Viavi Solutions Inc. (VIAV) Q2 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Q2 2015 JDSU Earnings Conference Call. My name is Alex, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will be conduct a question-and-answer session towards the end of this conference presentation. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to Mr. Bill Ong, Senior Director of Investor Relations. Please proceed.

Thank you, Alex. Welcome to JDSU's fiscal second quarter 2015 earnings call. My name is Bill Ong, Senior Director of Investor Relations. Joining me on today's call are Tom Waechter, CEO; and Rex Jackson, CFO; Alan Lowe, President of our Communications and Commercial Optical Products Business Segment, CCOP and CEO-designate of SpinCo would also join us for Q&A. Please note, this call will include forward-looking statements about the company's financial performance and plans to separate the business into two independent publicly traded companies. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations. We encourage you to review our most recent filings with the SEC, particularly the risk factors in Part I, Item 1A of our Annual Report on Form 10-K filed with the SEC on August 26, 2014 and on quarterly report on Form 10-Q filed on November 4, 2014. The forward-looking statements including guidance we provide during this call are valid only as of today. JDSU undertakes no obligation to update these statements. Please also note that, unless otherwise stated, all results are non-GAAP, which excludes among other items, amortization of acquired technology and other intangibles, stock-based compensation and restructuring charges. As well as certain costs incurred as we prepared for and execute the separation. We include a reconciliation of these non-GAAP results to our GAAP financials, 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 today's call and will make the recording available by 6 p.m. Pacific Time this evening on our website. I would now like to turn the call over to Tom.

Thanks, Bill and welcome to those joining in the call today. I will begin with our quarterly results. Book-to-bill was greater than 1 for JDSU with only our Optical Security and Performance products or OSP business segment below 1. Revenues was within our guidance range at $437.1 million and healthy gross margins combined with strong cost controls result in operating margin at 9.9% in the top half of our guidance and midpoint EPS of $0.15. Our tax expense increased by $1.9 million sequentially due to geographic mix as higher profits were generated in higher tax based regions, which had approximately a $0.01 EPS impact on the quarter. Both CCOP and OSP perform slightly better than expected bolstered by record revenue levels in datacom and fiber laser. CCOP exceeded operating margin guidance at 12.8%. OSP experienced increased demand for bank note anti-counterfeiting pigment returning as expected to $50 million in revenue per quarter partially replacing the $9 million of revenue from last-time buy products discontinued last year. The NE business segment was challenged by lower demand from North American carriers while growth in mobility and next generation service enablement products did not fully offset the decline from legacy assurance products. The NE and SE Book-to-bill exceeded 1, even though a $12 million mobile assurance analytics quarter and SE booked one day after the quarter closed. We've achieved these results while concurrently executing on our committed separation plans. We are on track to complete the separation by the calendars third quarter, this year and to execute on $50 million of cost reductions, once restructuring is complete. The estimated cash requirements for the separation remained $75 million to $100 million. We met with numerous shareholders last quarter and they resoundingly agreed with our strategy to separate into two companies. SpinCo is a standalone company will have greater focus and agility to respond to the rapid changes and opportunities in the optical components in commercial laser markets. As a public company, it will also have the currency to further optimize this business and facilitate industry consolidation that many expect could occur in the future. For NewCo the separation will allow us to more quickly and effectively continue our transformation of our hardware-centric NSE portfolio with investments in virtualization and new software solutions that give service providers, enterprises and cloud operators unmatched end-to-end network application visibility and insight. I'll now turn the call over to Rex.

Thank you, Tom. Consistent with prior earnings call, we have a supplemental earning slide deck posted on JDSU.com supporting today's commentary. JDSU's fiscal second quarter 2015 revenue of $437 million was at the lower end of our guidance range of $433 million to $457 million. Gross margin at 49.1% improved 60 basis points from a year ago. Gains in each business segment reflecting continued operational discipline, favorable product mix from SE, strength in commercial lasers and OSP last-time buy product exit last year. Second quarter revenue was down 2.3% from year ago levels. However excluding approximately $25 million of 3D sensing and last-time buy revenues in last year's second quarter. Our core network laser and anti-counterfeiting businesses combined revenue grew 3.5% year-on-year. Operating expenses at $171.6 million declined 8% to 10% sequentially from $173 million on continuing expense controls. Operating margin at 9.9% exceeded our guidance midpoint on improved gross margin and expense controls, but was below last year's operating margin of 11%, principally due to higher R&D investments. Our EPS at $0.15 was at our guidance midpoint and exceeded last quarter $0.14 what was down from last year's $0.19 due to lower revenue, higher operating expenses and higher income tax and other in the current period. On the balance sheet, total cash at $867.6 million remains strong. Operating cash flow was $16.6 million down from year ago at $54.4 million due principally to lower collections in quarter and higher payables entering the quarter. As Tom indicated we are on track for plan separation, the management teams from both companies have been established and the teams are working towards setting up SpinCo in its own systems of the plan separation date. We plan to file a Form-10 registration statement for SpinCo and to announce a new branding for both companies, later this quarter. SpinCo is expected to be adequately capitalized and carried no long-term debt at separation. We continue to plan to utilize our net operating loss carry-forwards and the execution of the separation to yield an effective SpinCo tax rate of less than 10% for at least the first three to five years after the split. We remain on track to execute net $50 million and no cost reduction as we've said previously our goal is to take substantially all associated charges in fiscal 2015. We continue to expect about one third of the savings to occur in COGS and the balance in operating expenses. CCOP's book-to-bill ratio was at 1. Optical Communications was just below 1, while commercial lasers was above 1. CCOP revenue of $207.1 million was up 4.6% from the second quarter of last year, above the midpoint of our guidance range of $200 million to $210 million. Optical communications revenues of $167.1 million declined 4.2% from a year ago reflecting lower 3D sensing revenue of approximately $14 million partially offset, the higher telecom and record datacom revenues. The optical component pricing decline was 3.1% quarter-on-quarter consistent with our expectation. We continue to expect ASP decline through FY 2015 to be 10% to 14% year-on-year. Commercial laser revenue reached $40 million up 70.2% from a year ago marking at third consecutive quarter with revenue of $40 million or higher. Driven by strength from Gen2 fiber lasers. Fiber laser revenue was at a record $14.9 million up 20.1% from the prior quarter. CCOP's gross margin at 33.4% increased 110 basis points from a year ago reflecting primarily higher commercial laser mix. Optical communications gross margin at 29% declined 100 basis points from year ago reflecting primarily product mix shift from the decline in 3D sensing revenue. Commercial lasers gross margins reached record levels of 51.8% and rose by 240 basis points compared to last year and by 110 basis points compared to the prior quarter record, on higher volume levels and favorable product mix. Operating margin at 12.8% increased by 70 basis points from a year ago and exceeded a guidance range of 10.5% to 12.5% due to higher revenue and favorable product mix from lasers. Fiscal Q2 sales mix was 73% telecom, 21% datacom and 6% consumer and other versus a year ago at 69%, 17% and 14%. The shifts reflect datacom growth of 16.4% year-on-year and 17.2% sequentially driven by new products and design wins notably in our 100G, CFP2 and CFP4 product lines and the substantial reduction year-on-year 3D sensing revenue. Higher speed transmission defined as 40G and 100G continues to grow and represents about 49% of overall transmission revenue versus a year ago at 43% with its revenue growing 30.3% from last year. Telecom revenue grew seven tenth of a percent year-on-year, but declined 3.1% sequentially due to calendar year end customer inventory management. For fiscal Q3 guidance, we expect CCOP revenue to be $195 million, plus or minus $5 million, and operating margin to be 9.5%, plus or minus 1 percentage point. Our below target operating margin guidance reflects expected lower laser revenue and in turn a lower CCOP gross margin. Our CCOP revenue midpoint guidance at $195 million versus $194.6 million in Q3, last year reflects increased revenue from optical communications replacing approximately $8 million of lower 3D sensing revenue from a year ago. We saw strong bookings in the submarine product line in calendar 2014 including the December quarter as we added a new customer to our submarine business. We continue to expect new Transoceanic cable infrastructure build to translate into new network deployments, where the cable terminate. We should favorably impact our optical communications portfolio in the future. Commercial lasers is expected to be down sequentially reflecting seasonally software micromachining sales as well as lighter fiber laser revenue due to near term product mix shifts and demand from 4 kilowatt to 2 kilowatt lasers. We expect grow in commercial lasers to return however later in the calendar year. Moving to network enablement and service enablement. As a reference point, overall NSE revenue at $179.4 million was down 8% from last year's $195 million reflecting both weaker carrier spending and no budget flush in historically stronger December quarter. NSE gross margin at 66.3% expanded 190 basis points versus last year reflecting contributions from service enablement including our enterprise product lines from the Network Instruments acquisition. NE and SE book-to-bill ratio were above 1. NE's revenue of $133.7 million declined 14.2% from a year ago and was below our guidance of $135 million to $145 million. The year-on-year revenue decline reflects a softer North American carrier spending environment that continues to be impacted by architectural planning and M&A distractions in our customer base. This was partially offset by year-on-year strength in mobility. Gross margin at 65.3% improved 80 basis points from last year, primarily due to better mix. Operating margin at 16.8% declined 300 basis points year-on-year and was below our guidance range of 19% to 21% due to lower revenue and higher operating expenses. For SE, revenue reached $45.7 million growing 16.6% year-on-year although it was below our guidance range of $47.5 million to $52.5 million. The year-on-year revenue increase was driven by New Enterprise revenue as the result of the Network Instrument acquisition in early calendar of 2014, but the guidance range miss was also driven by lower than expected revenue in this business line. Gross margin was a record 69.1% of 510 basis points from last year, with a lower operating loss of 5.5% versus a guidance loss range of 8% to 12%. Better than expected operating margin reflects both higher software mix, lower allocation to sales, expenses based on relative bookings between NE and SE in controls [ph] and discretionary spending. Moving on the OSP, revenues of $50.6 million was 7.3% from a year ago, up 16.9% quarter-on-quarter and just above the midpoint of our guidance range of $49 million to $51 million. The year-on-year revenue declines reflects on FY 2014 exit of lower margin [indiscernible] business which contributed approximately $9 million in Q2 of last year. We were particularly pleased with OSP's return to its $50 million per quarter run rate, just six months after discontinuing these legacy product lines. OSP revenue reflects growth in anti-counterfeiting business as well as slight increase in government business. Consumer electronics including 3D sensing did not have a meaningful impact on this quarter's results, but OSP remains engaged with its customers in the development of next generation designs. OSP's book-to-bill ratio was below 1 in the quarter. gross margin at 52.6% improved 210 basis points versus a year ago on lower revenue levels, which reflects the benefits of our product exits last year. operating margin at 37.2% declined by 30 basis points from a year ago on lower revenue and it was just below our guidance midpoint. Looking forward to Q3, network enablement revenues is expected to be $128 million plus or minus $5 million with an operating margin of 16% plus or minus 1% point. Service enablement revenues expected to $45 million plus or minus $2.5 million with an operating margin loss of 18% plus or minus 2 percentage points. the increased operating margin loss principally reflects our expectation at proportionally much higher bookings in SE than any of this quarter and that's the higher sale expense allocation. We expect the NE market to remain challenging as carrier spending in the March quarter typically and seasonally weaker as customer evaluate spending plans for the New Year. SE revenue is expected to grow year-on-year and at this midpoint of $45 million growth would be 24% from a year ago levels driven by enterprise and mobility. As SE continues to ramp, cost allocation is expected to remain volatile given that it is tied to bookings. It will continue to be more useful to model NE and SE separately in revenue and gross margin, but to combine them again for operating margin forecasting until SE reaches scale. We expect OSP revenue to be $50 million plus or minus $1 million, with operating margin of 37%, plus or minus 1 percentage point. I will now turn the call back over to Tom.

Thanks, Rex. We expect combined JDSU fiscal third quarter revenue to be seasonally down from Q2 at $418 million plus or minus $10 million and non-GAAP operating margin to be 6.5% plus or minus 1 percentage point. Our non-GAAP EPS guidance is $0.09 plus or minus $0.02. Our revenue midpoint of $418 million is flat versus last year. However, approximately $16 million in revenue from a year ago is attributed to the 3D sensing and OSP last-time buys that are zeroed out this year. Therefore, the midpoint reflects year-on-year revenue of 4% from our core networking commercial laser business. While the March quarter is seasonally weak quarter, they're encouraging macro trends that are expected to benefit our business in calendar 2015. Investment spending in the 100G metro market appears likely to begin this year. while Web 2.0 providers are continuing to deploy significant capital in both 40G and 10G infrastructure upgrades. In lasers, we recently announced the 2 kilowatt direct-diode laser that is expected to replace many CO2 lasers used in sheet metal cutting. Additionally, our 6 kilowatt fiber laser product will enable us to expand same opportunity in the welding market. Carrier spending remains unpredictable reflecting the challenges carriers face in determining where to properly invest in the network. We expect service enablement to continue to benefit from changes in network investment towards more software driven solutions and while enterprise spending is expected to be slow at the start of the new calendar year given cautious surrounding macroeconomic concerns, longer term we expect it to be a growth driven for SE. In network enablement we see strength and mobility and broadband access including fiber, but are more cautious on Ethernet and storage network testing. Demand for OSP's anti-counterfeiting products remain solid however, we expect some revenue volatility and lumpiness later in this fiscal year. Calendar 2015 will be an exciting year for JDSU as we prepare to launch SpinCo and NewCo is independent more agile companies ready to capitalize on the opportunities of advanced optical network adoption, fiber [indiscernible] planning CO2 industrial lasers and network test tools involving into advanced network assurance in analytic software solutions. We are committed to the execution of our growth plans and as always remain open to other strategic opportunities for enhancing shareholder value. We'd like to thank our employees, business partners and shareholders for your interest and continued support at JDSU. I'll turn the call over to Bill to begin the Q&A session.

Thank you, Tom. I'd like to ask everyone to limit discussions to one question and one follow-up. Alex, let's begin the question-and-answer session.

Absolutely, sir. And the first question comes from the line of Mark Sue with RBC Capital Markets. Please proceed.

When we look at the [indiscernible] to pruning into decomposition of the business and where we've been and where we're going, the March quarter revenues are similar to what we see in year ago recognizing that composition is a little bit different. However the operating margin improvements actually were still back at similar operating margin levels, this despite the headcount reductions we've seen at the company. So I guess the thought is, can we see is there a lag effect in terms of the margin improvements and how do we get comfort, that we can actually get another incremental $50 million in savings post the split, if you can help us out in somewhere sort of metrics there, that will be great. Thank you.

Okay, sure. Thanks, Mark. I think as far as the business model that we put in front of investor community at our Analyst Day in September. If I look at Q2, we are in those models for CCOP actually towards the higher end of the margins in some cases, even though we are slightly below the revenue we put out there. NE is in their model is well, right on the revenue and at the high end of the gross margin range and actually at very top of the operating margin and as Rex mentioned SE, we're actually ahead of our profitability projection and we have another strong gross margin quarter and OSP performing as planned well within the model and doing well in operating margin. So I think, where we plan to be on the margins, we are continuing to invest heavily on R&D and so that continues to prevent us from dropping some of that gross margin improvement to the bottom line. I think as far as the $50 million net savings that we are looking as part of the as we divide the company into two public companies. As we mentioned in the earnings script, we are on target for that. We will achieve that on an annualized basis, once we get through all the restructuring and with time, we'll give more detail on some of those restructuring efforts, but that is on target. So we feel comfortable, we're going to be able to get that net $50 million out of our expenses going forward.

Your next question comes from the line of Patrick Newton with Stifel, Nicolaus. Please proceed.

Thank you, good afternoon. Thank you for taking my questions. I guess on the first one. I wanted to touch base on and focus on in SE in the guidance there. I think, given the March quarter guidance has been an issue for the last few years given later and later budget releases by some of your telecom customers, what's baked in to your guidance for the timing of these budgets release and is it fair to say, you've taken more of a conservative stance given some of the timing challenges over the last few years?

Yes, I think Patrick on the network enablement side, we've probably been about where we've been in the past year is a maybe a little bit more conservative because of what we're seeing with the larger service providers is they're still going through some changes with their architecture and still some consolidation, activities going on out there. So I'd say, it's too same to slightly more conservative. I think on the SE, we believe we'll continue see a pretty hefty growth rate, right now. Where we're probably running on annualized growth rate in that part of the business between 18% and 20% which is pretty healthy, we're going to pick it up being further, but it's pretty healthy rate today.

Okay and then I guess, if we dig a little bit more on that, NSE business it seems like that was the biggest miss both on the results and guidance relative to consensus. You had a couple of test peers that have indicated accelerating orders or discuss at least some budget flush, are they selling on month of December. You don't seem to have seen the same benefit. I'm curious, if that's the result of exposure to large carrier that's actually cutting CapEx year-over-year and had an abnormal seasonality in calendar 2014. Is it due to the continue bleed of the network solutions business, which you've talked about it at your analyst day or is there, can you talk about some of puts and takes of the outer performance?

Yes definitely down and continue to see the weakness with a couple of larger carriers. One of the positive aspects of that we did, were able to win some additional business into spread out customer base a bit more in that operator space, but definitely not enough to offset the weakness of the larger carriers. We do see the, as a legacy service assurance continuing to drop off pretty quickly. We are having good success with our next generation mobile assurance, but it's still in the early days. So it's not enough to offset that heavy drop off of the legacy assurance business.

Your next question comes from the line of Alex Henderson from Needham. Please proceed.

Thank you. I was hoping, if you can give us a little bit more color on how much you're reinvesting in the systems to support the spin off and when you're talking about net number, I assume that those reinvestment and the cost associated with running those additional systems and added people that would be necessary to have the dual administrative referrals, are part of and taken into that net number, but it would be helpful if we had some gage of when those additional cost kick in and the timing of it, as opposed to just looking at the net savings number.

Yes, Alex this is Rex. So we quoted earlier an incremental dollar figure of about $15 million as a cost to synergy to set up SpinCo as an independent public company that's conclusive of basic additional headcount in places like finance, but also corporate governance and other public company related expenses. We currently expect that number to be south of $15 million. If you look at that number, you add to it, the other expenses that would be going over from NewCo over to SpinCo. We expect the net effect of that would be an improvement over that CCOP has allocated today. I mean, you would see that kicking in after the spin. There are some incremental expenses that we are incurring today, that we are putting into the spin bucket and taking out of our non-GAAP results. So anyway, you'd see it's going to come out of the gate looking like it's supposed to look. It's not a big phasing kind of thing, it will come out looking having the business model that is supposed to have with a better than current allocations expense base as I just described.

And your next question comes from the line of Amitabh Passi with UBS. Please proceed.

Hi guys, thank you. I just wanted to clarify. If I look at the operating margin guidance year-over-year. it seems like one of the big delta's as in CCOP sub segment, the other seem to be actually better year-over-year. so I just wanted to understand again, why the CCOP guidance is lower, you might have alluded. When you talk about software laser revenue, but I wanted to clarify just the delta, when we look at the March, 2015 quarter over March 2014?

Yes, sure this is Alan. I think, if you look sequentially from the December to March quarter. the major drop is on lasers and on a top line and associated gross margin is much higher on that. if you look at year-on-year, we've lost probably about $7 million to $8 million worth of gesture recognition top line and that absorbs a lot of our fixed cost overheads in our fabs [ph] whereas in the March quarter, we are actually accepting very little gesture revenue. So that's the main two drivers for the lower operating income from the March fiscal 2014 to March of fiscal, 2015.

Your next question comes from the line of Rod Hall with J.P. Morgan. Please proceed.

Yes, hi guys. So I guess, I first wanted to ask you guys if you have made any further progress on the balance sheet at CCOP, if you can give us any indication how much cash you intend to transfer over there, at the spin. I know you're saying you won't put any long-term debt on, but how much cash and then secondly, I had thought at the time of spin that you had indicated that you would be able, I had thought by now that be able to give us as little bit more detail on these $50 million of cost saves, like exactly where they're coming from and so I'm wondering, if there is any further color you can give us on that or do you have that detail, but you're just not ready to share it yet, let me just walk us through, why at this point you're not ready to give us a little bit more on that? thanks.

So the capitalization figure for CCOP will be something, we put into the Form-10 that's going to get filed later, this month and so we just need to put the finishing touches on finalizing that number. So we're almost there, but it's a couple weeks out before we feel like, we should do that. as far as the $50 million is concerned, the breakdown we can give you is a third COGS, two-third operating expenses most of the charges would be in FY 2015. Some savings will begin falling through into that, to the bit of P&L late this fiscal year. they really kick in earnest in FY 2016, there is some additional savings that accrue in FY 2017 and that's because it's tied to R&D program. So we need to do some consolidation or we'll, side consolidations or other move. So its front loaded in 2016, some in 2017 a little bit in 2015. I'd tell you that we're in very good shape from the standpoint of most of G&A related savings are very thoroughly baked and we're close to finalized on changes that need to be made in the business units.

Question is from the line of Kent Schofield with Goldman Sachs. Please proceed.

Mr. Schofield, please proceed.

I think, he might be on mute.

Okay, your next question comes from the line of Troy Jensen with Piper Jaffray. Please proceed.

Yes, good afternoon, gentlemen. I guess my question to start off would be with Alan. Alan, can you talk about just telco demand in the second half after CCOP getting your conviction, whether now you're seeing any evidence and also on that lines, can you talk about the timing of your 100G coherent CFP2 module and when you expect to ship those for samples?

When you say second half, you mean second half of our fiscal year or second half of the calendar year?

Second half of calendar year.

Okay, yes I think the headwinds are upon us today and that's why our guidance is as it is, I do think that, we'll start seeing some metro deployments for lab work in the summertime and real deployments coming really at the end of the calendar year in a meaningful way. I do think though that, it's still a question as to what is going to be the capital spending for the major carriers in North America, but everything that I can tell is there is a tremendous amount of activity and a tremendous amount of pent up demand that will have to be satisfied at some point in time. As far as the 100 gig CFP2, I really don't see meaningful business revenue until calendar 2016. We'll be sampling customers and doing through the qualification work between now and then, but there is a lot of work to be on an analog CFP2 to tie it with the customers GSP [ph]. So I think there's still a lot of design work that needs to happen and a lot of integration work and testing that needs to happen at our customers.

Your next question is from the line of Dmitry Netis with William Blair. Please proceed.

Good afternoon, gentlemen. I wanted to ask you, if you could update maybe growth expectations for the network enablement and service enablement business units. What do you expect in there, as you progress through the year? That's number one and maybe not just the, but as you work out, what should be the growth rate in those two segments because it seems like we were just either waiting on the SE to ramp and need to have the CapEx issue, so obviously but what do you think as you look into the product line as you look at the carrier spending or they tell you, they will spend throughout the year in the projects that they're ramping, what that growth rate might look like? And I apologize for being not specific, but also the reason I'm asking these questions is, Verizon had just come up and gave a upgraded CapEx for the year, they were ramping the 100G network build out. I'm curious to see, there is maybe a potential lead and get couple quarter lead and how they buy the equipment to prepare for these build outs. And I would assume that AT&T probably will follow not to fall behind. So just give us a sense of what's going on, on the carrier spending and the growth rates there?

Okay, so I think for the network enablement business, we expect on a normal basis to be about 4% CAGR, well we're expecting right now because of the carrier weakness and I think the transition are going through with the architectures in some of the M&A consolidation activity. We are going to see that flat, maybe slightly down. I wouldn't expect it up more than 1% or 2% on the upside for I would say, the next two or three quarters. The real growth activity is on the service enablement side and as I said earlier, our CAGR right now is running about 18% to 20%. Our goal is increase that significantly and I think with the new products, with the combination of our solutions that. we are working on today, I think that's very doable. We are also starting to see tractions scenarios like China with their service enablement. Where the solutions are getting to be pretty attractive to them with some of the complexities they're dealing with. We had some initial went up [ph] opportunities there with our location intelligence business. So that's really the breakdown that I see, I think as far as the build out the 100G metro, we will see some lab test activity probably in the next couple quarters. I think any major NSE activity pretty much will be out into the end of this calendar to beginning of next calendar year, based on what we think the deployments going to happen.

Your next question is from the line of James Kisner with Jefferies. Please proceed.

Yes, I was wondering if you, I think you disclosed how did WSS tunables trend quarter-over-quarter or perhaps percent of revenue.

We didn't, but I can tell you that ROADMs were up sequentially 15% and I think we are extremely well positioned with TrueFlex ROADMs and Super Blade for both the core network deployment and then the metro deployments that we expect to see in the second half of the year. on tunables, it was fairly flat. I do think, we saw significant growth in our tunable SFP+ and we believe we are by far the market leader on the tunable SFP+ as well.

Great and just one follow-up on Europe and international obviously there is concerns about slowing, have you seen any kind of push outs of additional visitation [ph] orders recognizing this is early in the year, but in the end that might give you a little bit pause in [indiscernible] internationally.

Why don't I talk about NSE and then, turn it over to Alan for the CCOP side. that was part of the weakness I mean we tend to focus on the large NAM carriers, but we actually get some weakness in the European carriers, this past quarter. prior that, I was pretty encouraged by seeing some pickup there, but we did see some softness, more than we expected in European market for NSE, we have to watch how that progresses and when we get into the next couple quarters, here.

Yes and as far as CCOP is concerned, it's hard to tell where the product ends up in the telecom networks because we sell to NAM's all over the world and typically don't have a clear visibility as to what service providers they end up in, but I will say that, we do expect and have seen China build outs continue and we think that's going to go for quite some time.

Alright, thank you.

Your next question is from the line of Michael Genovese with MKM Partners. Please proceed.

Thanks very much, you guys talked about industry consolidation or potential industry consolidation and outlook components Rex's saying that couple times on the call. Can you just talk about your thoughts on the potential timing associated with and then also just kind of theoretically and generally benefit that might come from consolidation and whether there would be different drivers on the data converse talk on side, how consolidation would benefit each of those businesses? Thanks.

Well, I mean we typically don't talk about M&A and timing of M&A because until it's done, it's not done. I can't talk about the theoretical benefits from my perspective on telecom and datacom and you know from my perspective I think we look at M&A either to fill out a product portfolio or to bolster something that we want to get larger footprint. I do think that there is consolidation that has been happening and will continue to happen. The question is, will we participate or not after the spin out and I think having the ability to be agile and act quickly and focus on what's important to CCOP and our customers will allow us to be able to take advantage of opportunities as they come up, but at this point we are not able to talk about anything specifically.

I guess just a follow-up, maybe it's a different, the way look at it different market share characteristics of datacom versus telecom, did you see that, could you just talk about industry structure and those two different pieces, do you look it in differently or do you see them entirely similar dynamics?

I look at them differently just because of the growth rates of the different telecom is single digit growth rates and datacom is growing high teens to 20%, so I think from that perspective, we're focused on making sure organically we have the right products at the right time and I think I'm very satisfied with our progress on our organic datacom business. In fact, what Rex touched on a lot of growth in this past quarter was on 100G CFP2 and what I believe to be the first to volume on CFP4 and if you look back over the years. We've been more of a follower and now we really invested and we believe we are leader on 100G CFP4 and supplying customers samples already in QSFP28 that our customer's feedback is quite positive. So I think, our focus is going to be on organic. First to market on datacom and telecom and I think we are making good progress, there. I think, if an opportunity comes by and either telecom or datacom, we'll take a look at it and see if it fits in our portfolio. If there is a compelling reason to move forward.

[Operator Instructions] the next question comes from the line of Kent Schofield with Goldman Sachs. Please proceed.

Great, thank you. I appreciate it. Follow-up on the datacom side of things. Do you think, as you expanded your customer count there, do you think you're taking more share at your current customers or do you think you're participating just kind of with market growth at this point?

I think all of the above, I think we've, if you look at say 10 Gig, I think we've expanded our presence in 10 Gig at existing customers as well as new customers, but when you're first to market with a product like CFP4, you broaden your customers base as well because they are hot to get that product and it really opens doors and before we had that, it was hard to open doors at new customers because we weren't viewed as a leader in datacom and I think that's changing. So I'd say it's a combination of both bigger footprint within existing customers as well as new customer additions. We grew datacom 17% last quarter, so we're going faster than the market.

As is it similar though process on with kind of Webscale, the Web 2.0 guys as well?

Yes, very much so, I think the Webscale guys are really looking for QSFP28 and as I said before, we are first to sample into a couple of Webcast guys as well as some NAM's that are giving us pretty positive feedback. I don't think, they're going to be deploying CFP2's or CFP4's within the data center, they're really waiting for that smaller, lower power consumption, lower cost product that we'll bringing out later this calendar year.

Okay and then, I think you earlier on the call, there was a reference to some OSP lumpiness later in the year, if I heard that correctly, what's driving that, what could drive that?

Yes, we said Kent we talked about it later in this fiscal year. So in fiscal 2015, we see as we get to the end of the fiscal year, we are going to have seen some lumpiness it's really based on timing and off getting some of the new products actually VMP out to market and we're going to see some lumpiness in the timing as that is engaged in some new opportunities, so we expect that to happen towards the end of this fiscal year, I don't believe that's a long-term type of effect.

Okay, so maybe just some push out revenues in FY 2016.

Yes, we drove to get back to the $50 million a quarter kind of run rate, we're there now, we could see pulling off a that a bit, at towards the end of the fiscal year and bringing that back up beyond there.

Okay, thank you.

You're welcome.

Your next question comes from the line Subu Subramanian with The Juda Group. Please proceed.

I just wanted to understand on the CCOP guide, Alan. If you could talk about, you mentioned that commercial lasers is probably most of the down tick. It's about $200 million down tick, so I'm just trying to understand if on a percentage basis that sounds like a fairly large for commercial lasers, if you can give us some more clarity on that? and then on the NSE side, I just wanted to understand the first half of the year and Tom, I think you had earlier expected some rec [ph] benefit early calendar 2015 from SE, is that playing through the way you see it right now and how much is that benefiting in the near term and then, what is the slope decline for the legacy SE business, when does it stop being kind of drag on a row SE revenue growth?

Yes, so for the March quarter guidance, where CCOP commercial lasers is more than half of the reduction we expect and it really comes from two fold. One is we've ramped up the fiber laser significantly nearly $15 million of revenue last quarter. the pipeline is full, their manufacturing facility is full and so things are now more run rate business. So we expect a little bit of a pull back on the fiber laser business as well as mix shift from 4 kilowatt to 2 kilowatt. I think, with the introduction of the direct-diode in the second half of the calendar year as well as 6 kilowatt come in around the same time, we'll see a continued pick up in that business, but back in the March quarter we also see historically see a drop off of our micromachining lasers and we are expecting that to happen again in the March quarter of this year, where consumer electronics ramp up is not happening yet usually fix up in the summer time and anticipation of holidays. And so it's a combination of both the fiber laser and the micromachining that we expect to be dropping offset by higher datacom and we're expecting some lower telecom in the March quarter as well.

Subu I think, as far as the deferred revenue was primarily around location intelligence and we said that, we've start seeing more of a drop in as we got into the first fiscal quarter of 2016. I think we're on track for that, a big dependency is getting out expanding our customer base and that is happening. So I think we're on track for that to happen. We did grow deferred slightly this last quarter-on-quarter, what's happening as we're seeing the deferred from more of the legacy products dropping off and it's starting to accelerate on the answer product. So I think we'll continue to see that for a while, we'll see growth in deferred but there is lot of moving parts in there with the legacy and some of newer products and solutions, we're moving into. I think as far as the I think your question on the other part was legacy service assurance. We've seen that drop as much as 15% to 20% kind of year-on-year, so it's a very significant drop. We'll continue to drop at that level, I'm not sure it may flatten a little bit, but it's going to continue to be a drag on our revenue. Our key there is really growing the next generation of assurance and analytics and again, we're getting very good traction there. I think it’s matter of timing on that.

And If I could follow-up and Tom given the U.S. service provider spending this year seamless to be down in fact, it is any more or less or actually correlated with that. I think you've talked about flattish, but I was just wondering if there is potential for it to be down in calendar 2015 versus 2014.

I think there is in spite we've seem strengthened places like fiber mobility as part of that is in, NE and we're seeing good growth in mobility. We're seeing access in Ethernet be down and those are usually strong areas for us, we have very strong market share. So as they start building metro, I suspect that will start helping us and as I mentioned earlier I expect to see some latent production opportunities in that as we get towards the end of this fiscal year, into the next fiscal year and more of the field instruments and activity as we get into calendar 2016 for that. So that's we really would be beneficial if we saw Ethernet in the access apart rebound because those are important business for us. The other parts remain regionally strong especially mobility and fiber.

Thank you.

Welcome.

Your next question is from the line of Jorge Rivas with Craig Hallum Capital Group. Please proceed.

Thanks. Thank you for taking my question. First I wanted to ask, if you could share are you having a pass, what was the growth rate for 100G modulator [indiscernible] and what are your cut out capacity, right now?

Yes, the 100 gig modulators grew by 14% sequentially and we're still adding capacity and trying to stay up with the continued demand, we expect while we transition the back end assembly from our North America factory off to contract manufacturer in Thailand, which really gets as more capacity as well. So we're pretty bullish on the outlook for 100 Gig modulators and expect that to continue to grow.

Okay, thank you and one last question on the SE side. when competitors on the Network Instrument side, what makes your competitor had a pretty good quarter that was driven by enterprise, I think it grew 18% quarter-over-quarter. so just wondering, if you can provide more detail on what's going on the enterprises specifically? What happening in, what you would expect for the rest of the year?

I would say the Network Instruments or the enterprise side was not as strong this past quarter as we had anticipated it. So that was part of being lower in our range than we expected in our guidance range. I think the enterprise business remains healthy. I think we have very good solution there. We did see some aggression from some of our competitors out there in the market, but I think it's probably a timing issue. We've also started to integrate further our packet portal capabilities with Network Instruments and I think that's also going to benefit going forward. So I think the market is still strong. We weren't as healthier as they anticipated this last quarter in that business, I think we'll see that come back over next few quarters.

Great, I'll jump out of line. Thank you.

Thanks.

And your last question is a follow-up question from the line of Amitabh Passi with UBS. Please proceed.

HI guys, thanks for squeezing me back in. Tom just a couple of quick one's for you for NE, NSE. I think at the Analyst Day you spoke about SE potentially getting to breakeven by fiscal fourth quarter, is that still the goal and for NE, could you actually get back to the 20% level you saw last year? and then Rex just a couple of modeling questions for you. What should we expect for taxes and other expense as well for OpEx for next quarter.

Okay, I'll do the NE, SE and then Rex is going to do tax. So for NE actually, Amitabh, we did for Q2, we did hit 20.2% operating margin so that was right towards the top end of the range. We gave at analyst day at 17% to 21%. Our revenue was pretty much right now 165 slightly as over as 165.5. So I think that's very doable, we did in Q1 hit profitability in SE. so we were really far ahead this past quarter. we were at negative 5.5 better than what we had anticipated, I think we said it will be at least 8 percentage points negative, so we were much better there. Again I think part of the complexity for a while, is going to be how we allocate the sales expenses between NE and SE and it's when you have heavier bookings for that particular quarter and either NE or SE, they will attract a higher part of those operating expenses. So it's going to be a little bit lumpy, I like that, but I think we're on track or even early on the SE profitability if you take away the lumpiness of the bookings. That was shown in Q1, where you only read $48.2 million revenue, 69.1% gross margin and we hit 1.7% profit. So I think it's doable.

And then assumptions on tax and operating expenses for the interest tax is another, I would use $6 million and then for OpEx it's going to be between $173 million and $175 million.

Okay, thank you.

And there are no additional questions in queue at this time, I would now like to turn the call over to Bill Ong for closing remarks

Thank you, Alex. We will be processing a number of investor conference [indiscernible] this quarter as listed are now supplemental slide deck, posted on company's website. This concludes our earnings for today. Thank you everyone.