Good day, ladies and gentlemen, and welcome to the First Quarter 2012 JDS Uniphase Corporation's Earnings Conference Call. My name is Erin, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today's conference, Ms. Michelle Schwartz, Senior Director of Investor Relations. Please proceed, ma'am.

Thank you, operator, and welcome to JDSU's Fiscal 2012 First Quarter 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 30, 2011. 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 limitations 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, supplementary 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 first quarter revenue of $421.1 million, at the high end of our guidance range. Gross margins for the quarter improved from the prior quarter despite lower revenues. Operating expenses declined by over $9 million due to stringent cost controls, resulting in an operating margin of 10.9%, which exceeded our guidance range. In fiscal Q1, new product revenue remains strong, with 67% of Optical Communications revenue and 56% of CommTest revenue being generated from products less than 2 years old. Additionally, our financial strength continued to provide us with the necessary capital to fund our robust new product pipeline, as cash generated from operations totaled $22.9 million. On our last call, I highlighted that we expect some short-term revenue volatility due to uncertainty in the macro environment, and that optical customers were reducing their on-hand inventory levels. I'd like to provide an update on these topics, as well as some clarity on the impact with the recent flooding in Thailand. Significant improvements in our optical customers' inventory levels have been made over the past 6 months. Q1 bookings for some of our key optical products were very encouraging. ROADM bookings were up nearly 25% from last quarter, and were the highest level in the last 3 quarters. Our tunable XFP bookings were up 70% from the prior quarter. 7 out of 12 product lines saw their bookings increase on a sequential basis. Turning to the situation in Thailand, the floods have created a great deal of hardship on the Thai people, the infrastructure and the ability to do business in the affected areas. I am happy to report that all the JDSU employees in Thailand are safe but many of them have been displaced from their homes due to the flooding. We…

Thank you, Tom. Before I start, please note that all numbers are non-GAAP, unless I state otherwise. First quarter revenue of $421.1 million was down 10.8% from the prior quarter, and up 2.4% when compared to the first quarter of fiscal 2011. Revenues declined sequentially in each of our business segments as expected. Book-to-bill for lasers was approximately 1. CommTest, Optical Communications, and AOT book-to-bill were each less than 1. Book-to-bill for the total company was also below 1. The first quarter's gross margin was 47.3% of revenue, up from the previous quarter's gross margin of 46.7% and relatively flat with first quarter fiscal 2011's gross margin. The sequential increase in gross margin was primarily due to segment mix and improved CommTest gross margins. Operating expenses for the first quarter of $152.9 million was down from the prior quarter's $162.3 million, primarily due to lower headcount in CommTest, a direct result of the previously announced restructuring activities and lower corporate spending. The first quarter operating margin for the company was 10.9%, up from 10.8% for the year ago period, due to lower operating expenses as a percentage of revenue. Net income for the quarter was $40.9 million or $0.18 per share, which compares to $53.9 million or $0.23 per share for the prior fiscal quarter, and to $44.8 million or $0.20 per share for the year ago period. The year ago period benefited from a favorable tax provision. A detailed reconciliation of our non-GAAP results to our GAAP results is available in today's press release. Our non-GAAP operating income excludes, among other items, amortization of acquired technology and other intangibles of $21.2 million, an $11.6 million charge for stock-based compensation, and a $7.4 million accrual for a legal dispute. Including the noted items, the fiscal first quarter 2012 GAAP net…

Thanks, Dave. I will now provide fiscal Q1 highlights from each of our business segments. I will start with the CCOP segment, first Optical Communications. Innovation remains robust as we saw 67% of revenue from products less than 2 years old. ROADMs were 28% of optical revenue with strong booking. Book-to-bill was nearly 1, following 3 consecutive quarters of book-to-bill less than 1, due to the inventory build up. During the quarter, Infonetics identified JDSU as the leading provider of ROADM products for the first half of the calendar year at over 50% market share as we took significant share from a major competitor. In Q1, we also secured an increase in share at a major customer for our 50 gigahertz ROADM, expanding our leadership position into the second half of fiscal year '12. Tunable XFP revenue was 10% of optical revenue. Bookings were up 70% quarter-over-quarter and book-to-bill was over 1. Super Transport Blade revenues were up 18% and bookings increased by 28% quarter-over-quarter. 40G demand continues to gain momentum as we are winning new slots at the component level, and with our new 40G module. In the second half of FY '12, we will launch our coherent 40G solution line-side module, and additional 40G client-side solutions to add to our existing portfolio. 100G design activity is also strong, and customers are engaging with us on new partnerships. In Q1, we increased our shipments of 100G coherent receivers and coherent modulators, and made significant progress in the development of our 100G coherent solutions and client-side solutions. Our vertical integration of 100G components provides us with a competitive advantage as we develop and introduce our 100G module solution. As we introduce these products over the next several quarters, we will provide additional updates. For 40G and 100G applications, we currently…

[Operator Instructions] Your first question comes from the line of Nathan Johnsen from Pacific Crest Securities.

Two quick ones. One, just in looking at the bookings spike in optical, I was wondering what if any of that bookings spike be attributed to customer behavior associated with concern surrounding the flooding in Thailand. And then secondly, you guys have highlighted the self-aware networks and then clearly an area of differentiation for you. I was curious how many competitors you guys see as having the necessary components to follow you guys into that demand?

Maybe to address your first question regarding the uptick we saw in optical bookings for the quarter. The bookings really were recorded before any knowledge of the Thailand flooding or any impacts from Thailand's flooding were identified. So I would say there really wasn't any anticipation or any impact from those. So healthy bookings in the quarter. I think as far as the self-aware networks, we do expect competitors to be out there. But as we've demonstrated, I think on some of our recent technologies, we plan to jump out ahead in this area and lead from a technology standpoint to solve our customers' needs in this area.

I think additional color is to the first 4 weeks of this quarter, we saw orders in the optical space also coming in at a slightly higher rate than the previous quarter through the first 4 weeks. So that's why we are encouraged with the statement we made about September being what we thought would be low, if it wasn't for the floods in Thailand.

One last thing from me, just on the gross margin line. Any potential implications just typically having to scramble to meet demand, particularly with the constraints that you guys are dealing with, can have a persistent headwind to gross margin. Do you guys anticipate gross margins to be under pressure for optical through any period of time passes or...

As far as -- so if you exclude the Thailand impact, just normal course of business, I think, we think we'll see our normal -- we're going through the contract negotiations now. Over the year, we see a typical 2% to 4% impact from ASPs, but we don't see any unusual gross margin impact on the business.

And your next question comes from the line of Alex Henderson from Miller Tabak. Alex B. Henderson - Miller Tabak + Co., LLC, Research Division: If we could just delve into a couple of those issues a little bit more detail would be helpful. First, the negotiation on pricing I would assume is going on as we speak, relative to the price adjustments that are typically made January 1. So is there going to be any adjustment to those price discussions that would impact the rate of change in pricing in the first quarter of next year or into the second quarter because of the tightness on supply as a result of the flooding? And second I know it's almost impossible to get your arms around the timing of when you're going to get that facility back up, but would you expect the costs associated with bringing the facility back up in Thailand to be a cost that increases beyond the December quarter and continues to impact you into the first quarter, or will those lines be up and running by the end of the year and therefore no incremental pressure? And conversely would you get that revenue back that you lost in the December quarter, in the first quarter, in a nonseasonal fashion as they make up for the lost orders in 1Q, or in the December quarter. I know that's a lot of material but it's all related.

Let me see. This is Dave. Let me see if I can work on that. One, as you may recall, before when we had shortages of supply, we noted that the customers don't really tolerate inappropriate pricing behavior so we don't expect the prices to change dramatically from what's being negotiated now just because of the floods in Thailand. Second, with regards to the carryover of any revenue, we believe there will be some carryover of revenue. At the same time, as our customers will be looking for other folks that can meet their immediate needs, so that portion could potentially be diverted elsewhere and so it will really be a factor of how quickly we bring the revenue or the production lines back on track. As we noted in the call, as you asked about the costs rolling into December, we believe we can get the factory from what we know right now, to a higher level of production. Obviously, we'll have much more information week by week, and we expect by the end of the quarter, we'd be ramped up to full production, provided there are no other logistic issues that get -- that interfere with that. So I think we're in sort of a wait and see to see if we can get back to full production. That's why we gave that range, but we certainly anticipate we will get to full production by the end of the quarter.

And your next question comes from the line of William Stein from Crédit Suisse. William Stein - Crédit Suisse AG, Research Division: If we can delve into the Thai flood just a little more, if you can comment on how you're seeing customers react. We saw post the Japan earthquake and tsunami, we saw customers try to pull in as many component orders as possible. Are you seeing any of that behavior? And also related to that, how do you expect to adjust your supply chain going forward as it relates to other contract manufacturers in addition to Fabrinet? And as a follow-up, I wanted to ask in the CommTest business, whether there was a pull in from Q4 into Q3, like we saw with one of your competitors.

I think as far as the first question around flooding in Thailand. First of all, our customers are trying to get clarity, obviously, as to when we're going to be back up and running. We did note in our earnings call that we were able to ship some finished goods that were already completed, so that's I think helping with some of the immediate customer needs. But I think primarily, they want to get clarity and see what type of contingency planning they might need to make during this period of time. I haven't seen any kind of what I'd call abnormal behavior. I think everybody's being rational at this point and just trying to understand the facts and we're providing those on a daily -- updates on a daily basis, and being very transparent with our customers so they can do the best they can to meet their end customers needs. I'm not sure on the CommTest statement, if you could just repeat that question on the pull in? William Stein - Crédit Suisse AG, Research Division: So one of your competitors in the CommTest service assurance space talked about earlier than expected rev rec in calendar Q3 that they previously expected to happen in Q4 in North America in particular. Did you see any of that? Is that at all part of what's driving the below seasonal outlook or the no budget flush for you for calendar Q4 for that business? And is that a view based on kind of what you see in backlog now or is this just a matter of kind of being conservative relative to the macro?

I think -- and to answer your question, at calendar Q3, we didn't see really any pulling of Q4 orders that we're aware of, nothing significant. So I don't think that's not impacting Q4. I think Q4 is primarily knowing what the macroeconomic climate is now. Look at some of the larger carriers and what they've announced as far as spending and how that's proportioned out in the year, gives us the inclination that Q4 is going to not have robust budget flush and be slower than what we normally see in the December quarter. I think Europe's been soft for a number of quarters and we're starting to see a bit of that more hesitancy in North America on the spending.

And the lengthier, as we noted on the call, the lengthier approval cycles that appear to be getting implemented by the carriers.

And your next question comes from the line of Subu Subrahmanyan from Sanders Morris.

I have some follow-up questions on the Optical Comm side as well. Dave, could you talk about what the level of exposure is from the revenue perspective to Fabrinet if you could quantify that? And I'm just trying to understand between having almost had a month of production in the current quarter, some finished goods, what the assumption is for the range of revenue impact, $35 million versus $45 million, I assume that the Pinehurst facility does not come back at all during the course of the quarter? And then I know you're not guiding to March, but directionally, should we expect revenues for Optical Comm to be back to a normalized level in the March quarter? Or could this be a multi-quarter impact?

You asked the question about how much revenue we do out of Fabrinet. And as we said, our Commercial Lasers are done out of there, plus the ROADMs and tunable XFPs and some of our amps. So if you take just those numbers, you can see that it can affect greater than or right around approximately 50% of the revenue that we reported last quarter. Now obviously that's what goes through Fabrinet, not all of that is impacted by the events that are occurring and that's what we've basically contemplated in the guidance we gave. And on the $35 million to $45 million on that question that's just basically looking at what we know right now and basically ranging it as I stated in the guidance at what rate we can bring back on the production. We didn't really talk about at this point how that is by product line because we're assessing at what rate each of the factories is coming up in the product line.

Is it fair to say though you expect, both of those, expect some production starting to happen in the current quarter? Or does the $45 million not assume any recovery at all with production in the current quarter?

We're expecting a level of production. It's really just a matter of how much production, right? So if we had, had assumed zero production for the quarter from this point on, the range would have been greater.

And for March, would you expect to be back to a steady run rate, meaning the $150 million you did last quarter, plus or minus a little bit back to the March quarter level?

Again, the visibility is pretty limited right now and I think that right now, our focus is on getting the production back online for this quarter. And as we get better visibility into that, we'll be able to get a better focus on what the opportunity is for the March quarter.

Your next question comes from the line of Todd Kaufman from Raymond James.

Steve, can I just get a clarification on that last question? You said 50% of CCOP comes through Fabrinet, and is that all coming through only historically this Pinehurst facility?

We're only in the Pinehurst facility in a number of buildings there. I believe it's 2 different buildings that are in Pinehurst. I think there's 3 total buildings there at Pinehurst. And yes, we've basically said the Commercial Lasers are manufactured there, ROADMs and our tunable XFPs and if you just look at the numbers, which we disclosed there, you can see that it's roughly 50% of the revenue that we did in the last quarter.

So it looks like you're guiding down, I don't know, $45 million sequentially. It would seem as though if there's extended difficulties with those facilities that there's additional revenue at risk if those facilities did not get back online.

The range we gave is what we believe the revenue that -- the risk is if they don't come online at all, again, in our projection is that we will get a level of production out of those facilities.

So assuming there's more difficulty and extends further, you would not be able to do the $150 million in CCOP revenue and the December quarter would be something even worse than that?

We're not assuming that. We're just, like we said, we're assuming that we'll get a level of production out of those facilities and as I said with Subu that if we had assumed that we'd get nothing out of the facilities, we would have given a different range.

Can I just ask a quick follow-up to this, as it relates the competitive landscape, are you significantly disadvantaged relative to some of your competitors in these product areas, who maybe in the same product areas sourcing from different contract manufacturers, or is everyone in the same boat?

I would say the majority of our competitors get some level of products out of Thailand. So there's 4 of us probably that are in a somewhat similar situation. One of our competitors has a manufacturing outside of Thailand that probably puts them at, short-term, in a better situation on some of these products.

There's a number of factors there. Are they also qualified in the same slots that we're qualified in? What are the inventory levels of the customer? So that question is, there's no single answer to that question. There's a number of factors that have to be taken into consideration. I think right now, what we can give you is how we think it's going to impact us.

[Operator Instructions] Your next question comes from the line of Kevin Dennean from Citi.

Tom or Dave, I'm just wondering if you could talk a little bit about CommTest, it was down seasonally. But could you talk a little bit about how the various pieces performed, in other words, field tests, lab equipment service assurance, and even wireless?

Sure. I think as far as field test, it remained reasonably strong during the quarter. That's always a strong point for us. We talked about fiber test being up and being strong quarter-after-quarter and year-over-year. So I think that has held up pretty well. I think lab, on the lab side, as I mentioned, we're continuing to see significant orders from the 100G test equipment so that continues to expand and to grow. I would say service assurance, we continue to focus on an area, a growth area but still remains a smaller part of our total revenue. So I would say that did not grow significantly during the quarter.

And just one more quick one, and maybe its for both you and Dave. If you could update us on your thoughts around M&A, you've got a healthy cash position, you're generating solid operating cash flows. And valuations in the sector have obviously come way in. At this point in time, or maybe once we get a little bit more clarity on Thailand, and that starts to resolve itself, how should we judge your appetite for M&A, increased, flat, the same? And should we think about the priorities in M&A, still being CommTest, even though component value, optical component valuations have really gotten depressed?

I think M&A remains one of our top priorities for our use of our cash, that and investing into innovation for R&D. So that continues to be at the top of the list. We do see a number of opportunities out there. Valuations have pulled in so with some of the uncertainties in the market, et cetera. So we do see a number of opportunities out there that are interesting. I would say because of the fragmented nature of the CommTest market and the areas of -- that we see to be able to continue to build out in places like wireless and the LTE deployment, it does offer a number of opportunities for us that are pretty visible at this point. It doesn't mean we're not looking in the other 2 parts of our business, but I would say that there are -- tend to be more of those kind of opportunities in CommTest because of what I just mentioned.

Your next question comes from the line of Ehud Gelblum form Morgan Stanley.

This is Kim Watkins in for Ehud today. Just had two questions. First on -- I believe that Fabrinet has a new building coming online. I'm just curious if you've entered into any discussions with them of potentially using that building at all to increase your capacity at the Fabrinet site? And secondly, are there any markets leading JDSU to possibly benefit assuming that manufacturing comes on again towards the end of the quarter, perhaps amplifiers kind of come to mind, but are there any others where you could possibly benefit from other competitors having lengthier production limits?

Fabrinet is in the process of building a new building, just really adjacent to the main facility or 2 main facilities we're in on the Pinehurst campus. So that is a potential area for expansion of capacity into the future and that was one of the reasons for them bringing that facility on. I think as far as opportunities that may come out of this, out of the flooding conditions in Thailand, there are the potential for some opportunities where we're manufacturing in other locations certain products that some of our competitors will probably be down, not able to produce for a while. So right now, it's I think a little hard to say what the size of that opportunity is, but we do think there are some opportunities out there to fill some of those voids.

So Tom, just to clarify the first one, is there any opportunity for you to use the new building fix to get back online faster?

I don't think it's completely -- I don't think the building is completely fitted out at this point. So I think the main focus is going to be on getting the 2 buildings up on the Pinehurst campus that we're in. So I don't see that as a potential today. That hasn't come up as an area where we could get ourselves going faster.

Your next question comes from the line of Cobb Sadler from Catamount Advisers.

I had a question on the CCOP business and your XFP tunables, if I did the math correctly, look to be down pretty strong quarter-on-quarter. ROADMs look to be down a little bit also, but the bookings were really strong. And I understand that you do both the -- you manufacture both of them in Thailand. So how does all that shake out? I mean with the bookings strong, are you going to be able to deliver, given they're manufactured in Thailand?

So again as I said, the lasers, the tunables, the ROADMs and the amps, those are all impacted by the Thailand situation. And so as we bring the production online, those 2 buildings are impacted that's what they build. And that's what we basically contemplated in the guidance. So we're expecting it to be impacted obviously. And so you would assume that the revenue levels for those products would be down from the quarter we just reported just based on the impact that we talked about. So again, where there's not very many suppliers of the tunable XFPs out there, so we're working with our customers. And on the ROADMs, again comes down to the products that you're designed into if there's a competitor or not, and we're working with our customers again to meet their needs.

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

Tom, in Optical, if competitors are qualified and they don't rely on Thailand, it sounds like they will gain share in the near-term, but why would that revert longer term? Are customers telling you that they're holding a spot in line for you when things get back to normal?

In some cases, we do have contracts with our customers that would give us those opportunities back even though they may, we may be displaced over the short term. In fact, what you just said, happened so that's 1 factor and then I think it also comes down to past performance, quality, delivery, service, total service to the customer. And we think we rank very high with most of our customers in those areas. So if we do get displaced in the short-term, well, we're going to work really hard to get that back and in some cases we're covered contractually once we're back online.

And the other thing to consider is with this situation in Thailand, other suppliers to our customers could be impacted, which then could affect their total capability of building the end product, which would include our products. I think our customers are still figuring out what those other impacts are.

And your next question comes from the line of Troy Jensen from Piper Jaffray.

Just curious to know if any of the products coming out of the Fabrinet facilities, would they need to be recertified now with customers?

No, we don't -- as far as we know, we haven't seen that dialogue with any of the customers. Because we're not going the change the process. We're not changing equipment. In fact, they have all the operators back.

The facility was dry, so it's really -- it's almost as if they just had a temporary shutdown because there was no breach of the clean rooms.

And your next question comes from the line of Ajit Pai from Stifel, Nicolaus. Ajit Pai - Stifel, Nicolaus & Co., Inc., Research Division: Just a question on your gross margins and then on your laser business. Your Test and Measurement business had gross margins that were above your target range. So is that reflective of something that could continue, so you'd raise your target range for that business? And then on your laser side, you also had probably the best gross margin we have had since you started providing us some color there. And also a record quarter for revenue when I go back and look that business. So I know you're including photovoltaic products within that, but is that really a record quarter since you started breaking that out? And can we expect the growth over there to continue?

I think in lasers we believe it's at least the best quarter we've had in 2 years, so probably since we -- it's pretty close to when we were breaking it out. So I think that's the case. I think lasers -- it's mix, and also the kilowatt fiber laser is being well-received in the field with a modest customer base. I think from a CommTest standpoint of gross margin, that's an area as you know we've been working real hard on bringing that business model up. The mix of new products has continued to grow, 57%, I believe it was this past quarter so it continues to grow pushing well above 50%. I think we're also gaining efficiencies with our outsourced partners through the supply chain now, where we had talked about refining that flow and that process and it's starting to happen. So as far as your question, are we going to move the range up? Not at this point, but we are hitting now pretty consistently above 60% and above the high end of our range.

I will now turn the call over to Tom Waechter for closing remarks.

Thanks, operator. As our call concludes, I have some final comments. I'm pleased with the progress JDSU continues to make to further our operating model. This quarter, we improved our gross margins through new product revenue and leveraging our contract manufacturer model. Our flow of new product introductions has been strong, and we continue to innovate through collaboration with our customers. While the macroeconomic environment and the flooding in Thailand have created a challenging environment in the short to medium term, the underlying fundamentals of our business remain healthy. We remain focused on executing our strategy to address the market trends of broadband demand, focusing on profitability and cash flow generation, while we continue to invest in R&D and new products that will further differentiate us in the marketplace that will benefit the company over the long-term. I'd like to thank our employees for their hard work and commitment and contributions to JDSU, especially those on the ground in Thailand, who are working tirelessly around the clock to do everything possible to fulfill our customer commitment. We also greatly appreciate our CEM partner, Fabrinet, for all their efforts as well. Finally, I'd like to also thank our customers, partners, vendors, and long-term shareholders for their continued support of JDSU.

Thank you again for taking time to join us on this earnings call. We appreciate your interest in JDSU. Have a good evening.

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