Good day ladies and gentlemen, and welcome to the JDSU fiscal 2009 first quarter Earnings Call. My name is Stacey, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Ms. Michelle Levine, Director of Investor Relations. Please proceed.

Thank you Stacey, and welcome to JDSU's fiscal 2009 first quarter financial results conference call. Joining me on the call 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 expectations. We encourage you to look at the company's most recent filings with the SEC, particularly the risk factor sections of our report on Form 10-K filed September 26, 2008. The forward-looking statements include guidance, provided during this call are valid only as of today's date, October 29, 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 through our GAAP results as well as the discussion of their usefulness and limitations 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 from the Investor portion of our website at www.jdsu.com/investor. I would now like to turn the call over to Kevin.

Thank you Michelle, and good afternoon. JDSU's results for fiscal Q1 2009, reflect advancements in our financial model. At the start of the calendar year, we embarked on productivity improvement programs across the business segments. Our fiscal Q1 results begin to evidence the impact of these initiatives and the efficacy of reaching our desired sustainable financial targets. Highlights of JDSU's fiscal first quarter non-GAAP results, include revenue of $380.8 million, at the lower end of our stated guidance range, representing 6.6% year-over-year growth. Test and measurement represented 43% of the total revenue, Optical Communications 37%, advanced optical technologies 14%, and laser is 6%, relatively unchanged from last quarter. Gross margins for the quarter were 43.3%, up from 41.3% in the year-ago period. All four businesses improved their gross margin percentages quarter-over-quarter, as well as year-over-year. We continue to have nearly 55% of our total business with gross margins of over 50%. Operating margins of 5.4% compares to 2.2% operating margins for the year-ago period. All four business segments saw improved operating margins on a year-over-year basis. JDSU's adjusted EBITDA as a percent of revenue was 9.7% compared to 6.6% for the year-ago period. Earnings per share for the quarter was $0.11, up from $0.08 in the year-ago period. And free cash flow, when adjusted for a one-time legal payment was $52.3 million or 13.7% of revenue. This is the seventh quarter in a row, the company has been free cash flow positive. Book-to-bill for the company and each segment was less than one. We continue to have strong geographic diversity, as we continued to grow our revenues from Asia Pacific and EMEA regions. This quarter, less than 45% of total revenues were associated with North America. To summarize, the first quarter results show financial metric improvement as a result of…

Thank you, Kevin. Before I start, please note that all numbers are non-GAAP, unless I state otherwise. First quarter revenue of $380.8 million was down 2.5% in the prior quarter and up 6.6% when compared to the first quarter of fiscal 2008. The fourth quarter decline was driven mainly by the Optical Communications test and measurement segments. First quarter gross profit of $165 million or 43.3% of revenue was up from the first quarter of fiscal 2008 gross margin of 41.3% of revenue and from the previous quarter's gross margin of 40.9% of revenue. The improved margins were due primarily to improve product mix and execution against our lean manufacturing initiatives. Operating expense for the first fiscal quarter of $144.6 million, and 38% of revenue was down from prior quarter's $151.4 million. The lower operating expense reflected a reduction of temporary charges, lower change management costs, favorable foreign exchange rates, and the impact from change management initiatives. As a result of improved gross margins and lower operating expenses, operating income for the quarter was $20.4 million, or 5.4% of revenue, up from first quarter fiscal 2008's operating income of $7.8 million, and up from $8.4 million or 2.2% of revenue in the prior quarter. In fiscal Q1, all business segments reported positive operating margins for the third quarter in a row. First quarter net income was $23.4 million or $0.11 per share. This compares to first quarter fiscal 2008 net income of $18 million or $0.08 per share. Adjusted EBITDA, for the first quarter was $37.1 million or 9.7% of revenue, which compares to adjusted EBITDA of $23.7 million or 6.6% of revenue for the first quarter of fiscal 2008. A detailed reconciliation of our non-GAAP results or GAAP results is available in today's press release. Our first quarter, non-GAAP…

Thank you, Dave. Finally, I want to inform our stockholders that I have resigned from JDSU and will be leaving the company at the end of December. I will be joining another company and will formally announce my position in the coming weeks. I will remain on the JDSU Board of Directors in an active capacity. The Board has initiated a search for my successor, I would like to take this opportunity to thank our stockholders, the Board of Directors, my direct reports, and all of our employees for their support during these last five years. During this period, we have moved the company from declining revenues, negative operating margins, and negative cash flows to one that has leadership market positions, growing operating margins, and positive earnings and positive cash flows. My decision to leave JDSU reflects the convergence of a unique opportunity presenting itself, as well as my confidence in the JDSU leadership team that is in place to execute the initiatives now underway, and they will result in the best-in-class operating metrics. I look forward to continuing to work with the team to my capacity on the Board of Directors. Thank you, and operator, we will now take questions.

(Operator Instructions). Please stand by for your first question. Your first question comes from the line of Subu Subramanian with Sanders Morris. Please proceed.

Thank you. First of all, Kevin, I wanted to say thank you for all of your work and help. Definitely I'll miss you at JDSU, and look forward to working with you in your future capacity. And then, let me follow up with my question. It's really on two things. First, if you look at the revenue guidance for the next quarter, can you talk a little bit about book-to-bill in all the areas that are lower, but is there no part seasonal spiking contest that you expect? How would you expect to be for a mid-point of the range being down a little bit? And then, I know there have been a lot of steps of cost reduction, Dave, so can you lay out at this point what's already in the numbers for OpEx reductions, and what are the other factors to follow?

Hey Subu, let me start, and I'll hand it off to Dave for the second piece. Number one, it's been great working with you. I hope we continue to do so, and thank you for all the great questions and probing. Relative to the guidance and the sense of seasonality that we have observed in the past on the CommTest piece, which is I think precisely what your question is, I think as we went through all of the puts and takes. As I have pointed out, we have had several consecutive quarters of decline in CommTest revenues in North America, and North America field services to be more specific, tends to be the primary impetus behind seasonality. We have judged on the norm that we are unlikely to see a favorable seasonality there. So that's probably the single largest deviation from what would be a historic model. You are secondly correct that, in general, as we have gone through the quarters, we have tended to see a bit more down side risk, and that's why, frankly we actually expanded the range for guidance this quarter. Dave?

Yes. Subu, you asked about what's built into the operating plan right now for the December quarter. We have slight improvements in our operating expenses, and related in the gross margin, depending on where we are in the revenue range. Going forward, we expect over the next four quarters for there to be from the new initiatives that we're talking about, for there to be about a $4 million per quarter benefit that we will get over the next, we should get full realization at about four quarters from now. We'll get parts of it as we go through the year, and this has to do with the initiatives that we currently have announced to our employees.

And will those be between cost of goods sold and OpEx, or will that be primarily in OpEx?

It will be between. It will be probably split between the two.

Got it. And final question, what products are you pruning specifically in optical comp?

Two general categories. We had some very low margin circuit pack level products that were not far removed from being a contract manufacturing level of engagement with some specific customers, and then the low speed datacom pluggable. So things like 2 and 4 gig.

Got it. Thank you.

Thanks.

Next question, please?

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

Thanks a lot, and Kevin, I wanted to extend the same condolences and goodwill as Subu did. So on the quarter-on-quarter decline, how much of that is discontinued businesses? Could you tell us roughly how much of the low speed plugables, which I think is probably two gig and four gig, how much of those businesses will not show up in the December quarter? Thanks.

Relative to the quarter that we just completed, they're mid-single digit millions of dollars. They could be bought in between mid-single digits to sometimes low double-digit millions in any quarter. All I could really comment about is what they were for the quarter we just completed, there was high single-digit millions of bookings opportunity that we passed on in this area. Those would have been delivered over a quarter, and some of it in the Q2 period.

So the two gig and four gig, did you have a full quarter of those products this quarter, or when should we expect those products to come out of the revenue stream?

There's less time buy efforts and so forth as we obviously work with our customers and make sure we have the smoothest transition we can with the customer. So there is still a level of revenue, but it's at a lower level than it historically had been.

Got it. Great.

Cobb.

Is that the last question?

Yeah. Thanks very much.

All right. Thanks.

Your next question comes from the line of Mark Sue with RBC Capital Markets.

Thank you. Kevin, I was just wondering if you could just comment on the bookings linearity. Was is general degradation throughout the quarter, or was it a steep drop-off? And then separately, if you could just talk about your product pruning, shouldn't the gross margins and operating margin targets actually be higher? And also just your philosophy on product pruning, if you could give us your thoughts on whether that's going to be a continuous part looking at the business? Thank you.

Sure, Mark. On the linearity, I don't think there was anything unusual other than to say that we are certainly in a market that has evidenced slowing. And so, deals that you expect to begin seeing close in early September, they slide out and some of them get done in the quarter and some of them don't. So I think, you see more of the strain on the closure of the deals, and that's one of the reasons that we have the same kind of guidance philosophy, and when we end up in the lower end of our guidance range, it's usually in a decelerating market. In a neutral to favorable market, we tend to be in the high end of the guidance range.

The other thing you have in the September quarter is, Europe procurement activity tends to be slow in the July-August timeframe, so there was no noticeable change in the order patterns, as you get into September, and we saw that the decisions would be more drawn out when we start to see the impact.

Relative to your observation, as we prune things that have lower gross margins, should that be an element of things that ensures that our operating margins improve? The answer to that is absolutely yes, and that's comprehended in some of the kinds of thoughts Dave was giving you. In terms of the operating philosophy that we’ve had, we started out probably four years ago instituting a process that on average we wanted the company to be able to grow it, and therefore the products portfolio to be able to be in markets that could grow at 10% a year or better, and would be at their target gross margin within say 18 months. And I would say anything that has sustainably been below that growth, so certainly as it hits 5% and heads negative, and anything that we think is at a gross margin level that because of volumes has virtually no chance of improving, we're pruning it. We have taken these steps with the two categories that we overtly announced today: products that are long in tooth, they are old. There's not much growth, in fact they are declining in terms of volumes, and the market ASP compressions have been active for many years. So therefore, there's little intellect in investing lots of money to cost reduce, though, obvious candidates relative to that prescription to exit, hope that helps, Mark, thanks.

Next question, please?

Your next question comes from the line of Ajit Pai with Thomas Weisel. Please proceed.

Yeah, good afternoon.

Hi, Ajit.

Just one question, which is, as I'm looking at your balance sheet and looking at the cash and investments at the end of the last quarter, and then at the end of this quarter, and it has fallen from $873.6 million to $791.1 million, almost an $83 million drop. There isn't a cash-flow statement, but could you give us color as to how that happened, especially when your receivables are down and your payables are up, could you reconcile that for us?

What you have is the two big items we talked about on the call: the current debt payment of $8 million, the stock buyback, which was $86.8 million, and then we did make a $20 million payment, which Kevin noted for litigation costs, so those are sort of the three big disbursements that you would argue are not in the normal operating course of business.

Got it. And does that mean that on a go-forward basis, given that you are guiding to a better profitability and better EBITDA, and the fact that the cash flow should actually improve quite materially over the next two to three quarters?

We don't give guidance on cash flow, but it is our desire to continue to improve our cash flow.

Got it. Thank you.

Your next question comes from the line of Jeff Evenson with Sanford and Bernstein. Please proceed.

Thanks. I was wondering if you could give us some color on the most important criteria you are looking for in the next CEO.

You know, Jeff that we have a separate committee of the Board whose job it is to deal with the successor. I am unable to provide input into that; I'm not the owner of those requirements. So that’s about all I can tell you. The progress on that, or the update on it will be shared by our Chairman at the shareholder meeting, so...

Which is in about two weeks?

Sorry to dodge the question, but the fact is there is a set of the Board that is tasked with it, and they will provide an up date at the shareholder meeting. Okay?

Great. Thanks.

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

Thank you. I have a two-part question. The first part is related to the pricing environment. I'm wondering if you are seeing from your competitors any irrational pricing, given where demand seems to be going this quarter and into 2009, and also from your customers as they begin to look at contracts and year-over-year price declines for 2009. And the second part of the question is with regard to currency impacts. I think you stated that there would be about a 2% to 4% negative impact on CommTest, and I'm wondering if there will be impact on the segment revenue from other business units. Thank you.

I'll go backwards and, from a currency standpoint, CommTest does more of their business in various currencies, so you’re right its a potential revenue impact of 2% to 4%. And that would also the impact on the operating margin although if OpEx will go down, the gross margin also goes down, but it has a about a one-to-one tradeoff.

Let me take the question on the pricing environment. I don't remember if we put it in the script, but certainly for this particular quarter, we have told you that in general, we see pricing declines in the range of 2% to 4%. This quarter was no different than any of those quarters in the past, which, for me, I think this is the 21st quarter. So it fits still in that envelope. Relative to your question in terms of the ferment in the market on competitors and customers right now, do we see any change given the environment, I would say from a competitor's perspective occasionally, and to the same players, but I would say there's nothing very unusual. It's just a specific product to a specific customer. So I don’t see anything out of the norm. But, you are right, occasionally people will become quite aggressive. On the customer side there are some product areas, and some customers, the network equipment manufacturers in particular, that some have become fairly aggressive during contract renewal times. One of the reasons that we have invest so heavily in R&D, and in the functional integration, is so that we have new platforms, that are actually lower cost, equivalent form, or equivalent function, and lower power, if you will. So we try to migrate people to something that is different, more potent, more functionally innovative rather than to having to have a conversation about the past. You are correct that it's aggressive. Again one of the reasons we have invested so heavily in new product transitions. Hope that helps. Thanks, Paul.

Your next question comes from the line of Kimberly Watkins with JPMorgan. Please proceed.

Thank you. Wanted to ask about the Optical Communications segment, last quarter you talked about $10 million worth of revenue that was pushed out, was that in the result this quarter from extending capacity for ROADMs or if not, how much it was and when does the capacity come on to satisfy that demand? And then the second part to that question is, I think last week you talked about seeing a little bit of a inventory build at a few of their customers, are you seeing any signs or evidence yet of that happening in the market?

So, on the ROADMs from the previous call, we talked about how $10 million was pushed from Q1 into Q2. As you may recall that the call we had was near the end of August. So we're talking about how in Q1, what have we just finished, we couldn't fulfill all of the orders. We have brought on additional capacity in our WSS ROADMs. We've increased by I think when I look from a year ago, about 40% to 50% more than what it was a year ago. We plan on continuing to increase the capacity there as the demand is good, and so that's what we have on the ROADMs. We did have increased revenue and the push up was from Q1 and the Q2.

And the second question was what…?

The second question was about inventory, inventory build with the optical components.

One of the statements that I made was as we looked at the market, we saw some customers being fairly positive on the outlook over the next couple of quarters, and we have some customers who are evidencing some level of pullback, diffidence, and decline in their own business. I would say that it would be true that there are some customers that have circumstances of either decline. They may have over-purchased because they thought that they were going to win a particular operator build-out, and they didn't. There are two camps out there. I would say the majority of the network equipment manufacturers have a more favorable outlook than the minority. But, you are correct that there are two camps. Hope that helps.

Okay. Yes, it does. Thank you.

With no further questions in the queue, I would like to turn the call back over to management for closing remarks.

Thank you for your participation, and if you have any further questions, please call us in the investor relations department. Thank you.

Thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.