical WSS offering. The Mini WSS is designed to provide a compact low cost solution to traffic management in the metro and access areas of DWDM networks. So for customers have demonstrated enthusiasm for these new products and as we have already been awarded some design wins. We are very encouraged by this customer traction. R&D spend will increase somewhat in this segment in order to continue to invest in the business and to respond to customer request for design proposals. We expect that these three strategic initiatives of technology leadership, cost leadership and functional integration when fully implemented will enable optical communications business to achieve and sustain the following business my target near term 25% to 30% gross for margin and 5% to 15% operating income. Moving on to our advanced optical technology segment on February 13 we announced the close of the acquisition of American Bank Note Holographics, ALT financial results includes seven weeks of ABNH revenue. Fiscal Q3 revenue for ALT was approximately $56 million representing growth of 12% compared to the second quarter fiscal 2008 and up 22% compared to the third quarter of 2007 excluding the revenue from ABNH year-over-year growth was 12%. Currency market has provided strength for this business driven by pre-Olympic currency in China, general inflationary trend convergence of new denominations and redesign activity. As we have noted before we expect the trend of this business to have some levels of surges in it. This quarter the ALT team generated operating income of approximately 36.6%. Favorable mix higher volumes and improved factory absorptions contributed to the healthy margin. Gross margins continued to be strong as we continue to execute well on this business. Favorable with mix as well as revenue from ABNH contributed to this performance. The inauguration of ABNH proceeding and we are experiencing some early customer acceptance of an overall solution strategy of technology from ABNH and JDSU's flux products. In Commercial lasers, third quarter fiscal 2008 revenue was $23 million, second quarter in a row a sequential increase and up 3.6% from the second fiscal quarter of fiscal 2008 and down 6.5% compared with the third quarter of fiscal 2007. Business continues to be impacted by a lower demand from the semiconductor manufacturing equipment customers and therefore the book to build for the quarter was less than one. Once again we saw a significant improvement in gross margins quarter-over-quarter. The fiscal Q3 was improved and it increased productivity and lower direct materials cost. ]: Contribution margin was positive in fiscal Q3 due to improvements in gross margin. Our commercial laser business serves a relatively small number of customers so quarterly performance is impacted by spending cycles further more semiconductor industry activity has declined which we believe to be temporary. On the other hand our engagements with bio medical and material processing customers continue to be strong and growing. Also during the quarter we initiated key partnership in Japan and China which see expect to advance our international efforts. Focusing on our later platforms gross margin expansion in it initiatives reiterate the following. We believe gross margins upside will come from an increasing solid state laser volumes in counter with the manufacturing initiatives. Now focused on increasing productivity reducing scarp, driving inventory turns up and a supply chain costs down. We believe these initiatives once fully implemented will result in a 10% to 12% gross margin improvement. Other corporate activities. First, acquisitions during fiscal Q3 we closed two acquisition a January 7, Westover Scientific acquisition was closed and on February the acquisition of ABNH was closed. Both companies had an EBITA divided revenue that is greater than 15%. Second. Relative to the class action law suit, final judgment entered by judge in favor of JDSU late March. We expect that this matter is therefore concluded. And last, during the quarter we added Marti Menacho to the executive management team as JDSU's Chief Information Officer. Marti is leading our multi quarter upgrade to a more [indiscernible]. In summary we set out at the beginning of fiscal 2008 with the intention to advance JDSU's business model. We expect that each business within the portfolio to continue to improve its operating results. Three quarters into this fiscal year we have moved towards achieving our model of sustainable gross margins in the range of 43% to 47% and operating margins at above 10%. The efficacy of the model was substantial last quarter. year-over-year financial performance improvements for the first three quarters of the fiscal year evidenced in the structural improvement in the business model. With our continue focus on business follow advances we remain confident of exiting the calendar year at more sustainable levels. There is a strong focus on gross margin expansion and predictability in all operating cycles. At the corporate level we are simultaneously investing in critical operational systems to better manage utilization, the seasonality complexity reduction. At the same time we will continue to seek opportunities to strategically expand our product portfolio for partnerships and acquisition. In closing I would like to thank JDSU employees who have continued has advanced the company's business model and with that I'll hand the call over to Dave.

Thank you Kevin. Before I start please note that all numbers are non-GAAP unless I state otherwise. Third quarter revenue of $384.2 million which included revenue from our Westover Scientific and ABNH acquisitions was down 3.8% from our seasonally strong second quarter and at the lower end of our stated range, primarily due to order push outs from several of our test to measurement customers. On a year-over-year basis, third quarter revenue grew 6.2% when compared to the third quarter of fiscal 2007, this growth was driven by the optical communication and ALT segments. On a year-to-date basis, fiscal 2008 revenues of $1.14 billion or 9% when compared to the same nine month period for fiscal 2007. This revenue growth was primarily in the context in ALT segment. Third quarter gross profits of $163.5 million or 42.6% of revenue was down from the previous quarters seasonally high gross margin of 46.3% in up from the Q3 2007 gross margin of 37.6%. On a year-over-year basis, gross margin improved in each segment. Operating expense for the quarter of 147.6 million or 38.4% of revenue including expenses associated with the acquisitions of ABNH and Westover scientific in temporary expenses associated with both our change management initiatives in our ERP upgrade activities. These temporary costs in total represented approximately. Our operating income for the quarter increased to $15.9 million or 4.1% of revenue versus fiscal Q3 2007 operating income of $3.3 million with less than 1% of revenue. Net income for the quarter increased to $31.2 million of $0.14 per share when compared to fiscal Q3 2007 net income of $12.3 million of $0.06 per share. Net income for the quarter was favorably impacted by the release at the international [indiscernible]. Adjusted EBITDA for the third quarter was $32.3 million or 8.4% of revenue, which compares Adjusted EBITDA of $17.7 million for 4.9% of revenue in the prior year. A detailed reconciliation of our non-GAAP results to our GAAP result is available on today's press release. Our third quarter non-GAAP result exclude among other items amortization required technology and intangibly of $20.5 million and $11,3 million chare with aim to stop these compensation, including these items our third quarter GAAP net loss was $6.2 million where loss of $0.03 per share which compares to our prior year net loss $14,2 million where loss of $0.07 per share moving to the segments in the current segment third quarter revenue of $169.3 million was down 14.3% from the seasonal strong December quarter and at the lower end of our expected range remembering you to order and delivery push ups in several customers, on year-over-year basis quarterly revenues increased 1% due to acquisition related revenue the contest operating profit decreased to $22.8 million or 13.5% revenue versus $48.5 million or 24.6% of revenue in the prior quarter primarily due to lower revenue lower gross margins and higher operating expenses. Higher operating expenses were associated with Westover acquisition, foreign currency impact and temporary cost associated with change management initiatives. In the CommTest segment we are engaging in a number of change management initiatives focused on our selling structure and our business operations. These initiatives were requiring temporary investments and we expect majority of these initiatives will be completed by the end of the calendar year. In the optical communication segment revenue for the quarter of $136.1 million was up 4.9% when compared to the prior quarter in each of the three business units experience sequential revenue growth. On a year-over-year basis the quarterly optical communications revenue grew 9.6%. The optical communications quarterly operating profit of $6.3 million or 4.6% of revenue were down from the prior quarter's operating profit of $9.9 million due to the product mix, targeted pricing actions with several customers, supply constrain and the fact that the previous quarter's operating profit benefited by more than $1 million from customers funded development. On a year-over-year basis the third quarter operating profit improved by $10 million when compare to the prior year operating loss of $3.7 million, reflecting the impact of the cost reduction initiative that was implemented over the last year. We believe that we have a gross margin improvement opportunity in the high single digit percentages that will be realized as we execute against our Lean manufacturing initiatives and as we increase utilization of our factory. Our ALT segment quarterly revenue was $55.8 million up 12% from the prior quarter. ALT revenue growth was primarily driven from the ABNH acquisition which close in the middle of February. On a year-over-year basis the quarterly revenue growth was 22.4% of which organic growth was 11.6%. ALT operating profit for the quarter was $20.4 million or 36.6% revenue. We expect that the operating profits ALT to fluctuate by 1% to 3% points as demand tends to have a level of absurd surges in this segment. In our commercial lasers business third quarter revenue of $23 million increased 3.6% from the prior quarter. Laser's had an operating profit of $900,000 in improvements from last quarter operating loss of $300,000 primarily due to improved gross margins. We believe that we have a double digit gross margin improvement opportunity in this segment as we increase our solid state Laser volumes and concept with implementing Lean manufacturing processes. Now looking at revenue by region. During the year, the geographical mix of our revenues have remained balanced. In the third quarter of fiscal 2008 the Americas contributed 52% of revenues, EMEA 29% and Asia Pacific 19%. Geographic diversity remains relatively unchanged compared to the prior quarter. Moving to the balance sheet, for the fifth quarter in a row the company was free cash flow positive, generating $31 million. Our net cash balance was approximately $422 million and total cash investments succeeded $1 billion. Head count as of March 29 2008 was 6745 up from 6509 last quarter. The increase in head counts primarily result of the Westover Scientific and ABNH acquisition. Well our markets are generally favorable, we remain focus on improving our operating model on a sustainable basis. Our long term operating model targets had a revenue level of 400 million per quarter are gross margins of 43% to 47%, operating expense of 35% or less in an operating margin of 10% or greater. Each of our business segments is engaged in improving their gross margins with our largest opportunity as a percentage of revenue in the optical communications and the commercial laser businesses. We expect that these improvement will reduce the impact of segment mix on our operating margins. We are also focused on reducing our cost structure and are currently investing in change management activities in upgrading our ERP system. These activities are designed to reduce the cost of our manufacturing operations and our SG&A. The resulting savings from these activity along with the completion of the temporary investments required to identify and migrate to these more efficient cost model is expected to reduce our quarterly operating expenses by the end of the calendar year by approximately 2% of revenue and improve our gross margin. Successful execution of these activities we believe will enable us to sustainably execute our long term operating model. Finally we have been notified today that we have received final court approval with regards to security litigation in connection with our sale of a subsidiary in 2001. We expect to realize in the fourth quarter a GAAP only non-operating gain of more than $50 million. Now looking forward some points to consider as you think about our financial performance over the coming quarters visibility across our business is not changed for the count as business continues to be a shortly timed working shift business. As we prepare the CommTest business for further growth in scale we have initiated some change management activities which could cause some risk during the period of transition. The ALT segment has benefited from incremental demand over the past several quarters. This segment head and surges in demand. Optical communications products, due to increasing demand experience supplying capacity constraints in the last quarter and may continue to do so. Total operating expenses for the fourth quarter expected to increase by approximately 1% of revenue reflecting a full quarter's expense for the ABNH acquisition, investments in optical communications R&D and a full quarter spend on the ERP upgrade project. Finally, we expect our quarterly tax provision to range between $3 million and $5 million. Taking into consideration the factors above based on our current visibility, we expect fourth quarter revenue to be in the range of $381 million to $403 million and non-GAAP operating margin to be in the 2% to 5% range.

We are ready to begin the Q&A. Question And Answer

[Operator Instructions]. And your first question comes from the line of Ehud Gelblum with JP Morgan. Please proceed.

Hi, how are you. Thank you. Can you hear me?

Yes hello.

Hi, Ehud.

Hey, great thanks. Couple of questions. First of all couple of housekeeping and then to some more things about some of serious issues going on. Did tax issue, Dave you said there was a release of the European provision. How large was that, how much did that impact if we would have backed that out?

Yes, Ehud, it wasn't European. I didn't say European I said international and it was basically a statue of limitations as far as how far the legal authority could go back from an audit and the benefit was about $7 million.

Okay. And that obviously so that's one time in nature and that will continue from there.

That's correct.

Okay on ABNH given the information you gave about growth in ALT would have been 12% without it. We are coming up with that ABNH was little less than $5 million this quarter. Is that that right now for some in run rate we should be expecting going forward?

That is the correct math remember we closed the deal in the middle of February, it was a public company. And so it was running I believe slightly over $8 million per quarter level historically. Well that's reference I give you.

Okay so the 5 million is consistent with 8 million if you take in the gap of timing or where there some loss in the acquisition.

Its reasonable relationship.

Okay. And then with the operating margin on that business any higher than your standard ALT?

No.

Okay, appreciate it. Another little more strategic question just understand a little bit more about what happened in customers [ph] measurement with respect to the I guess push outs [indiscernible]. At what point did the ...if you can comment a little bit on the linearity in the quarter and at what point you realize this much as for happening and you mentioned that you had generally seen more $100,000 plus deals some million dollar plus deals and now you're seeing more million dollar plus. Does that mean given that the total revenue isn't going up right now sequentially, does that mean you have fewer customers than you had before because...and fewer and larger customers?

Let me give you sort of a background. The first that note Ehud is when we brought the contest team it was a $90 to $100 million core of business. And I think the average deal size was between $102,000 $100,000 and you may have $1 million or $2 million or $3 million orders. Of course in general we have about doubled the size of the business in the two and half years that we have had it and what we have noticed is that the percentage of and Dave will probably correct me if will take a look Dave give you the numbers. But we monitor two things number of deals over $0.5 million have actually changed quite dramatically just in the nine months and in this particular quarter the number of deals over $1 million will probably be measured in tens of deals as opposed to if you go back to two and half years ago 1 or 2. So what we are seeing is that as we have grown our test of measurement is actually becoming more relevant deal sizes are getting bigger. All those are very good things. The other side of that however is that larger deals usually have more signoffs they take longer to get across the goal line and of course in this particular quarter as we have been very clear budgets get released late in the quarter and so it is very backend loaded. Basically its either going to happen to you in March and then you are got to figure out if you can ship it or not. So on one hand I think it's a growing pain and a positive that we do have larger deals that's been happening to us gradually but with I would say in the last nine months this is the toughest quarter for visibility it is about budgets being released and it is all about what actually falls in the month of March. Dave do you have some numbers on at $0.50 million mark what's changed.

Yes, what we look back three quarters we are doing less than 20% our deals were $0.50 million or larger and in the most recent quarter we have slightly over 30% of our CommTest deals greater than $500,000.

So at a strategic level, Ehud, I think this is a good thing on the practical execution side of it. It makes the quarters more volatile if you will especially if you have budgets that only get release two-thirds away into the quarter.

Yes, and the thing that slipped out, what point did you realize that it slipped out will you give any indication as to why or whether it be recovered next quarter?

I think you know if I took the big deals in general which I'll argue as on the many attempts we probably closed over two-thirds of what we thought we were chasing. In the cases of the ones that impact revenues for the quarter. We had one that was signed off in the late weeks of March. We signed it... it was going through the signoff at one level. The final signature cut that level and we were told they will take ship and floor in this particular quarter was reduced yet again. So that's just one example of the dynamic that occurs in the last weeks of the quarter.

Thank you very much.

Next question please?

Your next question comes from the line of Paras Bhargava with BMO. Please proceed.

Good afternoon gentlemen. On the CommTest side are you happy with the capacity that your at, have you done any... picking up that you might have called some activities and maybe reduced the size of the workforce. I am just wondering you know first of all is that going on and is that just sort of normal stuff or is there something structural that you are trying to change?

Yes, Paras I think at from a headcount level and number one we think this business is going to continue to grow in scale and become $1 billion business and will grow accordingly. I would say that as I mentioned to you before the... where the headcount exist was probably not where I think the headcount needs to be in the future we have probably more G&A dispersed in regional offices then as required. We probably have different choices to make in terms of what our manufacturing structure looks like and where R&D is located and so forth and so on. So I think we are making, we are going through a set of change management decisions that puts and concentrates more and more of our account in the place for us that's go in the future. But it's not dissatisfaction with the structure per say.

And it's not related to the potential slow down because when the kind of growth you had that's not in the last year or so. It's not hard to imagine that you might have added more people then they be needed and now you are pulling back a little bit?

I'd say most of our structural changes are predicated upon where we think the headcount needs to be... of course a lot of this you have to get to systems put in place. I will say that we are actually and I hope I have been explicit by this. When I look at the size or the size of the funnel or opportunity that we are pursuing and we are happy that we are pursuing that... the downside is that we didn't bring in as much of that funnel into this quarter as we had hoped.

Well, it's going to happen any quarter. But I am just trying to sense of this structural changes now on the cable side or cable revenues actually down in that cable customer segment year-over-year in this quarter. Would you measure it that way?

We, I don't know the answer to that on the call... I am going to see if Dave does.

Yeah, they were... if you recall about a year-ago there is cable customers were in a investment mode in and they have been reducing their level of investment over the last four quarters and so we hit a constant level. But compared to a year ago its at a different level of investment.

So, when you are talking about the longer terms 6% to 12% growth rate which sounds reasonable for that market that would assume cable customers would give back a little more or would they be at this level?

I think it looks that all the puts and takes of growth in Asia, Latin Americas and its just our belief here we have products what we think each product growth rate is going to deliver us.

Okay and then one housekeeping. What was the share count at the end of the quarter it looks like ABH happened a little bit later and average share count was little low I am just wondering what the average share count would be next quarter?

The average share count will go about 5 million to 6 million shares, because you are right because ABH is portions go the quarter.

Okay, Thanks a lot gentlemen.

Thanks Paras.

And your next question comes from the line of Cobb Sadler with Deutsche Bank. Please proceed.

Thanks a lot I have a question on you talked about pricing with the last visit may be little more aggressive. It has been in the past was that you kind of talked about it like might be one time in nature was that primarily on durable laser side, or was it kind of cross the board?

What we have said in the prepared comments Cobb is it was customer related. I would say that tunable is one of the areas that will generally has higher ASP tension. Whether I can specifically correlate those two statements for you right now I don't have knowledge on the call. But for us the basically delivered by 2 customers or several customers you would also be correct that it is aggressive in the tunable space as well.

Okay, and on just overall revenue growth in the quarter was legacy can you tell us the legacy type components I mean are you seeing some tightness even there or was it really just your high growth items the kind of for the quarter up 5%.

I don't think we had an unusual circumstances in terms of legacy confluence and they somewhat of a legacy components we saw slower growth in. Which is one of the reasons which I mentioned and some of our internal factories or higher overhead under absorption. But I... where the market is higher we are there is a lot of competitions on the new areas to tunable is certain one of them.

Okay and I think you talked about extending ROADM capacity and if my guess is that you get to carry this to deploy via an OEM your ROADM late this year probably early next year if you... what kind of impact do you think that I have on the overall ROADM business and what's your current market share?

I'll leave to others to... to let us what our market share is I would say that there was point in time when we felt that we would drop below 50% just because more people will get in to the market I am less fearful of that today than I was and you are correct that the nature of what we have just experienced is one or two network equipment manufacturers coming in and asking us to very quickly increase volumes like 100% in a very short period of time. So that's why the supply constraints is more about opportunity than it is any other challenge.

And last question...

Next question please.

Okay thanks.

And your next question comes from the line of Ajit Pai with Thomas Weisel and Partners. Please proceed.

Yes, good afternoon.

Hi.

Just few quick questions the first one is, how would you prioritize the uses of cash over the next twelve months in terms of further investments potential buybacks and acquisitions?

Yes, the board reviews our priority scheme each quarter Ajit I think we've mentioned that before that the top priority although has been a dwindling need has been to support restructuring and something that's new but is high priority is the investments we are making at Oracle and infrastructure improvements. So that... that has not been something that what historically on our priority scheme, but it has come up as we entered this calendar year. After that we've tended to be focused on combination of M&A for advancing the business model and paying back some of the debts That we didn't have a single impulse function we want latter that in over time. We have continue to ask the questions about buyback or other and ultimately it's a debate on what we think is a best use of cash at any point time, so I can't tell you where the board will move the needle next but I can't tell you it's a quarterly debate.

But the big investment in order to have behind... so what is the quarterly run rate right now as far as that grows and great to see it going through for the next four quarter?

The Oracle investment is not very behind thus we actually just started and Dave maybe you can provide some more color on that.

Yes, in the last call we talked about the investment being a $25 million to $35 million investment that all happens throughout the calendar quarter we started it, we just started in the early February timeframe and as I noted on the call that this quarter was in fact have a full quarter impact from that investment and will be using our cash to buy whatever equipment we need in consulting services that you some of those of which way cap rise etcetera. So its probably its collide to full run rate level in this quarter.

Got it and then we need just [indiscernible] optical communications component s business., right now you have talked about in expecting to get some benefits over them the costs side but from a pricing environment I think initially your comments you said that this quarter was down more than it usually has been in skeptically mentioned that to deal with specific customers. What gives you the confidence that is going to change and its kind sort of resume its normal projecting for the rest of this year and beyond?

I think its was probably two or three thing here is just wanted is that we've got about 17 quarters which stayed in the balance of 2% to 4% and so there is a benefit of longevity, longitudinal analysis of numbers. The second is that generally this kind of thing becomes a bit less intensive the market you pick you so well. We're in capacity to discussions you tend that have on those class of products a bit less conversation income pricing. The market continues to will aggressively and as I noted to you we have multiple product lines it had double-digit quarter-on-quarter growth. I think it will be self feeling a bit. We are going to pay attention to every quarter, we've got aggressive costs reduction plans. I think there is a longitudinal view that is long and there is a reality that demand side is favorable especially on the new products. Hope that helps.

Yes, got it, thank you.

And your next question comes from the line of Jeff Evenson with Sanford Bernstein. Please proceed.

Couple of question related to your guidance just wondering if you could give us a little bit o f color on the componenetso0f your interest and other income and how we should think about modeling that over the remainder of the calendar year given what looks like a lower interest environment.

Yes, so the... I look at that as a basically we have it's a spite of 1 million delta quarter-over-quarter other than its item I noted where we expect to have over 50 million come in during the fourth quarter.

And the 1 million delta is from how you model your interest your affected interest rate changing over the year.

Yeah its interest rate.

Okay good thanks now ramekins comments I that about 94% of your revenue for the quarter had a book to build greater than 1 and that in the upcoming quarter you'll receive the full benefits of your recent acquisitions yet your revenue guidance sequentially is minus 1% plus 5% growth and I am wondering if you could just give us a little bit more color on how you got there?

Well Jeff I think you see that we called specifically that lasers had 6% of the revenue of then company and that was the one that had the book to build below 1 so mentioned that in terms of guidance its very simple we don't start with what we think people want ton hear, we start with what we know to be true we do a bottoms up roll up Dave and I take a look at how the teams are executing what other risk factors exists and then we come up with a number so I think if we came in to the mid range of that we'd actually be guiding up, but fundamentally we think we've captured what we think the down side risk is at the low end and what the path and is possible they other.

I think that's really the does it. And to the same process we have used for a while so sought you have tell you.

Okay great thanks. Calling yesterday and its mentioned that they had seen some slowdown in the actual deployment of fiber at the home In a couple of places in Europe given that EU has said its final decision date for a competitive access regulations for October have you noticed anything on this and would you expect an uptake after the EU makes its final decision?

Could be I don't think we have seen it as a factor in the line of businesses that we have I will tell you what we have seen Jeff is that our sense of momentum differs by virtue of whether an operator has pretty competitive cash flows of at a moment in time or does so we haven't actually seen a psychological pull back you feel sorry to tell that from the feedback I have provided on the optical comm side but in terms of operators making choices specially if they are more discretionary if they have good cash flows right now they tend to be moving with their build out if they are among some of the ones that have lesser cash flows they are more cautionary with how they spend the money in the quarter. Hope that helps?

It does thank you.

Next question please.

Your next question comes from the line Todd Koffman with Raymond James. Please proceed.

Thank you in response to a earlier question with regard to the slowdown or weakness in test of measurement you were talking about these larger size deals and then you said some of the deals were signed and then they got reduced in size but in your prepared comments it sound like you thought some of those larger deals got pushed out or they pushed were they actually just captured at a smaller dollar value.

We had both the one the specific example that I mentioned to you was what was were it was signed off to another level of approval and the size that was reduced and the amount that was approved for shipmen in the quarter was reduced yet again we also have several other deals that would pushed in to this quarter and we're pursuing them so both cases are occurred.

And just allow up on that Test and Measurement business I want to ask are you in a process or are you going to be clear the work force in that business you talked about some transition this year?

We have and will continue to make adjustments in the work force depending upon the needs by function whether we feel like the sales force is sized right as we move from our direct versus in direct models in different regions so we are going to continue but I do not think if some thing that move the needle of the business Dave.

Right I want the other part to also moving some of the shared services support for that group in to more of a regional hubbing model or traditionally that business had the shared services support located in each office. These are the normal steps you take as... as you would go and look for opportunity to reduce the complexity with in the model.

So is this movement to the regional hubbing what you are referring to when you talked about some transitional risks?

There would be one of several yes.

Next question please.

Your next question comes from the line of Paul Bonenfant with Morgan Keegan. Please proceed.

Yes hi thank you Kevin in the past I think you have talked about CommTest having a revenue pattern with a peak nadir within a range of 1.1 to 1.3 and assuming that this quarter has nadir, do you expect some of this or do you have some other expectations for this calendar year?

Yes, several comments. You are right that when we first brought the asset and for the first probably 12 to 15 months 1.1 to 1.2 was the ratio or were the ratios. The nadir actually moved around in terms of which quarter we found it in. More recently and probably just back about two quarters or so though we adjusted that ratio to a range of 1.1 to 1.2 and as far as I can tell you know that ratio is still operative.

Okay and in this quarters results you get any sense in the fourth quarter budget flush resulted in the build up of inventory and any of your customers in CommTest?

No I have no... you know the nature of this business fall is that people wait till they actually need it. They give you a very short period of time to ship it. If you don't ship it they will either buy it from somebody else or they will just put it off for a period of time so not the kind of thing that... it is not a strategic asset that people would stock pile for a long time.

And I understand that there is more in the context of the user to reader spend that you might see typically with a service provider in the fourth quarter going back to something that you said I believe in the prepared remarks I wanted to make sure I heard correctly. Did you say that within optical communication some of your North American customers some of the larger ones were actually flat sequentially suggest that build that the business held up there.

I think the comment that we made within CommTest if you look at the very largest service providers that we so to, the actual revenue that we got from Q2 to Q3 were flat.

Next question please.

And your next question comes from the line of Sam Dubinsky with Oppenheimer company. Please proceed.

Hi guys a couple of quick question on the components side I enterprises weak a question one can just summaries what segment of enterprise that was that a store transceiver or was it a was it broad based, give some more color and then I have a couple of follow ups

I think the storage for sure would be I don't know I would say legacy products more generally Probably would be true I don't how to give you any more insight on that at the moment.

Our and then on telecom side it seems like you guys are capacity constrained, when in lead times starts stretching in this business and I guess what are lee times to that I guess is visibility improving over the coming quarters and we customers start taking inventory

Yes, of our present into build inventory if they can given the products to build that up and secondly say that we the kind of capacity that we have to rebuild is large last year training people in the existing facility that we have as well as Probably more at test station, so it is the kind of thing that begins to come on fairly linearly and end roof summer There will... be a lot of relief month by month.

We need to go to the next question.

And your final question comes from the line of Patrick Calagary [ph] from Piper Jaffray. Please proceed.

Hey guys thanks for squeezing me in there, more question on the component side equivalent you mentioned telecom are strong and data communication may be along the weaker side you talk a little about how you see this moving into the June quarter with respect to I know you have got some capacity constrains but that you see telecom continuing on that stress.

Yes, Patrick [ph] I'll come back to say that most generally we don't have a huge amount of visibility it is certainly measured in upward 6 weeks as an as our lead times have come down I think that's true. I would say that on those things that whether our constraints we have better visibility and I would say the level of engagement between the network equipment manufacturers and supplier such as ourselves on getting our supply chains integrated with each other, has been good. So people are spending time on the right things. So I don't see right now I don't have any indication to suggest that the business is going to make a change, but it is, its been running good for four quarters, is the real message, okay.

There are no additional questions at this time. Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Good day.