Good day, ladies and gentlemen, and welcome to the Q1 2014 JDSU Earnings Conference Call. My name is Bree and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Jim Monroe, Vice President, Corporate Communications. Please proceed, sir.

Thanks, Bree, and welcome to JDSU's Fiscal 2014 First Quarter Earnings Call. Joining me today are Tom Waechter, President and CEO and Rex Jackson, CFO. David Heard, President of our Network & Service Enablement business; and Alan Lowe, President of our Communications & Commercial Optical Products segment are also here for Q&A. I'd like to remind you that this call will include forward-looking statements about the company's future financial performance. These 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 our most recent filings with the SEC, particularly the Risk Factors section in Part 1, Item 1A in our 10-K, filed August 23, 2013. The forward-looking statements, including guidance provided during this call, are valid only as of today. JDSU undertakes no obligation to update these statements. Please also note that all results are non-GAAP, unless otherwise stated. We include a detailed reconciliation of these non-GAAP results to our GAAP results, as well as a discussion of their usefulness and limitation in today's earnings press release. The release plus our supplementary slides and historical financial tables are available on our website. Finally, we are recording this call today and will make the recording available promptly on our website. I'd now like to turn the call over to Tom.

Thank you, Jim. Our first quarter highlighted the advantages of JDSU's diverse portfolio, reflected growth in solutions that support growing bandwidth demand and the expansion of cloud networks and demonstrated momentum in our adjacent markets. We are executing well against our strategic priorities, collaborative innovation, expansion in high-growth markets and disciplined focus on operational improvements. JDSU's Q1 revenue was $429 million at the high end of our guidance range of $410 million to $430 million. Gross margins were 46.3%, and operating margin was 8.3%, above the midpoint of our guidance. Earnings per share was $0.13. We delivered positive operating cash flow for the 28th consecutive quarter, with our cash balance at quarter end of approximately $1.1 billion. We generated $29.5 million of cash from operations in Q1 and completed a senior convertible debt offering of $650 million on favorable terms. We used $100 million of the proceeds to concurrently repurchase 7.4 million shares of JDSU's outstanding common stock, returning value to our shareholders. We intend to use the balance of the proceeds from the convert for general corporate purposes, including potential strategic transactions. Bookings varied by business segment. Book-to-bill for Communications and Commercial Optical Products or CCOP was above 1, with demand stemming from network capacity built, including 100G solutions, as well as other optical telecom products. Book-to-bill for Network and Service Enablement or NSE dropped below 1 on weak order intake in North America, including the U.S. government. Book-to-bill for Optical Security and Performance Products or OSP was approximately 1. Overall, JDSU's book-to-bill was below 1. JDSU's focus on collaborative innovation continues to drive strong customer adoption of new products. Network-related revenue from new products less than 2 years old was 64%, marking the 10th consecutive quarter that we have delivered new product revenue ahead of our 50% target.…

Thank you, Tom. JDSU's consolidated first quarter revenue of $429 million was up 1.8% sequentially and 1.9% year-over-year. The Americas accounted for $199.2 million or 46.4% of total revenue, while EMEA contributed $104 million or 24.3%, and Asia Pacific, $125.8 million or 29.3%. EMEA was up significantly from Q4, while Americas revenue was down slightly due to lower North America demand. Asia Pacific revenue was also slightly down sequentially. Gross margin of 46.3% increased from 46.1% in June and 45.8% last year. All 3 segments expanded gross margins sequentially, including 2 points of improvement in the NSE segment. CCOP margin improved 1.1 points sequentially and increased 1.9 points from last year. Operating expenses were $163.1 million, down slightly from Q4 and up from $154 million from last year, primarily due to FY '13 acquisitions and our continuing investments in R&D, yielding operating margin of 8.3%, up from 7.2% sequentially, but down from 9.2% year-on-year. Net income for the quarter was $30.2 million or $0.13 per share, essentially flat from $30.4 million or $0.13 per share last quarter and down from $35 million or $0.15 per share last year. Please note our Q1 non-GAAP results exclude, among other items, amortization of acquired technology and other intangibles, stock-based compensation and restructuring charges. Now moving to the segments, starting with CCOP, which consists of our Optical Communications and Lasers businesses. CCOP revenue for Q1 was $204.6 million, up 12.2% from Q4 and 5% year-over-year. This growth was driven by a renewed to telecom product strength and continued growth of our Datacom portfolio. Book-to-bill for the quarter was above 1 for Optical Communications and below 1 for Commercial Lasers. Overall, CCOP book-to-bill was greater than 1. Revenue for Optical Communications was $176.2 million, up 14.3% from Q4 with telecom, Datacom and Gesture Recognition all…

JDSU continues to deliver solid results in a dynamic environment. A consistent focus on our strategic priorities, including collaborative innovation and the balance that our diversified portfolio provides, are key drivers of this performance. In our network-related businesses, solutions that support core network capacity expansion performed well as industry investments currently focused in this area. While small cell and LTE deployments have been delayed, and the timing of these projects are difficult to predict, we believe we are well-positioned for these opportunities, as well as increased demand for service enablement solutions that typically follows periods of network expansion. I am pleased with the profitable performance of our OSP business, as we exit legacy product lines and position the business for the best opportunities in the market it serves. And finally, we are excited about our expanding market opportunities and the momentum we are seeing in our Gesture Recognition and Commercial Laser businesses. With that, operator, please open the lines for Q&A.

[Operator Instructions] And your first question comes from the line of Mark Sue with RBC Capital Markets.

I'm trying to get a sense of the lack of a growth within the test and measurement NSE segment. It's been flat to down for almost 8 quarters now, overall. And if I look at it from even on an annual basis, it's down almost $60 million on an annual basis from its peak, and that's despite adding some of the acquisitions. So it comes out to the investors asking us, is it really the timing? It's been quite some time since we've actually seen that growth -- that business grow. How long should we wait? Is it execution? Is it competition? Any granularity in terms of region or segment, LTE, field test or anything like that would be helpful in just understanding what you might do to grow this business going ahead?

I'll take the first part of that, Mark, and I'll take -- turn it over to David Heard. I think some of your questions or parts of your question around, is it competition? We believe in the traditional part of our test business. We're actually winning share in the instruments, field test instruments. We're winning share, and we believe we're expanding quickly into the mobility and network visibility parts of the business. So I don't think it's a competitive issue. We do believe that the network operator spending has been quite lumpy, and we expect that, that will start rectifying itself, as we get into the first part of next calendar year as the small cell deployments and things like LTE deployment pick up. David, do you have additional color to add to that?

Yes, sure, thanks, Tom. I think year-over-year, I think, on revenue, we were up about 1% and 4% when you take into account the fact that over the last 2 years, we talked about taking out some of those legacy low-speed products that aren't going to be appropriate, as we look to the forward direction in the network. And so I think we put the investments in the right place. I think you're going to see a lot more software-driven across the platform. What you're seeing in the uplift of the gross margins, we're investing in that now because we are engaged with the operators. And we know what their needs are on a forward basis. If you look at us now versus 2 years ago, Mark, we're now still around -- we're now around 40% in the wireless and mobile infrastructure field where we weren't. That is where the spend is going. When you look at the ecosystem, I think you're just seeing a bit of a delay in the spend, as carriers move from the macro LTE base station buildout for initial coverage down into capacity and application performance into small cell deployment that was supposed to happen kind of back half of the calendar year this year. But now looks like it's going to be the first half of the calendar next year. So I think we feel pretty good about where we put the investments. We are starting to see that growth, and we are starting to see both our funnel fill, as well as the match to what the customers are going to need in service enablement. And we are taking share in that ultrabroadband piece of our business while we have an improved business model.

With the focus approving the portfolio in the test and measurement and overall, does that mean we should actually think about -- should we even factor revenue growth in this business going ahead, looking forward? Or is it more hot [ph] higher profit contributions that we should think about, just considering -- it's been several quarters in a row where you would meet and then kind of lower the outlook. And I think a lot of it is just related to this business. So maybe all the analysts can kind of revisit whether the market really is growing and maybe your assumptions for that?

Yes. I think it's good question. I think when we look at the market on a go-forward basis, I think, as we mentioned at our last earnings call, a good portion of that pruning is really behind us as we look forward. I think what we've experienced, as we look at our first quarter and we look at our outlook for the first half of the year, is indeed around that large portion of the spend that is around the mobile architecture moving to small cell and STM. So fundamentally, I think our competitors and the industry believe that is a growing market. We continue to believe that's a growing market. We're investing in stickier software that will be a reoccurring and build a more solid business model going forward.

Your next question comes from the line of Kent Schofield with Goldman Sachs.

The NSE question, as we think about the operating structure of that business and look at the operating margins, are there any plans to look at that until we get the ramp-up in spend? Or do you think with the R&D projects and such that you'll continue at that current spend levels?

Well, I think we have shown the improvement in the gross margin, so I think we're on track with the mix. And what we're doing in the supply chain to continue to improve the gross margin, I think from an operating expense standpoint, we have been investing heavily, especially in the new software developments, where that is not showing up into the revenue yet. So we will continue to invest in the software. It's a matter of the timing, and some of these network visibility solutions is really a matter of timing. With that start showing up in the revenue and offsets that there's additional operating expenses, then we did have an acquisition in the peer software space that we, again -- until we have the revenue recognition caught up in the Q3 and Q4 of this fiscal year, we'll see the expenses, but not really a -- much of a realization of revenue. So I think there are other areas where we're reducing operating expenses and gaining efficiencies and put some new tools in for the sales, direct sales and sales channels. And we expect that will gain us some efficiencies as we go forward, as those tools have really just been implemented in the last couple of quarters.

Okay. And then you did mention for September some weakness around federal, was that -- is that all significant? Something that we should expect to continue going into the December quarter? Or was that more of a modest impact?

David, do you want to take that?

Sure. Yes, typically, September ends our year with the federal government, U.S. federal government. So we had some muted expectations built into the quarter, given the sequester. But we did not have built in a shutdown of the supply chain, which did have an impact. We don't believe that's a go-forward, while some budget was lost for the fiscal year for last year. The needs are still there in the government. So we believe we'll see that roll out as again, back to timing, as we get to the remainder of our year and their new fiscal year. But typically this month is typically very heavy, the last month of Q1 is typically over 60% of our government business for that quarter, 60% to 70%, and again, we did not expect a complete shutdown of the supply chain.

Your next question comes from the line of Alex Henderson with Needham & Company. Alexander B. Henderson - Needham & Company, LLC, Research Division: I was hoping you could just give us some sense of this size of the government business relative to how much exposure there is? And obviously, the September quarter is their fiscal year end, so is that a meaningful issue in the December quarter, just to follow up on that. But what's the rough scaling of that on a seasonal basis?

I think from a government exposure, most of what we saw, as far as the downward pressure was in the NSE side of the business -- so again, I ask David, if he can give a little more color on that?

Yes. Again, Q1, typically, is when we factor in our largest government quarter, which also tends to be bookshipped-turns business. So it's a lot milder and already contemplated into... Alexander B. Henderson - Needham & Company, LLC, Research Division: Is it 10% of your revenues in the quarter? And is it less than 5% or so in typical quarters?

I mean, it's about double the effect in Q1 than it is normally. Alexander B. Henderson - Needham & Company, LLC, Research Division: Yes, but what's the size of the business relative that we're talking about here? Is it 5% or 10% of the NSE revenue?

Of NSE total, you're in the 5%, 6%, 7% of total revenue annually, and typically, heavier weighting in the September quarter. Alexander B. Henderson - Needham & Company, LLC, Research Division: And the second question is, you've talked a lot about supply chain realignment and cost cutting, and you spent 1.5 years trying to really address the cost side of the equation. We're supposed to be seeing a margin expansion story in the test and measurement business over time. You've got target margins in the 20% to 23% vicinity, and yet here we are in single digits and guidance that is way below what is normally normal margins, and what is a seasonally strong quarter for the December quarter typically. So how do we get any confidence in the rebound in the margin percentages in the test and measurement segment as we go forward?

Alex, part of that relies, as we said in our model on the revenue levels, so we -- the model calls for $215 million or more per quarter. We've been pretty far off of that, on a quarterly basis right now. And as you look around the industry, I think it's being seen by most of our competitors as well, if not all of them, that there's been a softness out of the network operators right now. So again, we brought the gross margins up about 2.5 percentage points quarter-on-quarter. And we expect that to continue to improve, so I think we're in good shape on driving the gross margin improvements. The key to getting to the operating income is the top line growth and then also starting to see the spend on the software development level off. And then that starts generating revenue at a higher gross margin than the average -- in the kind of mid-60% level will be much higher than that. Alexander B. Henderson - Needham & Company, LLC, Research Division: Last question on the same subject, though. You see -- you also made a comment that you're expecting seasonality to substantially diminish. Can you elucidate what you meant by that and why that would occur?

I think we said that, specifically, around Gesture Recognition. And what's happening now is that our initial customer is in the gaming industry, and a lot of those sales build up for the Christmas season. As we get into some of these other applications, we don't think it's going to be as seasonal based around the Christmas season as the gaming products, so as those start layering on, we'll see less of that seasonality effect. But the gaming products right now, we're seeing that ramp to the December quarter and that start's dropping off for a quarter or 2.

Your next question comes from the line of James Kisner with Jefferies LLC.

I guess I want to just drill down a little on PacketPortal. I believe in February at your Analyst Day, you guys said that you thought you'd do $10 million to $15 million this year in PacketPortal revenue. I'm kind of wondering sort of where we are and do you still expect to hit that kind of number for PacketPortal and separately, on seasonality on CommTest, does it make sense that Q1 would kind of be less than historical given -- I'm sorry, calendar Q1 will be less than historical given the lack of flush in Q4, calendar Q4.

David, do you want to address those, too?

Yes, that's fine. So I think, to Alex's earlier point, I think when you look year-over-year at the NSE business model and you look at what we're investing both in PacketPortal in building up a book of business to move forward on the sticky software revenue, as well as our software acquisitions, you're seeing kind of -- as Rex mentioned in the script, a $6 million impact to that bottom line that 2 things are happening: one, we're not yet realizing the revenue and getting the gross margins, which would even be more improved than the 62.1 % that we're at; and number two, you see it as a kind of a year-over-year negative impact to the bottom line. So as we continue with our software acquisition, booking business in a growing space, again, a little bit more muted, due to software architectures where our customers are going, but equally bullish on a go-forward basis. And the same for PacketPortal -- we expect that to improve to the range based on a bit of the shift of timing. I think currently now we are still looking at the low end of that PacketPortal range. We've added 3 new customers. In quarter, we've got 47-plus trials now complete. We've got 2 new partners that we signed up in terms of go-to-market, with the product and we have a unique new application going out around that small-cell technology that we expect to really help us, as we get to commercial market. And as Tom mentioned, that will have significant uplift for the model and be able to show the hard work that we have done over the last 2 years.

Your next question comes from the line of Joseph Wolf with Barclays.

This is Tavy Rosner for Joseph. I was wondering if you could give us a rough revenue trend by segment for each of the geographies?

We can give it overall, which is typically what we...

Yes, not something precise, just to see some kind of trend.

What we typically do for the company, I mean, if you look over the long haul, you have the -- North America tends to be around 1/2, with the balance split between EMEA and Asia-Pac. We have not been breaking that down by segment.

Your next question comes from the line of Troy Jensen with Piper.

I'll give David a break, maybe a question for Alan here. I know you guys talked about CCOP being flat, but gesture being down. And David, can Telco be in up? Is there any way you guys can just quantify the growth that you expect to see in the data and the Telco segment here in the December quarter?

Yes. I was feeling a little lonely and left out here. Yes, I think, as Tom mentioned, the Gesture Recognition is seasonal and the peak season or quarter for us is the September quarter, so we're seeing a considerable drop in Gesture in the December quarter. That is up, and we're also seeing a softening in lasers. But both of those reductions in revenue are really offset by continued double-digit growth in Datacom and telecom. And just for a data point, our telecom bookings in fiscal Q1 increased from Q4 by 60%. And so we think it's a pretty good indicator that we're back in the beginning of a pretty strong telecom buildout.

So did you say bookings were up 60% or 16%?

6-0. Given the June quarter was light, but if you remember we had record bookings in the June quarter, overall. But our telecom bookings were up 60% in the September quarter.

Okay. Perfect. And then, Alan, just to follow up, CCOP margins were the highest they've been in 2 years, if you could just touch on that. And maybe some thoughts on the pricing negotiation, what it means to 2014.

I mean, pricing is always a challenge in our business, in our industry. And what we focus on is driving continued operational improvements and supply chain improvements, and we're continuing to make a progress there. So as we said, 2.6% reduction in the September quarter, typically, that's larger in the March quarter. And we'll see what happens in the current quarter, but we're not expecting anything out of the norm for the December quarter from typical price reduction. Was there a second part of your question?

I guess, I was thinking why the negotiations for 2014, calendar '14?

Well, they are ongoing now. We've settled a few of them already in trying to get ahead of some of the uncertainty that competitive landscape has created opportunities to close business earlier and some of the changes in the landscape provided that opportunity to go ahead and lock in share for 2014. So I think from that perspective, we're pretty happy with where we are with our customer engagements and negotiations for '14.

Your next question comes from the line of Michael Genovese with MKM Partners.

I guess, my question is about the CapEx environment, in general. And specifically, did something happen in October in service provider CapEx. Did things get a little bit worse? And if you could just comment about the 2 sides, NSE and CCOP, if you're seeing any different CapEx tends across those 2 businesses or if there's -- you can characterize CapEx spending overall, that would be great.

I think you said October. I'm not sure if you meant September, but what we've been talking about is the September quarter. So we did see -- as we mentioned in the script, trends where we saw more of a focus on the core buildout with the 100G really building out the core. And we saw really delays in the deployment of the small cells and LTE, it's actually TD-LTE in China. I think we're all aware of that. So we did see some bifurcation there where there's a lot more spending in the core part of the business and less out into the mobility and the EDGE than we expected. So it was a little bit more lopsided than we expected. We do believe that eventually that right to sell fast -- typically, there's a lag in time. And then we start building out the Metro and out to the EDGE, and we do believe that LTE is going to continue to build out strong. So there was quite a split there this past quarter. We think that's going to start improving as we get into beginning of next calendar year.

And your next question comes from the line of Patrick Newton with Stifel. Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division: I guess, just dovetailing off that comment on China, pushouts on TD-LTE. I was just wondering if you could help us understand what type of contribution you have from these Chinese rollouts built into your December quarter guidance? And then you seem to have a reasonable degree of confidence that these LTE rollouts -- I'm sorry, the TD-LTE rollouts. So the small cell, I'm assuming that's more North American than other geography focused, accelerating. Can you help us understand why -- what gives you that degree of confidence?

Yes. So first of all, I think as far as what we've built into the December quarter for the TD-LTE buildouts in China is very limited. We do have some volume built into our optical components businesses, again, for the buildout of the 100G, as we are starting to see some of that happening, although still at a pretty small scale. And then we suspect from our discussions with the operators in China that we're really going to see more of the TD-LTE buildout that will affect the NSE business more at the beginning of next calendar year, calendar year 2014. Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division: And then the confidence on the kind of small cell and LTE?

Yes. We're very -- have a high level of confidence that, that's a technology that is going to roll out. We do believe it adds some complexity and some new technical challenges because of the -- where these are deployed on sites of buildings, up poles, et cetera and trying to get these 2 all -- be able to talk to each other and all the back hall capabilities that are going to need to come off the small cell. So we do believe it's going to happen. We see it on the roadmaps of our major customers, but we do believe they're working through some initial technical issues before they get these out in the field in large numbers. I think the complexity there is if they are deployed in the field and there's issues with them, the OpEx related to supporting them is very high as compared to a macrocell. So I think there's a lot of testing out happening today in ensuring that the technology is pretty bulletproof before it rolls out into the field. Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then one -- I guess a couple of CCOP questions for Alan and/or Rex. On the optical side, can you comment on where lead times stand in general? I'm curious if you're seeing any capacity constraints across your portfolio or any extension of lead times across any specific products. And then while on the subject of optical, did VMI -- the issue that was prevalent last quarter, did that snap back in the September quarter as a percentage of revenue?

Let me get the VMI number while I answer this question on the lead times. I mean, what we've seen -- and I think in the last 2 earnings calls, I'd said we'd been constrained on 100G modulators. We continue to be constrained on 100G modulators while at the same time hiring people in our Bloomfield facility to grow with the demand, as well as CapEx to grow our capacity in our modulator line. And we expect continued growth through FY '14 on that, so lead times for modulators are challenged today. But we are putting in VMIs on most other products to be able to respond to our customer demand changes because it's uncertain what they need, when they need it and we just need to be able to be there for them and support them. As far as VMI is concerned, Optical Comm's VMI last quarter was 38%. And I think one of the things we saw last quarter was because some of the concerns over lead times, we did see some hard orders from customers who typically took VMI. And I think that, that really stabilized VMI. So I don't think we'll see any changes with respect to VMI, as we go forward in our business. Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division: Great. And I just -- one more on the NSE side, David. I have to just keep drilling down on this one on the operating target. If I take your midpoint of revenue guidance in essence, relative to your targeted model year, about $40 million lights in the December quarter guide. And on an operating margin side, you'd be about $30 million light, so you have somewhere around a 70% to 75% type of incremental operating margin. Even if I take into account kind of the $6 million of software investments that haven't really been levered on the revenue side, that's still a 60% incremental operating margin. I'm just -- I think we all just struggle to see how this target is obtained, even with some of the clear push as you guys have made to software. Anymore comments will be appreciated.

Yes. That's great. Again, if you look at Q1 proxy and you look at gross margins as 62.1% on that level of revenue without software realization, revenue recognition realization. That would take the gross margins of that up. Again, that has about a $6 million swing to the bottom line of where we're at today. If you look at kind of the current environment around Nokia Siemens and everybody else that's talked about the wireless deployments being down and again, shifted to the right, it is volume-based. And so we had a different mix in our quarter due to the government push and the lack lot of that mobility piece tends to be higher-margin business for us. So there's probably another 2 points just on mix that we were off in quarter. And that's received the benefits of the work we've done on the supply chain. So as we return to -- again, all of the things we're investing in: our location, intelligence, small cell, all the things that the carriers are saying they absolutely have to go spend on and are making the architectural decisions to do so. You're seeing M&A happen in that field because people believe with capital that these are spaces and network visibility where they want to be. But as we get that volume, we should be well on schedule and ahead of pace to the 64% to 66% on the gross margin level. And as the revenue recognition happens, both for the acquisitions and software, as the deferred revenue falls off and as we begin to realize the new bookings that we are continuing to see. I think we're feeling comfortable the -- that's why we're continuing the investment. We've moved OpEx dollars out of legacy areas in the places we believe where the public is going. Hopefully that helps.

Your next question comes from the line of Amitabh Passi with UBS.

I had a few questions on NSE as well. David, I appreciate the fact that the segment grew 1% plus in the September quarter on a year-over-year basis in terms of how you reported revenues. But the guidance implied about a 10% decline and if I assume normal seasonality, it looks like we're going to see somewhere between 9% and 10% declines through the rest of the fiscal year. So I guess the question for you was, at this stage, is normal seasonality the right assumption as you go into the March and June quarter, just given how muted December is. I apologize if you answered that before. And then related to that, what should we be thinking about RESO [ph] and its contribution in the March and June quarters?

Yes, so again, we're not guiding out into the first calendar quarter, but I think due to the timing of the shutdown on the government side and the slowdown on the carrier side of orders in our first fiscal quarter, I think that's -- we're expecting to see a book-to-bill above 1 for Q2. I think it's a timing issue in terms of the release of orders that's contemplated into our guidance. As we move forward, I'll let Rex handle the financial assumptions around the prior acquisitions that we've made. But again, we're not yet into substantial revenue recognition in this first half of the year, as we described when we did the acquisition. But again, it remains a very exciting space. We continued to see new bookings, new customers in location intelligence. And I think you're seeing a lot about that in the industry and a lot of excitement and need for that from our customer base. Rex?

Yes, Amitabh, on the most recent acquisition, I would stick with what we've said, 3 to 6 months ago, which is that we are expecting that acquisition to be -- have a positive impact from a gross margin perspective by Q3 and to be breakeven or better on the bottom line by Q4. We are still driving to that, and I don't see any reason why we would want to correct that. From a bookings perspective, you do have an input or visibility into what they did last year and we have represented it as a growth business, and I think that still holds true. To David's point, the revenue recognition side of it is the harder part. So I encourage people to track it on a bookings and cash standpoint. But we would expect to see that kicking in over the next, I'd say, 1 to 3 quarters.

And then maybe as a follow-up, is there a way to think about how big the China opportunity could be for NSE? I think a lot of clients struggle trying to even -- both sides of the opportunity and also assign a probability to you, getting a piece of that business on the NSE side, so any help there David, will be much appreciated.

Yes. So obviously, those are the 3 -- the 2 largest operators in the world are there in China. I think we're well positioned with them on a daily basis as they go to deploy. I don't think we're ready to talk about that as a percent of business. I think we're optimistic based on the current plans and design wins we're getting in that market and feel good. I think we've been consistent on this talking about that being a first half calendar or a second half of our fiscal year uplift on our business.

Okay. And then just final one for me, for I guess, anyone here. Any updated thoughts on the use of cash on your balance sheet at this stage?

Yes. I think again, our primary use of the cash would be looking at strategic acquisitions that would be meaningful to where we want to go strategically and filling out our portfolio. So we will continue to follow down that path.

Your next question comes from the line of Mark McKechnie with Evercore.

A couple of clarifying questions. I apologize I missed some of it. But first on your revenue, OpEx guide, I want to plug that into my model. It seems like we're talking about gross margins going up, am I right? Sequentially? Rex, can you talk about how you expect gross margins in the next quarter? Or this quarter?

Yes. So if you run the guidance that we gave you, you would see -- to get to the operating margin targets, you would have to have an uplift on 2 of the main business units, so CCOP and on NSE. I would expect because of the mix issue we mentioned in the script, the OSP margins are going to decline a little bit but that's a smaller impact on a smaller business.

Got you. And then to clarify on CCOP, if your Optical Communications up 14% sequential, bookings up, you say, 60% sequential, so when you guided that overall grew flat, do you, on a sequential basis, are you expecting another double-digit sequential growth on Optical Comms and a decline in the Laser? Or -- if you can clarify that for me.

Yes, this is Alan, Mark. Just to clarify, the comment I made about 60% increase in bookings is specific to telecom in the September quarter, so not overall, Optical Comms. And we do expect revenue to be down in Gesture Recognition in December quarter due to seasonality, as well as revenue in Lasers to be down. So both Datacom and telecom we expect to grow in the December quarter to offset some of that other softness we see in Gesture and Lasers.

Okay, good. That's helpful. And then finally, just a thought on the NSE business. If we're looking at no flush for December and we've heard that from a lot of carriers, right? Or the equipment vendors into the carrier space that December, we're not getting that flush, we're not expecting the flush. Folks asked about that seasonality into March. I'd have to think, yes, March you'd buck the trend for sure on seasonality, if China Mobile starts kicking up and you don't have that [indiscernible] -- that budget flush in December. I mean, could that be a flattish to down quarter? Or how are we looking into March?

Yes, I think as David mentioned, we are not forecasting out into March but if I do think back on previous years where we had almost 0 budget flush, we did see less of a drop in the March quarter. So we would expect that type of a pattern if, in fact, with don't get any budget flush in December.

[Operator Instructions] And your next question comes from the line of Simon Leopold with Raymond James.

This is Georgios Kyriakopoulos for Simon Leopold. First of all, a housekeeping question. You did not provide percent of sales for ROADMs and Tunables, excess [indiscernible] products this quarter. Can you please give it to us?

I don't have it at my fingertips. ROADMs were slightly down. Tunables were slightly down. And I think it was really a result of the carriers spending mostly, as Tom indicated, on the core network buildout. We do expect both ROADMs and Tunables, both Tunables SFP+ and Tunable XFP to increase in the December quarter. And that's really reflected in some of the strong telecom bookings we saw last quarter, as well as ROADMs to grow as we've seen dramatic increase in demand for our TrueFlex products. And in fact, that's another product I meant to mention with respect to capacity constraints. We're adding capacity to respond to that strong demand on our TrueFlex products.

Okay. Then I'm trying to understand your comment from last quarter where you mentioned the strongest booking in years for test measurement or NSE. When do you expect to recognize revenue from these bookings? And given the weak guidance, is it fair to assume a less seasonal March quarter?

Yes. I think again what we said last quarter on the bookings was, is the largest bookings we had in 8 to 10 quarters, in NSE and that we -- some of those larger orders were spread out over multiple quarters, so I think that's consistent and factual, is what we're seeing happen. Again, as I said in previously, if we do not see budget flush in the December quarter, typically, what we're seeing in the March quarter is less of a percentage down than historical, so we just have to see how that plays out. We're not giving guidance for March yet, but that is typically what we would see.

Okay, then remaining on the Test and Measurement segment, historically, Wireless has driven upside your Test business, and I think you said that in fiscal 2013, it reached 40% of revenue. Now with LTE deployments likely picking North America this year, how do you see this business shaping up over the next few quarters? And also, help us understand the need for your wireless test equipment. Us [ph] carriers, our capacity versus deployment, like for example, you get a higher portion of carrier CapEx colors [ph] when your customers are at capacity? Or when they deploy new footprint?

Yes, I think that's an excellent question. So again, I think what we saw is a shift as people are deploying small cells and more software in the network -- again, you're seeing more of our spend but you're not seeing the revenue right away. You're seeing gross margins over the last 2 years. If you trend it, constantly going up, and you're seeing our spend go up, and you'll see us cross the chasm as we get more revenue recognition of the products we've already sold and the new products launch. For mobility, you're just seeing a delay in the new small-cell architecture, as Tom mentioned, more complicated to be able to hook up to the network. The core is being deployed out there in 100 gig, how you connect those small cells to the core, there are multiple architectures that do that. The good news is we're very well-positioned, with the test equipment and software to test small cells, which there's more of when you deploy for capacity. And players like Sprint that announced today that they'll be deploying small cells in '14. You're just seeing this over and over with the carriers talking about how they're going to use small-cell technology. So we have the test equipment to actually test the cell, connecting them to the -- to that big core via Metro, which you heard players like Juniper talk about a shift in the spend going towards. We're #1 in the Ethernet market. Meeting to deploy these small cells with very small probes to get network visibility is all what PacketPortal is about. And again, the new applications that we have to be able to allow carriers to do that. And so we really see that as a -- again, back half of our fiscal, first half of our calendar when we expected that to be the first half of our fiscal. And I think that's been corroborated by the entire ecosystem and it's a delay, it's not a matter of "if", it's a matter of when. And it appears the when from our engagement is that first half of the calendar, second half of fiscal. And in particular, China with the 2 largest mobile operators, same story, which I think we've been consistent on.

Geographic data, it seems that EMEA grew strongly this quarter, almost up at 20%. Can you offer some color as to what products saw strength, we've seen that region? And how should we extrapolate the strength going forward?

Yes, I think from an EMEA standpoint, we did see an improvement. We don't see a strong trajectory in EMEA. We think we're coming off the bottom. But we really would not say that's an indicator of what's going to happen over the next quarters. We still think EMEA is going to be pretty cautious in their spending and we still think that's going to be reasonably soft. One thing we did say that America's are normally about 50% of our revenue and EMEA and Asia Pacific about 25% each. We did -- have seen Asia Pacific come up and in last quarter, it was about 29%. So we are seeing a trend of APAC improving for us. And again, once the China rollout happens in a larger scale of 100G and the TD-LTE bay stations, we believe that's probably going to increase some more in the future quarters. I think Alan's got an update to a previous question.

Yes, just to get you the specifics on percentage of Optical Comms from ROADMs and Tunable XFP SFP+, ROADMs was approximately 17% of Optical Comms' revenue and Tunable was approximately 12% and both had book-to-bills of greater than 1.

Okay, that's helpful. And when I mentioned about EMEA, can you give us some color which products of strength we've seen in that region? You see more strength in optical versus...

Yes. CCOP saw good growth in EMEA. I think, again, really based on deployments of the core network and just because we ship a component or a module into EMEA doesn't necessarily mean it ends up in EMEA. But I can say that 100 gig amplifiers and things that would go into the core of the network were exceptionally strong.

Your next question comes from the line of Jorge Rivas with Craig-Hallum.

This is Jorge for Richard Shannon today. Sorry if I missed this when you prepared remarks, but did you say that TrueFlex grew 3x from the fourth quarter?

Yes. It was, obviously, off of a small base, but it was -- the revenue was up 3x from the previous quarter. So we're getting good traction there, it's starting to take hold, and again, we think that's going to be a strong performer for us.

And then when could we expect this product to reach the $1 million in sales, quarterly, is that something can happen in the next 2 quarters?

It's already over $1 million.

Okay. And then on the Datacom, so on the growth that you're seeing on the Datacom, what are the products that are seeing the largest dollar growth contribution?

For Datacom, our largest products are 40 gig in TSFP+ [ph], but we've seen a lot of traction on the basic 10 gig XFP+ short reach modules, as well as we've been penetrating more customers with that product.

Ladies and gentlemen, this will conclude the question-and-answer portion of today's conference. I would now like to turn the call over to management for closing remarks.

Thank you, operator. As our call concludes, I'd like to thank our employees, business partners and long-term shareholders for your interest in and continued support of JDSU. Have a great evening.

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