Viavi Solutions Inc. (VIAV) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 JDSU Corporation's Earnings Conference Call. My name is Chris, and I will be your coordinator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And I would now like to turn the call over to your host for today, Ms. Michelle Schwartz, Senior Director, Investor Relations. Please proceed.

Thank you, operator. And welcome to JDSU's Fiscal 2011 Fourth Quarter and Year End Financial Results Conference Call. Joining me on the call today are Tom Waechter, Chief Executive Officer; and Dave Vellequette, Chief Financial Officer. I'd like to remind you that this call will 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 Factors section of our annual report on Form 10-K filed on August 31, 2010. The forward-looking statements, including guidance provided during this call, are valid only as of today's date, 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 the discussion of their usefulness and limitation is included in today's news release announcing our results, which is available on our website at www.jdsu.com. As a reminder, the quarterly earnings press release, slides and historical financial tables are posted at www.jdsu.com/investors under the Financial Information section. Finally, and as a reminder, this call is being recorded and will be available for replay from the Investors section of our website. I would now like to turn the call over to Tom.

Thank you, Michelle. And good afternoon, everyone. JDSU delivered solid fourth quarter results in an uncertain macroeconomic environment. Revenue of $472 million was at the high end of our guidance range and operating margin of 12.3% was near the midpoint of our range. Gross margins of 46.7% were down less than 1 percentage point from the prior quarter and up more than 1 percentage point from the prior year. Cash generated from operations was $56 million. I am pleased with the business model improvement achieved in fiscal year 2011. From fiscal year 2010 to fiscal year 2011, revenue grew 32%, gross profit was up 40%, and operating income increased by over 136%. Throughout fiscal year 2011, we benefited from our collaborative innovation strategy as revenue from new products continued to grow. In fiscal Q4, we achieved record new product revenue with over 71% of Optical Communications revenue and 52% of CommTest revenue generated from products less than 2 years old. Our financial strength continues to provide us with the necessary capital to fund our robust new product pipeline. We generated over $200 million of cash from operations during the fiscal year. As we look ahead, there are several factors causing some short-term volatility for JDSU: First, our general economic conditions and uncertainties; second, our inventory corrections by our Optical Communications customers; and finally, the September quarter seasonality for our CommTest business segment. We strongly believe that fundamental end-market drivers for our products remain strong for the long-term, but, as indicated by our guidance, we are not immune to the current macroeconomic challenges, optical inventory corrections or CommTest demand seasonality. We cannot predict exactly how long this downturn will last for us but we do believe it's a near-term issue. During this time, we will remain focused on our winning strategy, including profitability and cash flow generation while we continue to invest in R&D and new products that will further differentiate us in the marketplace. I'll now hand the call over to Dave, who will take you through the details of our financial performance in Q4 and the fiscal year and will discuss our outlook for Q1. Following Dave's remarks, I will provide more details on our results, the trends we are seeing, and our strategy moving forward.

Thank you, Tom. Before I start, please note that all numbers are non-GAAP, unless I state otherwise. Fourth quarter revenue of $472.3 million was up 3.7% from the prior quarter and up 18.6% when compared to the fourth quarter of fiscal 2010. Revenues increased sequentially in our CommTest and AOT segments and declined, as expected, in our CCOP segment. Book-to-bill for AOT was greater than 1, CommTest and lasers book-to-bill were approximately 1, while Optical Communications was below 1. Book-to-bill for the total company was also below 1. Fourth quarter gross margin was 46.7% of revenue, down from the previus quarter's gross margin of 47.6% and up from fourth quarter fiscal 2010's gross margin of 45.5%. The fourth quarter sequential decline in gross margin was primarily due to product mix within the segments and lower manufacturing absorption in the optical business. The year-over-year improvement in gross margin was due to improved margins in both the CCOP and the CommTest segments. Operating expenses for the fourth fiscal quarter of $162.3 million were 34.4% of revenue, relatively flat from the prior quarter's $161.9 million. Increased R&D investments were offset by lower G&A spending. The fiscal fourth quarter operating margin for the company was 12.3%, up from 9.3% for the year ago period, primarily due to higher revenues and gross margins. Net income was $53.9 million or $0.23 per share, which compares to $51 million or $0.22 per share for the third fiscal quarter and $33.1 million or $0.15 per share for the year ago period. For the full fiscal year, total revenue was $1.8 billion, up 32.2% from the prior year. Gross margin for the full fiscal year was 47.6%, up from 44.6% for fiscal 2010. Operating income for fiscal 2011 was $230.7 million or 12.7% of revenue, up from 7.1% of revenue for fiscal 2010. Improved operating income is primarily due to increased revenue and gross margins. Our net income for the year was $216.7 million or $0.93 per share, up from $91.9 million or $0.41 per share for fiscal 2010. A detailed reconciliation of our non-GAAP results to our GAAP results is available in today's press release. Our fourth quarter non-GAAP operating income excludes, among other items, amortization of acquired technology and other intangibles of $22 million, an $11.5 million charge for stock-based compensation and restructuring and nonrecurring charges totaling $4.5 million. Including the noted items, for fourth quarter fiscal 2011, GAAP net income was $9.3 million or $0.04 per share, which compares to our prior year GAAP net income of $1.5 million or $0.01 per share. For the full fiscal year, GAAP net income was $71.6 million or $0.31 per share, which compares to a GAAP net loss of $61.8 million or a loss of $0.28 per share for fiscal 2010. Now looking at quarterly revenue by region. Americas revenue of $230.1 million or 49% of total revenue was up $21.2 million from the prior quarter. The increase was due to strength in AOT and in CommTest, as CommTest experienced typical seasonal demand from service providers. The MDA revenue of $122.5 million or 26% of total revenue was down $4.8 million compared to the prior quarter, due primarily to lower demand in the Optical Communications business. Asia-Pacific revenue was $119.7 million or 25% of total revenue, relatively flat from the prior quarter. And the increase in Optical Communications and laser revenues was offset by a slight decline in AOT and CommTest revenues. Now moving to the segments. First, to the CCOP segment. Total CCOP revenue was $202.3 million, down 3.4% from the prior quarter and within our guidance of down 2% to 4%. Gross margin was 32.8% and operating income was $32.2 million or 15.9% of revenue. The decline in operating profit was primarily due to lower optical revenue and gross margins. Geographically, Asia revenue grew in both our optical and lasers businesses, while the Americas and European revenues declined. Optical Communications revenue in fiscal Q4 was $174.5 million, down 5.5% when compared to the prior quarter's revenue and up 29.5% compared to the prior year. Seven out of 12 product lines grew sequentially. We saw strength in our pluggable products for LAN/SAN applications, while revenue for ROADMs, circuit packs and Tunable XFPs declined, primarily due to customer inventory corrections. Quarterly ASP decline was 2.1%, which was at the low end of our historical range of 2% to 4% sequentially. Gross margin for the quarter was 31.1%, down from the prior quarter's 32.9% but within our target range of 30% to 35%. Gross margin's declined due to product mix and lower overhead absorption. Additionally, as a result of increased capacity and current demand levels, we have reduced product lead times to 4 weeks to 6 weeks on a majority of our optical products allowing our customers to respond better to their customer requirements. In our lasers business, fourth quarter revenue of $27.8 million was up 12.6% when compared to the prior quarter and up 23% compared to the prior year due to strength in our Q series solid-state lasers and our newly launched 4-kilowatt fiber laser, which is incorporated into an Amada Laser Cutting System for metal processing applications. In the fourth quarter, we recognized approximately $1 million of revenue from our kilowatt fiber laser, and we expect this to grow throughout fiscal 2012. Gross margins were 43.4%, down from the prior quarter, primarily due to startup and transfer costs for our kilowatt fiber laser production. As a reminder, our targeted CCOP operating model is for operating margins of 16% to 20% when revenues are above $190 million. Now moving on to our CommTest segment. Fiscal Q4 revenue of $211.3 million was up 11.7% from the March quarter's revenue. On a year-over-year basis, fourth quarter revenue was up 13.5%. Q4 revenue, excluding the NSD products and the third-party complementary products, grew by 10.4% year-over-year. On a sequential basis, Americas revenue saw strength while EMEA and Asia-Pacific revenues declined modestly. Fiscal Q4 gross margin for CommTest of 59.3% increased by more than 300 basis points from the prior year's Q4 gross margin of 56.1%. The decline, on a sequential basis, primarily due to product mix and inventory charges. The year-over-year gross margin improvement was driven by favorable product mix as 52% of CommTest revenue came products introduced in the last 2 years. Our target range for CommTest gross margins remains at 57% to 61%. CommTest operating profit was $30.4 million or 14.4% of revenue, which compares to $20.5 million or 11% of revenue in the prior year. The operating profit is below our targeted operating model range, due primarily to our current investment levels in R&D and selling costs, which are focused on advancing the business in high-growth regions. Our targeted CommTest operating model is for operating margins of 20% to 23% when revenues are greater than $215 million. As previously noted, we are transitioning our CommTest investment away from certain products that do not meet our profitability targets, while at the same time continuing to invest in products for mobile, video, wireless and ethernet backhaul. As a result of this transition, we recorded a restructuring charge of approximately $4 million in the fourth quarter. We expect our CommTest business to be in the target operating model range for the December quarter, provided we meet the revenue and gross margin targets. For the Advanced Optical Technologies, or AOT, segment, fiscal Q4 revenue was $58.7 million, up 3.3% when compared to the prior quarter. We saw revenue increases in our currency and transaction card businesses. As previously noted, demand for currency products will fluctuate according to the level of bank note printing. Fiscal Q4 gross margin for our AOT business was 49.4%, up from 48.3% in the prior quarter due to favorable product mix. AOT operating profit for the quarter was $20 million or 34.1% of revenue, up from 31.5% for the last quarter. The AOT target operating model is for operating margin of 32% to 35% when quarterly revenue is greater than $55 million. As a reminder, JDSU's total company targeted operating margin range is 14% to 17%, when quarterly revenues for the company are $460 million or greater and gross margins are 49% or higher. Also, JDSU revenues are impacted by the seasonal buying patterns of our customers. The March and September quarter revenues tend to be lower than the December and June quarter revenues. Carrier buying patterns positively impact the December quarter and negatively impact the March quarter, while EMEA customer buying patterns impact the September quarter. Moving to the balance sheet. For fiscal Q4 2011, the company generated $56 million of cash from operations. Capital expenditures totaled $30.9 million. At the end of fiscal Q4, the company held over $728 million in total cash and short-term investments. Headcount as of July 2, 2011, was 5,001. Now to our Q1 guidance. First, some points to consider as you think about our financial performance over the coming quarter. Based on our current visibility, we expect normal seasonality to result in CommTest revenues declining sequentially by 12% to 15%. AOT revenues are expected to be down sequentially by 3% to 6%. And although recent bookings trends are improving in our Optical Communications business, CCOP revenues are expected to decline between 10% and 13% sequentially. The reduction in CCOP revenue is approximately evenly split between lower demand for telecom optical products and lower demand for gesture recognition products as some of our customers adjust their inventory levels. Gesture recognition revenue is expected to be less than 2% of total company revenue for the September and December quarters. This compares to recent quarterly revenue of less than 4% of total company revenue. Operating expenses are expected to be down by $3 million to $7 million sequentially. Due to the lower revenues in each segment, CommTest operating margins are estimated to be between 8.5% and 10%, AOT operating margins are expected to be between 30% and 32%. And CCOP operating margins are expected to be between 13% and 15%. Taxes, interest and other income are expected to result in a net expense of $5 million to $6 million. Share count for calculating EPS is expected to be approximately 236 million shares and capital equipment purchases will be approximately 6% of revenue. Given the current macroeconomic uncertainties and our limited visibility at this point in the quarter, we are providing a broader guidance range for the September quarter. Taking into consideration the factors above, we expect first quarter revenue to be between $400 million and $425 million, and our non-GAAP operating margin to be between 7.5% and 9.5%. I will now turn the call back to Tom.

Thanks, Dave. Now I will provide Q4 and fiscal '11 highlights from each of our business segments. I will start with the CCOP segment. First, Optical Communications. I am extremely pleased with the accomplishments of this business. On a year-over-year basis, fiscal Q4 revenue increased approximately 30%, gross margins improved by nearly 3 percentage points, and operating margins improved by over 4 percentage points. We continue to grow market share and grow our product portfolio offerings to support both enterprise and telecom customers. Our achievements are a result of our technology leadership in ROADM, including our Super Transport Blades, and in Tunable XFP and gesture recognition products where we are significantly ahead of our competitors. We expect that in FY'12, our customers will qualify second sources for some of these products. It is important to note, however, that we have negotiated long-term share agreements with a number of customers for our Tunable XFP, and we have one significant customer for our Super Transport Blade. We expect that as the total available market expands for these products, we will continue to benefit. Most importantly, we believe our continued investment in technology and expansion of our product portfolio will keep us ahead of the competition. Currently, the optical market is facing a short-term inventory correction. We still see strength in the drivers for optical products but, in the near term, we will experience a slowdown in demand. Tunable XFPs revenue declined 6% quarter-over-quarter and grew by over 300% year-over-year. Our penetration across the customer base is strong, having shipped to 41 customers to date, up from 37 customers last quarter. We believe demand will remain strong for the long-term as customers continue to design the Tunable XFP into more applications within their optical network. Our Tunable XFP portfolio is the broadest in the market and we expect to continue to expand on it. This quarter, we will release an even higher performance variant, targeted for 2 key customers. Just yesterday, we announced that JDSU has developed the first Tunable SFP+ transceiver designed to replace fixed wavelength SFP+ transceivers in the enterprise and Metro networks. The Tunable SFP+ will allow network operators increased flexibility to optimize the performance of the network and will ease the cost of holding expensive inventory required with current fixed wavelength SFP products. In addition, due to it's smaller form factor and reduced power consumption, it increases the density of transmission parts. We are very excited about this new market opportunity, which Infonetics estimates to be $300 million in 2012. It is expected to continue growing rapidly as enterprise and Metro networks are optimized to meet growing bandwidth demands. Being first to market, we expect we will give JDSU a competitive advantage, similar to the advantage we have with the ROADMs, Super Transport Blade and Tunable XFP. We expect to have the product introduction in the next 12 months. ROADM revenue represented 28% of total Optical Communications revenue for fiscal Q4. Our growth in this product area was significant for the full year, growing over 100% from fiscal 2010. Despite short-term inventory timing issues, long-term growth is expected to continue for ROADM products as carriers upgrade their networks to include better wavelength provisioning functionality. JDSU is currently working with their customers to support next-generation colorless, directionless and contentionless technology for the ROADM-based networks. Our MEMS solution serve the current market well today. For future applications beyond 100V, we're building on existing JDSU R&D skills to produce L-cost-based products as well. We believe that with both MEMS and L-cost-based product portfolios, we will have solutions for diverse requirements of future networks. We will have the broadest ROADM portfolio to meet the needs of our customers today and in the future as networks demand both low-cost and high flexibility. Over the last few quarters, we announced the release of new 40G and 100G optical components. We continue to gain traction on 40G short and long-reach non-coherent components, as well as components for coherent 40G and 100G customers, who have developed their own 40G and 100G solutions. We have developed a strong product roadmap for high-performance 40G and 100G coherent modules that we will launch in calendar 2012. For 40G and 100G applications, we currently have 16 design wins and 20 more in process with 17 customers. Revenue from gesture recognition grew 8.5% quarter-over-quarter, as our customer completed its necessary inventory build-ahead for the holiday buying season. As a result, we saw a pause in bookings for Q4, and consequently, revenue in Q1 is expected to decline significantly. The total gesture revenue for the company continue to be less than 4% of JDSU's revenue in Q4. Now I'll turn to our lasers business within the CCOP segment. We continue to see strength in our lasers business with 12.6% revenue growth quarter-over-quarter and 23% growth year-over-year due to strength in our Q series solid-state lasers and our newly launched 4-kilowatt fiber laser incorporated into the Amada Laser Cutting System for metal processing applications. This new laser enables up to 3x faster processing speeds on thick materials as compared to traditional CO2 laser technologies. Due to strong end-customer interest, we are working with Amada to expand manufacturing capacity for this product. We're also developing a second-generation suite of kilowatt fiber lasers with Amada, and we are also developing a new fiber-based class of pulse lasers expected to ship during the second half of fiscal 2012. We continue to make progress in developing our concentrated photovoltaic, or CPV cell technology, for large-scale solar power applications. In July, we announced the acquisition of important technology assets from QuantaSol. This technology allows more light to be converted to electrical power by raising the efficiency of CPV cells, the most important metric in the solar industry. Leveraging this technology will enable JDSU to further differentiate our product and expand our position in the CPV solar market as popularity for CPV grows. Now I'll go on to our CommTest segment. CommTest delivered solid financial performance in Q4 FY '11 reflecting the ongoing challenge our customers are encountering to add millions of new broadband subscribers to their network, and therefore their need for our field service tools, for service activation and troubleshooting. Infonetics forecast broadband subscribers to grow from 1 billion in 2010 to 2.9 billion by 2015. This trend is evidenced by our growth in field-test instruments by 24% quarter-over-quarter and 17% growth year-over-year and representing nearly 61% of overall CommTest revenue. In the cable market, Infonetics estimates that over 100 million homes, worldwide, have DOCSIS 3.0 service available, yet only 1% to 2% of the homes have subscribed to date. Even in the early stages of this rollout, we delivered strong results in the quarter with revenue from our DOCSIS 3.0 rollout toll growing 14% quarter-on-quarter and 29% year-on-year. During the quarter, we also saw increased carrier spending on IP video projects, Gardner forecast IPTV subscribers to grow from 35 million to 75 million by 2014. Because testing for bonded pairs is essential for IPTV rollouts, we introduced the first-to-market bonded combination VDSL2/ADSL2 test solution. Infonetics also forecasted fiber-to-the-home subscribers will grow from 33 million in 2010 to 98 million by 2015 with net addition rates increasing each year. Once again, our fiber optic field-test business delivered strong results with 23% growth quarter-on-quarter and 39% year-on-year. Our leadership in this area is confirmed at Frost & Sullivan as they recognized JDSU as the #1 global leader for fiber test with 24% market share. As more broadband subscribers are added, video traffic is growing exponentially and is expected that 90% of consumer traffic by 2014. Tier 1 carriers took advantage of our expertise during the quarter, with growth in our fiber and access test businesses as I mentioned earlier. We also made strong progress in other areas supporting video tests. By PathTrak return path monitoring, which offers significant labor savings for carriers by detecting troubles at the street level rather than the node, we'll have a Q4 revenue growth of 40% quarter-on-quarter and 43% year-on-year. In addition, we added over 20 deals to our pipeline in Q4 for Home PM, which extends quality of service visibility into the home. The current customer in Europe already reports Home PM is driving CapEx savings at a rate that is 2.5x greater than anticipated. Another spending priority for our customers remains mobility. LTE standards remain an investment priority for carriers. It is expected that 81 LTE networks will be in commercial service by the end of 2012. Our strengths and early position with LTE, particularly in the labs, will translate into growing revenue as service rolls out more broadly worldwide. Despite the growth in LTE, spending on 3G and 2G mobility projects remains larger than LTE spending. Also, Frost & Sullivan reports that over 60% of global total test and measurement spend will be on 2G, 3G projects by 2014. Our products developed particularly for 3G, 2G and LTE mobile testing saw 21% growth quarter-on-quarter. The move to 40G and 100G networks continues with major carriers worldwide making public announcements of their intention to deploy 100G into their networks. With Q4 revenue growth of 27% quarter-on-quarter and 40% year-on-year in this area, we are enjoying an early leadership position in the lab and production environment and expect this to translate into field deployments as the carriers begin to scale. Our focus on penetrating high growth regions of the world is paying off. As Asia grew 10% year-on-year, we introduced new products for high growth regions, including the MTS 5800 Ethernet field tester in a new feature set for PathTrak. Frost & Sullivan recognized our leadership across Asia by awarding JDSU the 2011 Asia Pacific Test and Measurement Company of the Year, citing our industry-leading portfolio of LTE, mobile video, next-generation broadband and fiber optic test solutions. The remaining segment is Advanced Optical Technologies. Revenues for the quarter included growth in currency and the transaction card hologram market, where we are experiencing positive momentum due to financial institution M&A and rebranding efforts and new banking regulations. We recently announced the partnership with New Momentum that will strengthen our authentication solution with online brand monitoring capabilities. The agreement enhances JDSU's end-to-end suite of services to help brand owners reduce risk and serious business issues that arise from counterfeit transactions. As I conclude my formal remarks, I'd like to emphasize that we believe end-market drivers remain strong and see this uncertain economic time as an opportunity to further our leadership position in the markets we serve. We will do this with focus on achieving share growth and technology leadership through investments in R&D. Innovation is at the core of JDSU's success and we'll continue to invest in market-based profitable innovation for the long-term benefit of the company. Operator, we'll now take questions.

[Operator Instructions] And your first question comes from the line of Kevin Dennean with Citi.

Tom, just wondering if you could address the inventory correction issue. I don't think an inventory correction is new news to anybody who's following in the industry, but I think what's a little bit surprising is that it seems to be hitting JDSU with a little bit of a lag. So could you talk a little bit about what some of the factors are? Is it specific customer exposures? Is it primarily driven by increased competition in tunables, with maybe customers pausing ahead of second sourcing? Any more detailed color that you can give on that, I think, would be helpful.

It does line up with specific customers for specific networks are going out into the field, so it does line up with specific customers. And I think part of it is the fact that we have been single-sourced on a number of products for over a year now and, at some point, we work capacity constraint on those products. So I think during that period there was pretty heavy ordering by these customers to ensure supply of those product, so I think were starting to see some of that built up that happened, and maybe that's part of that lag you're talking about between ourselves and some of our competitors. And I think the other thing is that we've brought our lead times down. I think Dave mentioned, we're down more on the 4- to 6-week range. So at one point, we went well above 12 weeks. So as we pulled those down, as we increase capacity and throughput and our yields improved on some of these new products, tended to reduce the ordering patterns also.

Okay. That's helpful. Just 2 quick follow-up. If we look of the optical component business and we strip out ROADMs and tunables, it looks like kind of your base optical business actually grew a little bit sequentially. In the guidance, how should we think about kind of the mix of what happens within optical components for comm, is it all ROADMs and tunables in the guidance, or are we looking for another lag down in kind of the more base part of your optical component business?

I think, our anticipation is we'll see continued growth in those products. We think there's a lot of replacement going on out in the field, there's new networks going in. So we think over a number of quarters, we'll continue to see growth in those areas. And especially, I think, we've picked up our game in the pluggables area. So I think we'll continue to see growth in that area as well.

I think if you look at it -- Kevin, this is Dave -- for the quarter, we didn't highlight whether specific product sets should be impacted in the September quarter other than we noted that about half of the reduction will come from the gesture products. So when you step back and look at the peak to September number, right, our March number to September is more optical revenue, you can see that the telco-specific products are about down about 10% from the peak, which is the March number.

Okay. And then one last follow-up on lead times. You mentioned that about 4 to 6 weeks. Can you put that in context for how low have lead times gotten kind of in recent cycle lows, and if you can give any color around that?

I think 4 to 6 weeks is getting back to kind of a norm, before we saw the expansion of the lead times, in some case it went above 12 weeks, as I said. So we're getting back pretty much to a norm cycle now, where you have VMI polls, and obviously you're replenishing bins and that's a lot faster for our customer base. But I think on most of the products, 4 to 6 weeks is pretty well back to normal.

[Operator Instructions] And your next question comes from the line of Nathan Johnsen, Pacific Crest Securities.

Two quick ones, if I may. On CommTest, you talked about the sequential decline largely as a result of seasonality. I know in the couple past years, you guys have had some acquisitions that had sort of masked some of the seasonal trends. Should we expect the guidance to be sort of the new normal for September quarter sequential seasonality? Or are there macro issues involved there, too? And then secondly, going to the SFP+ tunable products, you talked about having a lead there, I was wondering if you guys had a sense for how long the you're going to expect to have versus your key competitors?

I think on the CommTest September quarter, I think it is a combination of seasonality but there are some macroeconomic issues there that are also affecting it. So I think it's a combination of both. But we normally do see a pretty good drop on the September quarter from the seasonality. The SFP+, we have -- if you look at Tunable SFP, where we've had a good 12 month, maybe even going on to 18 months lead, we expect a similar type of lead in this product. Again, it's a very difficult product to design, and even as well very difficult to manufacture in volumes. So we believe we have a similar type of lead from everything we could see and understand out there in the field.

We're also very -- we're encouraged by the fact that, again, as you think about the Tunable XFP and now the Tunable SFP, how it's expanded the markets that we address. The tunable XFP has a addressable market of about $600 million annually, and the Tunable SFP will have another $300 million.

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

If I could just ask. Does your instincts suggest considering lead times for your customers that, perhaps, the September quarter is the bottom for CCOP, or is it possible that optical component revenues may be down sequentially in the December quarter as well?

I think, Mark, as I noted, we're encouraged by the favorable bookings trends that we're starting to see right now. We didn't give a forecast of what the December would be like, but the fact that now that we have lead times, but they're not likely to get much lower than we're they're at, and the capacity we have available to us and now we're seeing favorable bookings trends. So it's encouraging, but we really didn't go out and forecast what the December look like.

The improving bookings trend, would that be some catch up? Would it be new projects? Would it be broad-based customers? Any additional thoughts on that would be helpful.

Yes. I would say it's pretty well across the customer base, we're starting to see that starting to happen. Again, it's not a lengthy trend, but it is encouraging to see that pick up.

And I think the other point is, as you know in optical, about 10 customers make up 70% of your revenue. And some of the customers that had -- were not ordering before are now starting to order. So that was again one of the encouraging trends.

And your next question comes from the line of Alex Henderson with Miller Tabak. Alex Henderson - Miller Tabak + Co., LLC: There's a couple of things I wanted to just get some clarification on. First, following the comments that were just made. Is it reasonable to think that given the improving bookings orders, or the order trajectory that you mentioned, that the book-to-bill in your September guidance for the Optical segment would be at or above 1 based on what you know at this point? And then a second question. I wasn't sure what you said in the call and I was wondering if you could just clarify it. Did you say that you expected the CommTest margins to be in range in the December quarter with your target guidance, long-term target guidance?

This is Dave. I'll handle the second question first up. Yes, we did say that we expect the Test and Measurement business to reach their operating margin range in the December quarter, provided the revenue has hit that range, which is 215 or greater; and gross margins hit their range, which is the 57% to 61%. We did say that. As far as a book-to-bill for the September quarter, we did not provide one. And we're seeing more and more of our business in the VMI area. So we're really not talking giving guidance on book-to-bill. I think that the key here is that we're encouraged to see the improving trends in the bookings and that we're seeing customers that weren't ordering from us just a little bit ago, now starting to place orders with us.

And your next question comes from the line of William Stein with Crédit Suisse. William Stein - Crédit Suisse AG: I hate to be the fifth one to ask about this, but maybe you could give a little bit more clarity around the bookings trend in the optical components business. When you say its been improving and some customers are coming back, can you talk about linearity of bookings throughout the quarter, and how it's done in August month to date?

I mean that's when we're starting actually, in August here month-to-date, that's when we're starting to see it pick up. So prior to that it would remain fairly slow, but we do see a normal pattern that we're back-end loading. And as Dave mentioned, I think last quarter, we're up to 27% VMI, revenue from VMI. So we're seeing VMI go up and, at the same time, though, we did see the bookings pick up in the August timeframe. We do typically have a back-end loading with bookings.

And your next question comes from the line of Subu Subrahmanyan [ph] with Sanders Morris.

On the CommTest side, I wanted to -- of the seasonality you had mentioned, how seasonality is having a negative impact on September, in addition to macro factors. And I'm wondering if you think seasonal patterns hold for this year, for December, which is typically a strong seasonal quarter. I realize you're not guiding to it but any qualitative commentary, especially given carriers suggest that they lower the normal second half ramp versus first half?

Yes. We're not giving guidance for December quarter. But typically, the year-end flush in the December quarter comes mostly out of North America. And from what we're seeing and hearing from North American major network operators, we don't have any indication that, that's going to be much different this year. So nothing at this point that would give us cause on the negative side but, again, we have limited visibility out into the December quarter.

Yes. We're not quantifying at dollar level of the flush, but it's setting itself up to have a normal occurrence of a flush.

And your next question comes from the line of Kim Watkins with Morgan Stanley.

This is Kim in for Ehud Gelblum. Just wanted to first ask about the Tunable XFP market. It's interesting that you said that you have secured share guarantees but if you could give some commentary on what you expect for pricing, that's number one. And then secondly, I just wanted to follow-up on the pretty sharp decline in ROADMs, if you could give a little bit more color on what you saw maybe from a geographic perspective, because it caught my eye when you said the optical business was actually up in APac and down in North America.

I think on the Tunable XFP, typically, on where we've secured some future business, it's typically volume and pricing that we sign up to with the customers. So we have a pretty good visibility from that perspective on both volume and pricing. I think on the ROADM side, it was mostly tied into both the macroeconomic weakness and some of this inventory burn-off. So it was reasonably spread across geographic regions, but I'm not aware of any particular kind of hotspot as far as being down much more than other areas, one geographic region being down a lot more than another area. Dave, I don't know if you want to add?

I think the thing to remember in Asia-Pac, we talked about CCOP, we talked about the fact that lasers had good growth and we also talked about the growth in the gesture products sequentially, so those tend to ship in the Asia region.

And your next question comes from the line of Cobb Sadler with Catamount Advisors.

Just I had a question on, again, on the XFP tunable. Is it -- the down, I believe, was 6% quarter-on-quarter, is it inventory or competitive design wins? And I guess mostly revenue has been fixed XFP replacement but what about the 300 pin replacement market, it sounds like there are some other competitors that are targeting that market. And so I guess that's the first question.

I think on Tunable XFP, it's mostly macroeconomic conditions. We're only aware, really, of one competitor out there that said they had any revenue of any size in this past quarter and it was smaller than what they had expected. So I don't think much of any of it is due to market share loss there. It's just primarily the macroeconomic conditions at this point. We do know the competitors coming on. We're aware of that. Again, our focus is to keep evolving this product very quickly, so we stay ahead of the competition, and I think we're showing that we are doing that.

I think the other thing is, as we've said before in the fixed, it's about a $100 million a year opportunity in the Tunable XFP. And in the 300-pin replacement, that's about a $500 million a year opportunity. So and we are selling into both at this time.

And your next question comes from the line of Ajit Pai with Stifel, Nicolaus. Ajit Pai - Stifel, Nicolaus & Co., Inc.: Just one question and then -- just looking at the macro effects that you said are also impacting your test and measurement business, outside of the seasonal ones. Could you give us some indication as to what you're seeing in the change in behavior from the carriers and the deployments. And on the same note, you talked a lot about the Infonetics numbers, about increased broadband all of that over the next 3 to 5 years. But in the intermediate term, could you sort of walk us through how carriers are thinking about their deployment sizes. Most of them broadly sort of slowing down in terms of pushing out their deployments, so they're pulling their pin? And most of the work that you're doing with them right now, how are they -- what period are they focused on in terms of accelerating some of sort of transition to next generation, like 40G/100G as well as 4G and LTE?

Yes. I think first of all, in the macro T&M, it was a bit more skewed towards the European region where I think as you can tell, there are probably heavier macro concerns today, so I think it really is some delays in spending related to those macro concerns. I think there's still a lot of additional broadband requirements in the networks in Europe and that needs to be addressed. But there is some just being conservative, I think, in the short-term spending. But it did impact us across the world but probably most significantly in Europe, from what we saw on T&Ms, specifically. I think as far as the broadband deployments, I think what we see from the operator, they haven't changed any of their plans. They are still planning to pretty aggressively roll out additional capacity, additional networks, and what we've seen from sales of smart devices out there in the market, they continue to be deployed at an increasingly rapid rate, so we the know network's are in pretty difficult shape. They need to be expanded and the capacity added. So I think there's only so long that investments can be delayed into these networks.

And your next question comes from the line of Todd Koffman with Raymond James. Todd Koffman - Raymond James & Associates, Inc.: Can I just get a clarification in your response to the Alex Henderson question on Test and Measurement for the December quarter. You said you expect to meet your operating margin target range of, I guess, 20% to 23%. And, Mike, just a follow-on to that. Since it sounds like you got fairly good visibility, if that's what I heard you say, in the December quarter test budget flush, is it a stretch to say that the revenues in CommTest would be flattish to up year-over-year?

Dave, did you want to talk to the business model and then...

Yes. We did say it on the call and to Alex that we expect to be in the operating margin range for the December quarter for test provided the revenues are above the 215 level and that the margins, or the gross margins are in the range of 57% to 61%. That is what we said on the call.

I think as far as what we expect to happen in the December quarter, what we said was that we don't see anything that would indicate that the operators wouldn't have somewhat of a normal budget flush in that quarter. They all -- the major, because most of it comes out in North America and the major North American network operators have not given any signals other than a probably a normal type of period in the December period. But again, we do have limited visibility. So that's why we don't give guidance out into the December period.

And your next question comes from the line of Joel Achramowicz with Blaylock Robert Van.

Tom and Dave, I just had a couple of questions. There seems to be a lot of interest now in coherent DP-QPSK transceiver technologies for 40 and 100 Gig. And is that -- perhaps that interest now, causing any type of a pause now the supply chain for maybe some of the carriers that want to look at a more productive, more efficient transceiver throughput?

From our observations, we haven't seen anything that's indicated there's been a pause waiting for that technology to hit the market in volume. So we haven't seen any indication of that at this point, Joel.

And at this time, there are no further questions in queue, and I would now like to hand the call back over to Mr. Tom Waechter for closing remarks.

Thanks, operator. As our call concludes, I have some final comments. JDSU delivered a solid fourth quarter as well as full year results. I am pleased with the progress we are making towards our target operating model, as we continue to benefit from our new product introductions and our focus on operational excellence. Soft economic conditions and inventory corrections by our Optical Communications and gesture recognition customers are negatively affecting near-term results, but we strongly believe that fundamental end-market drivers for our product remains strong. We expect broadband infrastructure growth to continue based on demand from broadband, from bandwidth-intensive applications, and we are well-positioned with our portfolio of products. We will remain focused on profitability and cash flow generation and we will continue to invest in R&D and new products that will further differentiate JDSU in the marketplace and we will benefit the company over the long-term. In closing, I'd like to thank our employees for their hard work and commitment and contributions to JDSU. I would also like to thank our customers, partners, vendors and our long-term shareholders for their continued support of JDSU. I want to thank you for your taking the time to join us on this earnings call, and we appreciate your interest in JDSU. Have a good evening.

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