Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 JDSU Earnings Conference Call. My name is Jeremy, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Ms. Michelle Schwartz, Senior Director of Investor Relations. Please proceed.

Thank you, operator, and welcome to JDSU's Fiscal 2012 Second Quarter Financial Results Conference Call. Joining me on the call today are Tom Waechter, Chief Executive Officer; Dave Vellequette, Chief Financial Officer; and Alan Lowe, President of CCOP. Per your input, we will rotate the leaders of our business segments to participate on our earnings calls for the purpose of being available during the Q&A portion of the call. 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 they move through the quarter. Please note that all numbers are non-GAAP unless otherwise stated. A detailed reconciliation of these non-GAAP results to our GAAP results, as well as a discussion of their usefulness and 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 second quarter revenue of $413.1 million and operating margin of 9.6%, beating the high-end of our guidance range. I am pleased to report that we resumed full production of our products at Fabrinet's manufacturing facilities in Thailand more quickly than expected. Due to the outstanding efforts of our team and our partner, Fabrinet, the net revenue impact of the Thailand flooding was approximately $15 million, which was less than our original estimate. Demand for our products improved over last quarter as book-to-bill was above 1 for each of our business segments. It was our highest bookings level in the past year. New product revenue remained strong with 62% of Optical Communications revenue and 56% of CommTest revenue being 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 as cash generated from operations totaled more than $45 million. Although broadband drivers remain strong and networks continue to be overloaded, spending by network service providers has been more measured. We believe this cautious spending reflects global macroeconomic uncertainty, delayed investment in the U.S. due to contemplated M&A activity. In fact, that service providers continue to refine their own business models. Slower spending and more competitive bidding by service providers negatively impact pricing and margins in our optical business. We are confident these issues are not systemic or long term in nature and therefore, we will continue to execute against our strategic priorities to drive growth and profitability. Our first strategic priority is collaborative innovation. JDSU was first to market with ROADMs, tunable XFPs and a number of key test products. We firmly believe that ongoing innovation is critical to providing differentiated solutions to our customers. We…

Thank you, Tom. Before I start, please note that all numbers are non-GAAP unless I state otherwise. Second quarter revenue of $413.1 million was down almost 2% from the prior quarter and down slightly more than 13% when compared to the second quarter of fiscal 2011. The net revenue impact from the Thailand flooding on our CCOP segment was less than expected at approximately $15 million. Book-to-bill for the total company and for each segment was greater than 1. The second quarter's gross margin was 46.8% of revenue, down from the previous quarter's gross margin of 47.3%, and down from the second quarter fiscal 2011's gross margin. The decline was primarily due to product mix in CCOP and in CommTest and an increase in inventory reserves. Operating expenses for the quarter of $153.9 million were up $1 million from the prior quarter, primarily due to annual merit increases, which were partially offset by a $1.3 million facilities accrual release. The second quarter operating margin for the company was 9.6%, down from the previous quarter's 10.9% due to lower gross margins and slightly higher operating expenses on lower revenue. Net income for the quarter was $35.8 million or $0.15 per share, which compares to $40.9 million or $0.18 per share for the prior fiscal quarter, and $67 million or $0.29 per share for the year-ago period. The year-ago period benefited from significantly higher revenues, including $20 million of revenue from carrier year-end budget flush. 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 $22.6 million, a $12.5 million charge for stock-based compensation and a $5.5 million accrual for restructuring and nonrecurring charges associated primarily with CommTest related…

Thanks, Dave. I will now provide highlights from the quarter. Our discussion will differ from our usual format, and I will now focus on end markets rather than our specific business segments with a goal of providing a more market-driven and simplified view of our business. JDSU's core business focuses on the network and providing anti-counterfeiting solutions. These 2 areas drive the primary growth of our business. 80% of our business is a result of broadband demand and associated network builds. Unique from our direct competitors, JDSU provides network building blocks for optical components and subsystems combined with communications test instruments, software and services for network and service enablement. Our other core business area involves anti-counterfeiting technologies that mainly protect currencies and pharmaceutical products around the globe. This represents a smaller portion of our revenue but is a significant contributor to profitability and serves to offset a portion of the cyclicality experienced in the telecom and datacom markets. In addition, we are leveraging our core technology expertise to address adjacent markets, which today include commercial lasers, gesture recognition and solar or CPV. All these represent potential breakout opportunities for JDSU, less dependency on the telco industry and an increase in our total addressable market or TAM. Let's start with our core markets. Despite global macroeconomic concerns and other issues I described earlier, network equipment manufacture and service provider customers continued to spend in Q2 to keep pace with the steep growth of traffic, the addition of millions of devices connected to fixed and wireless networks and changing protocols to drive more efficiency from the network. Our customers need tools to enable greater network agility. They also need deeper visibility into and intelligence from their networks. We call these self-aware networks and they start with the building blocks JDSU provides to…

[Operator Instructions] Our first question comes from Nikos Theodosopoulos with UBS.

My -- I had a question on gross margin in the CCOP segment. Given the 6% ASP decline expected next quarter, can you give us a sense of how much you think gross margin will decline there? And then afterwards, do you see a more historical 2% to 4% decline going forward?

Yes, so first, let me go backwards on that. So afterward, yes, we expect to get back to the normal ranges to the 2% to 4%, that's what our historical experience is. As far as the impact on the margin for the coming quarter, that was contemplated in the operating margin range but again, as you could imagine, the mix could be shifting between the products and so forth. So it's a little bit hard to call the precise margin but we do look at a range of margins and that's how we came up with the operating margin impact. So the impact -- if you look at the operating margin range we gave, you would say that the OpEx will have some effects on it but the gross margin will probably have a greater effect on the reconciliation bridge between last quarter and the Q3.

Okay. Well that makes sense. But -- and then beyond this quarter, beyond the March quarter, if you get back to this 2% to 4% normal price decline, would we -- would you expect to see gross margin improvement thereafter?

That's the point I made about as where things like the fiber laser, where we're removing that to the contract manufacturer working that. As we also work through the current inventory levels, right at their price, the cost that we paid for them, as we work those through and then get the next round of saved inventories, we're obviously -- always working to get their cost down. So we should start to see some benefit from that.

Okay. And just lastly, with these price declines this quarter, do you think your market share held, given the concession you made?

One -- you say concession, this was -- it was a very competitive environment out there right now for pricing and that being said, yes, I think we're in good shape as far as margin. We're always looking forward to grow the margin -- or the market share, we always looking to grow the market share.

And our next question comes from Subu Subrahmanyan with TheJudaGroup.

I wanted to ask about the optical end market demand. Given the $12 million impact on optical comm, would suggest that, from a demand perspective it was relatively flat with September and the guidance for March also suggests kind of flattish demand. So I'm wondering how you guys are thinking about end market demand given the growth orders. And then operating margin for CommTest, I know you've had the 20% to 22% goal for some time, and it hasn't gotten up to those levels for a few quarters now. I'm wondering what are some of the key variables. And also, Dave, did you mention what the revenue would be for Dyaptive?

So why don't I let Alan, first, handle the optical communications part of it, CCOP part.

Yes. So I think the -- with the pricing reductions that we've given this quarter and the revenue growth, we believe that we're going to be growing faster than the market. That said, it's very hard to tell how fast is the market growing. But I can tell you that the products where we have clearly differentiated capability, our demand is quite strong. So I think overall, the market is growing at a lesser space today than we would like it. But our focus is really to develop new products where our customers want to continue to buy from us.

Is it fair to say though, I think when you provided your guidance last quarter, you had thought that excluding the issue of Thailand, growth in optical comm would have been low to mid-single digit and if you add back the revenue impact of Thailand, it's essentially flat. So from a trajectory, order of growth trajectory perspective, did it turn out to be a little bit slower than you have thought 3 months ago?

It's hard to tell what the absolute number that we lost because of the flooding, but I can tell you that the overall forecast prior to the flood was that we're going to have an up quarter. I think we did see some slowdown in the LAN/SAN part of the market that could have impacted our result excluding the flood. So it's hard and that's why we gave estimates on what we felt was impacted by the flood versus just overall demand.

Subu, I think your second question was around operating margins for CommTest and how we see that playing out and are we on that trajectory? I would say from a gross margin standpoint, we continue to hit in the high-end of our range, range being 57% to 61%. We've been at 60% or greater for the last 5 or 6 quarters, at least. So we're happy with that direction. We continue to look at improving that gross margin through a mix of new products, which again was well above 50% in CommTest this last quarter so that it has continued to gain traction. More software content we'll see, and we'll display some of that at the upcoming Analyst Show that we're going to have on February 16th. I think also we've been working with the VMs to get more efficiency throughout our entire supply chain. I think we have pretty aggressive plan there. I see good progress happening in that area. And then of course, just top line growth in itself will help quite a bit. So we do see a path to get there. And I think your last question was around Dyaptive revenue?

We've said Dyaptive is a low single digit millions per quarter at this point.

[Operator Instructions] Our next question comes from Alex Henderson with Miller Tabak. Alex B. Henderson - Miller Tabak + Co., LLC, Research Division: Just to clarify, the normal price declines occur January 1st and July 1st each year, thus semiannually. And you normally see a little bit of sequential price erosion in the interim quarters but the bulk of it happens there. But you offset that with 2% to 4% cost improvements as well, right?

Certainly, we continue to drive our costs down through design iterations as well as working with our supply chain and yield improvement. Alex B. Henderson - Miller Tabak + Co., LLC, Research Division: I just wanted to clarify that because there seemed to be a little confusion on it. So on the question I wanted to ask is that you talked about your ROADM products having a next-gen offering coming down the pipe this summer and addressing some of the grid spacing issues. Could you give us a little bit more detail on what the technology base on that is, whether we're talking about still on MEMs or whether you're going with liquid crystal offering. How should we be thinking about that? And then along the same lines, you talk about that coming out in the middle of the year. I assume that there's a qualification process. Can you give us some sense of how long that qual process will run before you actually see those incremental designs coming in as revenue?

The ROADM technology that we have in our TrueFlex product lines, is L cost based. We believe that there is a market demand for both the L cost based products as well as our existing MEMS products. So that's number one. As far as developing or qualifying the products, we have sampled customers today with our TrueFlex products but they're early samples. I think what we said in the script was that we'd be ready for production before -- during this calendar year. So it does take quite a while to qualify the ROADMs and then the Super Transport Blades take even longer. So what we want to do is make sure we have the right products today so that when our customers generate new products on their platform, that we have the right product at the right cost and the right performance for that. Alex B. Henderson - Miller Tabak + Co., LLC, Research Division: And just -- the last point is, is the TrueFlex is really more than just variable grid spacing because in order to do 200 and 400 gigabits per second, you need more than just being able to switch your grid spacing. And so there's a lot more to what we call the TrueFlex than just being able to run at 25 gigahertz or 50 gigahertz.

And our next question comes from Kevin Dennean with Citi.

This question, maybe it's best targeted towards Alan. I'm wondering if Alan, if you could discuss the competitive environment in tunable XFPs. Are you seeing more suppliers come online? And any change in pricing there?

Yes, I think we see a lot of customers talk a lot about it and have been talking about it for the last several years. I think we can only focus on what we're doing and that's really to make sure we provide our customers the variations and the qualifications that they need to be able to advance their network performance and their products and our customers. And so our competitors are entering the market. I think it's not a surprise. We've been in production for over 2 years, so we're driving the cost down as rapidly as we can and driving performance up and then working on the next generation with our tunable SFP+. So we sample products there with our customers, and we expect, as we said earlier, to be production ready by this summer.

And Alan, one follow-up, just in general, how have lead times developed in light of the Thai flooding situation? The book-to-bill is above 1 so I'm wondering, have lead times started to move out?

It depends, and what we really have been focused on is to get our lead times down so that we can win business if others aren't able to supply where we might not necessarily have that supply. And so we do a -- as good of a job as we can to forecast the capacity needs and we need to meet our customer requirements. But our customers don't always know what they need. And so if we can work closely with our supply chain to provide flexibility, I think we all win. And we are trying to drive down to the 2 to 6 week or less for all of our products, and in many cases, we have inventory on the shelf in our customers VMI hubs so they can pull it the day they need it.

And our next question comes from Mark Sue with RBC Capital Markets.

By all counts, the service provider segment still seems somewhat challenged when we look at CapEx and spending linearity. Certainly, we can confirm that the delay or the pause, it's temporary and timing related and what does that mean for JDSU? Should we think about a snap back by the time we get to the June quarter? And I guess in terms of the overall optical cycle, what you might be observing from your customers to kind of relate to where we are as a resumption to the overall start of carrier projects. Anything anecdotal would be helpful.

I think as far as the service providers or network operators, we have seen some [indiscernible] budget flush on the December quarter and we've seen it somewhat muted spending. And I think that's been pretty visible with especially the large -- 2 of the large North American network operators. But I do think we're lined up well for where they're going to spend their money. So even though they may spend less money in total, I think we're very well-aligned for the sweet spot of where they're going to spend, especially what we're doing to build out the wireless test capabilities, some of the improved solutions and services that we have out there in the market, especially for the roll out of LTE. So I feel comfortable with that. I see demands continuing on the network and the networks do need to be upgraded and become more agile, so we believe that spending has to happen in order to keep the end customer happy and reduce churn. So we're feeling good where we're positioned in this sweet spot. We believe the spending will increase as we look out here in time because of the high level of demands on the network. I think as far as the optical cycle itself, again, I think we're -- continue to be in a growth cycle here with what's happening in the amount of traffic over the networks, the amount of devices being hooked up to networks, just some of the forecasts we see on the projected future growth of devices is very, very encouraging. So we do believe we're in a continued growth cycle, but we will see some big major network build outs happen from time to time, we'll see some lumpiness in that cycle. Alan, I don't know if you have anything else to add around the optical cycle itself.

I think that captures it. I mean, I think our customers are saying that their customers have dramatic needs to be able to solve the bandwidth problems that they have. And so we've gotten closer with our customers to collaborate to make sure that they have a way of driving down the bandwidth costs and having flexibility in, because the networks don't know where the data is going to come from or where it has to go. So that's the whole concept behind the software networks, and that's what we're working with our customers on.

I think also key is that our customers -- our network equipment manufacturers, their lead times are very much reduced and our lead times to them as, Alan noted, are reduced. So the cycle between an order on the NAM to us and back to the delivery to the carrier, is much more normal, normal range of anywhere between 8 and 13 weeks. So that keeps the inventory levels in check.

And our next question comes from James Kisner with Jefferies. James Kisner - Jefferies & Company, Inc., Research Division: Sort of to clarify quickly on CCOP, the sequential increase, is that all just optical or how much of it is commercial or just recognition. Could you parse that for us? And I also would be curious on CommTest, could you help us -- do you have any underlying assumption on when the major operators aren't going back to spend in this quarter [indiscernible] release this. Your guidance just pretty much assume that things are kind of as they are in the December quarter, through the quarter. Or can there be upside if they were to come back and spend and release budgets [indiscernible]?

I can take the question on the sequential increase. I think it's a mix. All 3 areas we expect growth from, Lasers probably a little bit more than average with the growth in Fiber Laser.

I think as far as CommTest and what we've projected into the spending, we know that the timing of the budget releases for the network operators in this quarter is a bit unpredictable. It's usually by the middle of February, sometimes a little bit sooner and sometimes it drags in later. So we tend to be conservative with our approach, especially on the March quarter around that CommTest and what we expect to see. So we didn't see the budget flush at the end of the December quarter but we're being -- we think prudent with what we're expecting in the March quarter here as a result of timing of the release of the budgets. Beyond that, we think you will see some reasonably healthy spending.

And our next question comes from William Stein with Credit Suisse. William Stein - Crédit Suisse AG, Research Division: I'm wondering if you could talk a little bit about the supply-demand balance in the optical components part of the business. We've heard from one of your admittedly much smaller competitors about significantly raising prices recently and yet in your case, there's still what sounds like a supply-constrained environment and yet ASP is going down 6%. So how do we reconcile that? How close are we to balance today and when do you think it comes into balance?

Well I think the Thai flood has impacted certain product lines of some of our competitors that put them in a severely constrained environment. I think our recovery having been so quick, I don't think we have those kinds of situations nor are we going to hold a gun to our customers heads for short-term gains when we're really focused on long-term partnerships. And so while we have sequential ASP reductions in this quarter, those contracts that we've tried to land with our customers are in some cases 6 months, in some cases 1 year and then in certain cases, 2 years. And so those are the kinds of things that we try to work with our customers to get them what they want while at the same time ensure a long-term partnership with them.

And our next question comes from Todd Koffman with Raymond James. Todd K. Koffman - Raymond James & Associates, Inc., Research Division: In the CCOP segment, you have this long term operating margin model of 16% to 20%. I guess you're at 10% now and you're guiding up revenues but because of the price cuts you're guiding operating margin is only about 8% to 9.5% or something. My question is, is the long-term operating margin model that you have of 16% to 20% still realistic?

I think it is. I think we are going through abnormal quarter. If you go back even a year ago, the ASP decline wasn't anywhere close to 6% and so I think as we refresh our product lines and as Tom talked about some of the new stuff that we have coming up this calendar year, those have added value to our customers and we believe that we'll be able to justify higher gross margins. So I think between that and the Fiber Laser gross margin improvements, we'll be able to achieve the operating margin between 16% and 20% if revenues are above $190 million and certain things happen as we drive down costs with our supply chain, as we introduce new products. So I do think it's very feasible.

I think the thing to note for all of fiscal year '11, the CCOP profitability was over 16%. So -- and we have set almost 18% one quarter and almost 19% another. So we can get there it's as noted given the revenue level from some of the recent price adjustments, we're below that level but we think we can get back there.

Our next question comes from Ehud Gelblum with Morgan Stanley.

It's Kim Watkins in for Ehud today. Wanted to follow-up with a question on AOT. It looks like you're going to see some pretty good growth in that segment next quarter after a couple of softer quarters here. If you could give us a little bit more detail or insight into what's driving that, that will be helpful. And then just looking at profitability within that segment, I mean it's your most profitable, it's clearly pretty important to the bottom line but it looks like, particularly gross and also operating margins have been coming down over the past couple of years or even the last year. Wanted to just get a sense of what's causing that and if that's part of the improvements to the cost structure that you discussed working on with -- in the manufacturing side of the business.

The bookings were strong this quarter for AOT. I think it was 1.15 book-to-bill so very, very healthy and a reasonable portion of that was aligned with our Flex products which is a healthy profitable part of our business there. So we're encouraged by that. We do, as I mentioned, have some additional capacity coming online towards the end of this fiscal year, which will add about 25% more capacity in that area for these pigments that go into to the inks for bank notes for anticounterfeiting purposes. So we're very encouraged investing the money, bringing on additional capacity because we do see the demand there. So the majority of that uptick in demand is coming from that area. I think as far as the gross margins and the operating income or operating margin for the AOT business, they are very healthy today, dropped a little bit below our range this past quarter because revenue was below the $55 million. But I do see us being able to move into that range and maintain very healthy performance financially in that business. We have gone through some cost-cutting measures and a little bit of restructuring, which is going to help going forward as well.

And if you look at the range we provided, we said 31.5% to 33% and 32% to 35% is the range so the midpoint of that range that we provided would be in the target range.

Our next question comes from Troy Jensen with Piper Jaffray.

Two quick questions here, CCOP side, does guidance reflect any share gains from your flood impact to the competitors and specifically amplifiers from [indiscernible] given they're underwater and out of production until March? And then also why would you guys expect to have a normal, seasonal decline in CommTest given we didn't see the normal seasonal uptick here in December.

Well, let me start with the CommTest side. I'll let Alan address the optical. So if you look at what we've typically had in the test and measurement area, you first would take out the budget flush and then you would have a decline that sometimes would be as much as 10% or more. So we're seeing a seasonal decline. It's actually at -- the range we've provided was at a lower range than what we've seen historically. So that's really how we viewed it. So it's going to be seasonally lower. We expect but the percent decline is actually lower than what we've seen from most recent history. I'll let Alan talk to the optical side.

Yes, the guidance that Dave gave for CCOP does contemplate us catching up on anything that we didn't ship during the December quarter, as well as hopefully, potential share gains that we might get from our competitors if they're unable to deliver.

Our next question comes from Patrick Newton with Stifel Nicolaus. Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division: Tom, I guess on the CommTest side, have you seen any change recently in customer tone? Are we still in a situation where scrutiny of orders is the norm and is likely to continue to be the norm as long as macroeconomic uncertainty persists?

Yes, actually, we've have seen some improvement in Europe. And that's where over, let's say, the last 3 or 4 quarters we had saw -- have seen the most significant softness. We saw our order funnels improve there and actually business increased in Europe. So that was the area that we are pleased to see some improvement. Asia remains reasonably healthy for us, and Latin America is definitely picking up, especially on the cable side, which I mentioned during the call. So we are seeing areas that we see reasonable spend, primarily I think the biggest pullback has been in North America and again, I think it's for reasons that I mentioned. I think some of that was a contemplated M&A activity that was out there and then just some pullback at the end of the year. But I do again, see the strong drivers. We're seeing some good signs from those operators. And I think we have the right products and some of the products we'll talk about at the Analyst Day on the 16th. I think it will be encouraging to see where we're going with these products and solutions to help solve some of this -- the network operators' issues out there with these complex networks and the demands on the networks.

At this time, there are no questions queued. I'd like to hand it back to Mr. Tom Waechter for closing remarks.

Thank you, operator. As our call concludes, I have some final comments. I am pleased with the results of the quarter, especially given the challenges of the floods in Thailand and the macro environment. Demand for our products improved over the last quarter as book-to-bill was above 1 for each of our businesses and was our highest bookings level in the past year. The macro environment is causing more conscious service provider spending and an increase in competition for our NAM customers. As a result, we are feeling the pressure on gross margin in our Optical Communication business. We are currently working with our supply chain to reduce costs. And I'm confident we will make progress towards improving gross margins this year, especially given the introduction of the next-generation products that I discussed earlier. The underlying fundamentals of our business remain healthy. We are focused on executing our strategy to address the strong market trends in our core businesses related to the network in anticounterfeiting, as well as identified adjacencies 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 and will benefit the company over the long-term. I would like to thank our employees for their hard work and commitment, their contributions to JDSU, especially those who are on the ground in Thailand working tirelessly around the clock to do everything possible to fulfill our customer commitments. We also greatly appreciate our CM partner, Fabrinet, for all their efforts as well. We would also like to thank our customers, partners, vendors and long-term shareholders for their continued support of JDSU. And finally, JDSU will be holding an Analyst Day on February 16th in San Francisco. There, the JDSU management team will share their strategic vision to create shareholder value and showcase new technologies and our differentiated product roadmaps. Please see the press release issued today for more details or contact our Investor Relations department. We hope you can join us.

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

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