JDS Uniphase Corp. F1Q09 (Qtr End 09/27/08) Earnings Call Transcript

Oct.29.08 | About: Viavi Solutions (VIAV)

JDS Uniphase Corp. (JDSU) F1Q09 (Qtr End 09/27/08) Earnings Call October 29, 2008 5:00 PM ET


Michelle Levine - Director of Investor Relations

Kevin Kennedy - President and CEO

Dave Vellequette - CFO


Subu Subramanian - Sanders Morris

Cobb Sadler - Deutsche Bank

Mark Sue - RBC Capital Markets

Ajit Pai - Thomas Weisel

Jeffery Evenson - Sanford and Bernstein

Paul Bonenfant - Morgan Keegan

Kimberly Watkins - JPMorgan


Good day ladies and gentlemen, and welcome to the JDSU fiscal 2009 first quarter Earnings Call. My name is Stacey, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Ms. Michelle Levine, Director of Investor Relations. Please proceed.

Michelle Levine

Thank you Stacey, and welcome to JDSU's fiscal 2009 first quarter financial results conference call. Joining me on the call today are Kevin Kennedy, Chief Executive Officer, and Dave Vellequette, Chief Financial Officer.

I would like to remind you that this call is likely to include forward-looking statements about the future financial performance of the company. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from management's current expectations.

We encourage you to look at the company's most recent filings with the SEC, particularly the risk factor sections of our report on Form 10-K filed September 26, 2008. The forward-looking statements include guidance, provided during this call are valid only as of today's date, October 29, 2008.

And JDSU undertakes no obligation to update these statements as we move through the quarter. Please note that all numbers are non-GAAP unless otherwise stated. A detailed reconciliation of these non-GAAP results through our GAAP results as well as the discussion of their usefulness and limitations is included in today's news release announcing our results available on our website at www.jdsu.com.

Finally, and as a reminder, this call is being recorded, and will be available for replay from the Investor portion of our website at www.jdsu.com/investor. I would now like to turn the call over to Kevin.

Kevin Kennedy

Thank you Michelle, and good afternoon. JDSU's results for fiscal Q1 2009, reflect advancements in our financial model. At the start of the calendar year, we embarked on productivity improvement programs across the business segments. Our fiscal Q1 results begin to evidence the impact of these initiatives and the efficacy of reaching our desired sustainable financial targets.

Highlights of JDSU's fiscal first quarter non-GAAP results, include revenue of $380.8 million, at the lower end of our stated guidance range, representing 6.6% year-over-year growth. Test and measurement represented 43% of the total revenue, Optical Communications 37%, advanced optical technologies 14%, and laser is 6%, relatively unchanged from last quarter.

Gross margins for the quarter were 43.3%, up from 41.3% in the year-ago period. All four businesses improved their gross margin percentages quarter-over-quarter, as well as year-over-year. We continue to have nearly 55% of our total business with gross margins of over 50%. Operating margins of 5.4% compares to 2.2% operating margins for the year-ago period.

All four business segments saw improved operating margins on a year-over-year basis. JDSU's adjusted EBITDA as a percent of revenue was 9.7% compared to 6.6% for the year-ago period. Earnings per share for the quarter was $0.11, up from $0.08 in the year-ago period. And free cash flow, when adjusted for a one-time legal payment was $52.3 million or 13.7% of revenue. This is the seventh quarter in a row, the company has been free cash flow positive.

Book-to-bill for the company and each segment was less than one. We continue to have strong geographic diversity, as we continued to grow our revenues from Asia Pacific and EMEA regions. This quarter, less than 45% of total revenues were associated with North America.

To summarize, the first quarter results show financial metric improvement as a result of both our lean initiatives and changed management activity. These results evidence progress against our plan to achieve our financial model. The goal remains to have the business structured to achieve our model of 10% operating margins on a sustainable basis at a revenue level of $400 million per quarter at gross margins of 46%.

During fiscal Q1, we expanded our lean and change management initiatives, which we believe will enable us to continue to improve the leverage of our financial model, as we reduce the complexity of the company. The recent upgrade in our systems infrastructure was a critical factor enabling this expanded activity, the benefits from which we anticipate will be realized over the next four quarters.

These initiatives include further consolidation and elimination of the number of sites in which we operate, and essentially moving the company toward a model where we are outsourcing more at systems level for assembly manufacturing to contract manufacturers.

To expedite these initiatives, we've recently made a number of organizational changes designed to simplify our structure and reduce costs. Our Optical Communications and lasers segments are being combined into one segment called communications and commercials optical products.

This combination will enable us to leverage technology, our manufacturing model, and people as we continue to improve our profitability. Alan Lowe will assume the role of President of the Communications and Commercial Optical Product segment. David Gudmundson, who has driven the strategy and positive change for Optical Communications, will serve in an advisory role.

Additionally, Sharad Rastogi recently joined the Executive Management Team as Senior Vice President of Corporate Development and Corporate Marketing; in fiscal. In fiscal Q1, we also added a new member to our Board of Directors, Penny Herscher for extensive background and leading high growth technology companies is relevant to JDSU as we continue to improve our business model, and create additional operating leverage for the future.

During our discussion of the businesses, segment-based productivity improvements will be outlined. That said the scope anticipates the reduction of seven R&D sites, three or more factories and some level of product portfolio improvement. These initiatives began in part in fiscal Q4 and increasingly will provide operating benefits throughout calendar 2009.

We assert two principles as it relates to our manufacturing strategy. First, minimize the dependency of captive assembly operations by increasing levels of contract manufacturing, and two minimize facilities with unpredictable swings in unabsorbed overheads thereby converting fixed costs to an increase proportion of variable cost.

We are taking significant steps across the company to protect our profitability and to achieve our financial goals. These changes are designed to reduce overall complexity, which we believe will improve our agility in a changing economic climate, our working capital and our profitability model.

In terms of discussion of results, before discussing the segment reports, I would like to reiterate that our strategy continues to be to execute as a diversified technology company with a focus on optical and broadband innovation.

We embrace this view such that the composite company will be better able to navigate fluctuations in any one constituent business. We continue to see advancements in high speed broadband services and network build-outs.

We believe broadband capacity will continue to expand as higher data rates are being delivered to the access/edge accompanied by video applications and the requirements of high-definition networks.

However the environment is such that we are experiencing cautious spending from our customers given the current economic conditions, the book-to-bill ratio less than one in all four segments, evidences the reality that we experience more downside risk to our fiscal Q1 quarter.

Now I'll provide more detail on the business segments. First, communications test and measurement. Our first quarter fiscal 2009, test and measurement revenue was $165.3 million, down 3% sequentially over fiscal Q4 '08 and down 4.6% year-over-year.

The decline is directly attributable, to a slowdown in North America, specifically cable operators and Tier 1 telco carriers. Our telecom test and measurement revenues grew 2.2% year-over-year absent the prior North American cable surge.

Fiscal Q1 gross margins for our test and measurement business were up compared to the prior quarter and in the middle of our targeted range, due to the benefits of our lean initiatives as well as a favorable product mix. Our quarterly operating income increased 35%, compared to the prior quarter, due to the higher gross margins and lower operating costs. Looking at fiscal Q1 geographic diversity, we note the following results and trends for our products.

North America has declined for the third quarter in a row, where our top five North American customers are down 12% quarter-over-quarter. We are experiencing a push out of spending and longer approval cycles in telecom and cable. We saw a strong quarter-over-quarter growth in Latin America, where Greenfield build outs are increasing.

As a percentage of revenue, Europe has remained flat. Asia, increased 38% quarter-over-quarter, where we are seeing particular strength in emerging markets such as China, India, and new broadband deployments in Korea.

In fiscal Q1, we saw healthy bookings in three out of the four regions. Although as a whole, book-to-bill was less than one. Our communications test and measurement segment is structured along three business units. Each of these units portfolio's address is a portion of the life cycle of the communications network market.

First, lab and production, which supplies test equipment for development system verification and production, revenue was up slightly quarter-over-quarter. A significant driver of this growth in the business unit is the transition from 40 gig to 240 gig, as well as Ethernet transport.

Next, field services which supplies both telecom and cable instruments to install and commissioning of broadband triple play services, this is the largest of the three business units. Revenue in this unit was flat compared to last quarter, as service providers continue to build out the access layer and offer FTTx as well as new services, we would expect demand for field services test products to grow.

We see opportunities in carrier Ethernet and VDSL 2 deployments worldwide. And services assurance solutions, which ensure quality of services by providing end-to-end network test and monitoring, revenue here was down quarter-over-quarter as we saw a number of deals delay. Opportunities for this business unit are in mobile services and Ethernet.

During the quarter, we were selected by a major North American service provider for cellular back office service deployment. Despite the recent revenue levels, we continue to believe that the communications test and measurement segment has a long-term annual growth model of 6 to 12%.

Relative to innovation, in order to participate in this growth, we continue to offer service providers field tools and service assurance systems designed to speed up triple-play service, delivery and to ensure quality.

Recent announcements include the release of the MTS T-BERD 4000 multiple services test platform for testing and maintenance of FTTx networks. This is the first full capacity single box solution for fiber, copper and triple-play testing, which will help reduce operational costs for our customers. This product was selected by a major European service provider for FTTx deployment.

Last week, we announced the T-BERD MTS 6000A, the industry's smallest 10-GigE field tester with advanced IPTV and triple-play service test features. We have already seen traction with this product in North America and Europe. Specifically the product was recently selected by Deutsche Telekom and the major Tier I North American provider.

And finally, we launched NetComplete Home Performance Monitoring, which ensures high quality broadband service performance. NetComplete Home offers increased visibility required to meet quality of experience, expectations for video, voice, and data over DSL and FTTx networks by accessing service performance information inside the home.

Moving on to CommTest business model initiatives within the segment to achieve the model. Over the last 12 months, a new executive team was put in place for sales and operations thereby delivering better alignment with the market and corporate strategy.

In line with our lean initiatives, we will consolidate R&D sites transitioning from 19 sites down to 12, as we are lowering overheads. There will be no major changes in the Comm product portfolio at this time. We will continue to pursue a stronger contract manufacturing model and reduce North American manufacturing footprint.

We’ll be reducing the manufacturing sites by several. We believe that these initiatives will reduce structural complexity, which will improve productivity and improve the leverage of our financial model. We began to implement these lean initiatives plans during the first fiscal quarter of 2009, and we expect to complete them over the next four quarters.

Moving to Optical Communications, Optical Communications total revenue was $140.6 million in the first fiscal quarter, down 3.1%, when compared to the fourth quarter of fiscal 2008, and up 21.2% from the prior year. Growth continued in ROADMs and tunables, but overall growth was suppressed due to the management decisions to prune unprofitable legacy products in the portfolio including datacom pluggables.

I will discuss the strategy related to pruning the portfolio in more detail shortly. Focusing on our ROADMs and tunables, I like to note that we have shipped over 26,000 ROADMs to-date and this quarter our WSS unit shipped grew by 10% quarter-over-quarter. We are starting to see a wider acceptance of ROADMs technology outside of North America.

In Q3 and Q4, we began shipping ROADMs for use in European networks and in Q1, we have now began shipping ROADMs for use in Asia. We see these activities as a favorable trend moving towards Ethernet and DWDM mesh architectures.

As noted last quarter, demand for WSS ROADMs continues to be strong and therefore we've increased our manufacturing capacity. Tuneable's growth was in the double digits, as revenues grew to their highest historic levels. Operating margins of 5.3% were down slightly with the prior quarter, and significantly improved when compared to a negative operating margin of 2.8% one year-ago. With regards to geographic mix, we saw sequential growth in Asia for the fifth quarter in a row, with particular strength in Japan.

In line with our objectives to improve profitability, we will focus on key growth areas with sustainable differentiation and value add and trim the portfolio of products with slower growth and less profitability. We began this process in Q1, where we had revenue growth in our next generation of products, but this did not fully outpace the intentional decline in certain legacy products. We expect this trend to continue in Q2. The portfolio transition is as follows as it relates to the transport, transmission and photonic layer business units.

The transport business unit growth is driven by DWDM mess architectures, the IP photonic layer, and the move towards more highly integrated platforms. We will focus on ROADMs technology and our newly launched next generation products, including the mini WSS, the AON Super Transport Blade, and the photonically integrated amplifier, which we announced in Q1. We will improve the portfolio of low-value circuit packs.

I would now like to share data on our current and expected progress for these next generation products. Data unit shipments of the mini WSS platforms have begun to ship. Production shipments are expected next quarter. The AON Super Transport Blade platform has gained customer acceptance, as we currently have secured three design wins. Data shipments have started, and we expect to ship the product by the end of the quarter.

The transmission business unit is driven by the following trends, higher speeds, smaller form factors, increased performance, lower power and lower cost. We will phase out of legacy low speed, datacom pluggables and executed deliver transition to higher growth segments including a 10 gig pluggables and tunables.

Our tunable access [team] platform remains on schedule as we expect to ship data units in fiscal Q3 '09 with production shipments starting next summer.

The photonics business unit, we will continue to focus on scarce photonic components and differentiated lab technologies such as pumps, modulators, passives, as well as VCSELs. Our strategy remains to look for ways to accelerate our progress in the segments through our focus on three strategic principles that is, technology leadership, cost leadership and functional integration.

On the technology leadership, front, in addition to the products I just discussed, we will introduce or we introduced this fiscal Q1 the new 4900 Series pump laser, i.e. 70% smaller than previous offerings, to support a fiber to the home networks for voice, video, and data services.

The second strategic principle for optical comps is cost leadership and in 2008, JDSU began implementing lean manufacturing initiatives. Significant progress has already been evident in inventory management and cash flow. We continue to make progress on lean and continue to interact heavily with customers. These lean manufacturing initiatives are expected to continue to improve production cycles, lower manufacturing material cost, and reduce inventory levels.

A summary of our lean activities currently in process, fit four categories, business unit consolidation, portfolio pruning, manufacturing consolidation, and operational improvements.

And third, on functional integration, at the European conference and exhibition on Optical Communications in September, we announced the first ever photonic integrated amplifier platform. The PIA platform will replace up to 50 discrete components with the single chip and will be up to 50% smaller than current solutions.

Leveraging more than a decade of integration experience, JDSU is using it’s erbium-doped fiber amplifier capabilities combined with planar lightwave circuit technology, 980 nanometer pump lasers and optical component technology to create the new amplifier platform.

Market outlook perspective, our outlook for this market is characterized by a majority of our top 10 customers projecting a favorable outlook in upcoming quarters, albeit a minority delivering declining guidance as outlined in their quarterly results. Book-to-bill was less than one in fiscal Q1. Our results in bookings this quarter are characterized by portfolio pruning and lead-time reductions through our introduction of vendor managed inventory programs, which are our overt choices versus the market decline.

Moving on to our advanced optical technology segment, fiscal Q1 revenue for AOT was $53.5 million, an increase of 1.1%, compared to fourth quarter of fiscal 2008, and up 11.5% compared to first quarter of fiscal 2008.

Growth in Q1 was primarily due to an increase in transaction card or ABNH revenue. The growth in transaction card revenue is an improvement from last quarter's revenue levels, but not a complete recovery to its historical revenue levels, as we continue to see softness in the transaction cards due to the economic slowdown and a resulting decline in credit card issuance.

We saw a slowdown in growth in the currency market as past quarters had benefited from pre-Olympics currency printing in China, conversions of new denominations and redesign activities. As we've noted before, we expect the trending of this business to have some level of surges and ebbs.

This quarter the AOT team generated an operating margin of 40.6%, the highest operating margin in the segment's history. Favorable mix, higher volumes and improved factory absorption and a decline in operating expense contribute to the healthy margin.

In Commercial Lasers, first quarter of fiscal 2009 revenue was $21.4 million, down 3.2% from the fourth quarter of fiscal 2008, and up 7.5% compared with the prior year. This business continues to be impacted by lower demand from semiconductor manufacturing equipment customers. Gross margins have continued to improve and have reached the highest levels we have seen in several years despite lower revenue.

The gross margin improvement was due to a number of operational improvements including product yields, supply chain management and factory absorption. We also saw some improvements in overall product mix. As a result of the improved gross margins, operating margin improved further, making Q1 the fourth quarter in a row of improved operating margin. As discussed last quarter, there are market product portfolio and manufacturing transitions underway.

First, the semiconductor market slowdown continues to negatively affect our top line, and we do not currently see a recovery for several quarters. From a product standpoint, our customers continue to transition from gas to solid state. Our solid state business is over 50% of our laser revenue and it is anticipated to grow to over two thirds of the business during the fiscal year. Our pipeline for new products over the fiscal year is robust. Our product development will continue to be focused on advanced solid state and fiber laser platforms.

Additionally, our new laser development leverages, our advanced diode technology that we have developed and what we previously called our Optical Communication segment. These new products, when introduced will increase our served market by more than threefold. With regards to the structure of the segment, we are proceeding as planned to transition our laser manufacturing to Asia, to both our Shenzhen facility and to contract manufacturers.

This is expected to be completed over the next three to four quarters. And as discussed earlier, the laser segment has been merged with the Optical Communications segment and will operate under the leadership of Alan Lowe. We believe that this combination will lead to further synergies and technology advancement and in our manufacturing execution.

Now to summarize, in fiscal Q1 we demonstrated our ability through thoughtful, lean and changed management initiatives to improve our overall cost structure, our operating model, and the structure of the company. Over the next four quarters, we will continue to make improvements, which will include the number of business segments being consolidated from four to three, Optical Communications consolidating the number of business units from two to three, the number of manufacturing sites will be reduced by three or more, and we will transfer more of our final test and assembly to contract manufacturers.

The number of small R&D sites will be reduced by seven, as we consolidate and eliminate sites. The result will be a headcount reduction of roughly 400 employees and contractors. We expect these initiatives to result in a corporate operating structure that allows us to meet or exceed our operating goals at revenue levels of 400 million per quarter, and total gross margins of 46%, which models contest revenue at 45% to 47% of the revenue mix. This would also reduce the manufacturing fixed cost structure and therefore the impact on gross margins and operating margins in periods of fluctuating revenues.

Additionally, given that the current economic conditions have caused a level of uncertainty in the markets we participate in. We have initiated additional work on bottom-line improvements that will cushion deviations in our revenue. Dave will quantify the impact of these actions.

Our priorities for fiscal 2009 continue to be, accelerated profitable growth, improve the company's operating performance and efficiency, increase free cash flow; and improve predictability such that the impact of seasonality and gross margins is reduced.

In closing, I would like to thank JDSU employees whose focused commitment continues to advance the company's business model. And with that I'll hand the call over to Dave.

Dave Vellequette

Thank you, Kevin. Before I start, please note that all numbers are non-GAAP, unless I state otherwise. First quarter revenue of $380.8 million was down 2.5% in the prior quarter and up 6.6% when compared to the first quarter of fiscal 2008.

The fourth quarter decline was driven mainly by the Optical Communications test and measurement segments. First quarter gross profit of $165 million or 43.3% of revenue was up from the first quarter of fiscal 2008 gross margin of 41.3% of revenue and from the previous quarter's gross margin of 40.9% of revenue.

The improved margins were due primarily to improve product mix and execution against our lean manufacturing initiatives. Operating expense for the first fiscal quarter of $144.6 million, and 38% of revenue was down from prior quarter's $151.4 million. The lower operating expense reflected a reduction of temporary charges, lower change management costs, favorable foreign exchange rates, and the impact from change management initiatives.

As a result of improved gross margins and lower operating expenses, operating income for the quarter was $20.4 million, or 5.4% of revenue, up from first quarter fiscal 2008's operating income of $7.8 million, and up from $8.4 million or 2.2% of revenue in the prior quarter.

In fiscal Q1, all business segments reported positive operating margins for the third quarter in a row. First quarter net income was $23.4 million or $0.11 per share. This compares to first quarter fiscal 2008 net income of $18 million or $0.08 per share.

Adjusted EBITDA, for the first quarter was $37.1 million or 9.7% of revenue, which compares to adjusted EBITDA of $23.7 million or 6.6% of revenue for the first quarter of fiscal 2008. A detailed reconciliation of our non-GAAP results or GAAP results is available in today's press release.

Our first quarter, non-GAAP results exclude among other items, amortization of acquired technology and intangibles of $19.6 million, a $13.1 million charge related to stock-based compensation, $4 million for restructuring and non-recurring charges and a decrease in the fair value of investments of $3.2 million.

Including these items, the first quarter fiscal 2009 GAAP net loss was $16.4 million, or a loss of $0.08 per share, which compares for the prior year first quarter GAAP net loss of $6.9 million or a loss of $0.03 per share. Moving to the segments, in the CommTest segment, fourth quarter revenue of $165.3 million was down from the previous quarter's $170.5 million. The decline is due to lower demand in North America. The CommTest operating profit of $26 million, or 15.7% of revenue increased when compared to the operating profit of $19.2 million, or 11.3% of revenue in the prior quarter.

This increase was primarily due to, higher gross margins from favorable product mix. In the CommTest segment, we have engaged in a number of lean and changed management initiatives focused on our manufacturing models and business operations. These initiatives yielded, financial benefits in fiscal Q1, and we expect to complete the current set of initiatives over the next 12 months. We believe that, these initiatives can increase segments annual operating income by 3 to 5 percentage points, when compared to the prior fiscal year.

In the Optical Communication segment, revenue for the quarter was $140.6 million, down 3.1% when compared to the prior quarter, primarily due to management's decision to prune the product portfolio of products that didn't meet our profitability targets. The Optical Communications quarterly operating profit was $7.5 million or 5.3% of revenue, representing the fourth consecutive quarter of positive operating margins.

We continue to believe that we have gross margin improvement opportunities in this segment. The opportunities will come from execution on our lean manufacturing initiatives, which include pruning product lines that don't meet our profit goals, transitioning products to contract manufacturers, increasing factory utilization, and improving the flow of materials from our suppliers. We believe that these initiatives can increase the segments current operating margin by three to five percentage points over the next year.

Now looking at our Advanced Optical Technologies or AOT segment. Quarterly revenue was $53.5 million, up 1.1% from the prior quarter. AOT operating profit for the quarter was $21.7 million or 40.6% of revenue, up from $18 million or 34% of revenue in the prior quarter and above our targeted operating profit range of 34% to 37%. The higher operating profit was due to favorable product mix.

In our Commercial Lasers business, first quarter revenue of $21.4 million declined 3.2% from the prior quarter. The decline in revenue was due to lower demand from our semiconductor equipment manufacturing customers as well as our biomedical customers.

In the first fiscal quarter, laser's operating profit of $1.6 million was up slightly from the prior quarter's operating profit of $1.4 million due to improved gross margins. We believe that we have additional until gross margin improvement opportunity for lasers as we increased our solid-state laser volumes in concert to transitioning our solid-state manufacturing to Asia over the next year.

We believe that these opportunities will increase the segment's current operating profit by four to six percentage points over the next year. Now looking at revenue by region, the America's revenue was 45% of total revenue as compared to a range of 50% to 54% over the previous four quarters.

The lower revenue was primarily in North America as we saw a reduced demand in each of our segment. EMEA revenue was a $119.5 million for fiscal Q1, which was the highest level over the last five quarters, EMEA revenue is up over 6% from the prior quarter, and up 19% from the year-ago quarter.

EMEA represented 31% of total revenue. Asia revenue was $92 million, up over $11 million from last quarter, and up nearly $30 million from the year-ago period. Asia revenue for the quarter 24% of total revenue.

Moving to the balance sheet, the company was free cash flow positive $32.3 million, representing seven consecutive quarter of positive free cash flows. Total cash was $803 million. During the quarter, we reduced our outstanding current debt balance by $8 million and completed our stock buyback program purchasing $86.8 million of stock during the month of July.

Also we would note that our cash investment portfolio is highly diversified to minimize exposure to any single bank, firm, or sector. The majority of our cash and short-term investments are of high credit quality and matured in 90 days or less.

We do not invest in auction rate securities, mortgage back securities or collateralized debt obligation. In Q1, '09, we incurred a $3.2 million loss related to the bankruptcy of Lehman Brothers. Remainder of our investments, are expected to mature at par. Headcount as of September 27, 2008 was 6,664 down slightly from the prior quarter.

Moving to our operating model, we remained focused on achieving our goals, to a sustainable operating margin model of 10% when revenues of $400 million and gross margins of 46%. We expect to have the cost structure in place, to achieve this model as we exit the calendar year of the revenue levels depend on quarterly guidance.

As I already stated, each of our business segments engaged in improving and maintaining in the case of AOT segment, their operating margins primarily through improving the gross margins and containing their operating expenses. We expect that these activities will not only improve the cost structure of our business as a whole, but also reduce the impact of segment mix on our operating margin.

Additionally, we believe there is an increased level of economic uncertainty in the markets that we serve. This uncertainty, may result in fluctuations from demand for our product over the next several quarters. Therefore, in addition to the continuous improvement activities, we already have underway, we are taking additional steps to lower our cost structure over the next year.

These activities include further manufacturing cost structure actions and lowering our corporate cost, when fully implemented the benefits will be a minimum of $4 million per quarter. Now looking forward, some points to consider, as you think about our financial performance over the coming quarters.

As noted, there is a greater level of economic uncertainty, in the markets that we serve are beginning back level is lower than the prior quarters as the book-to-bill in each segment was less than one. At the current levels, we expect currency fluctuations to have a 2% to 4% negative impact on CommTest revenues and operating profits.

Finally, we expect our quarterly tax provision to range between $2 million and $4 million. Taking into consideration the factors above and based on our current visibility, we expect first quarter revenue to be in the range of $360 to $390 million, and non-GAAP operating margins in the range of 4% to 8.5% of revenue.

I will now turn the call back to Kevin.

Kevin Kennedy

Thank you, Dave. Finally, I want to inform our stockholders that I have resigned from JDSU and will be leaving the company at the end of December. I will be joining another company and will formally announce my position in the coming weeks. I will remain on the JDSU Board of Directors in an active capacity.

The Board has initiated a search for my successor, I would like to take this opportunity to thank our stockholders, the Board of Directors, my direct reports, and all of our employees for their support during these last five years. During this period, we have moved the company from declining revenues, negative operating margins, and negative cash flows to one that has leadership market positions, growing operating margins, and positive earnings and positive cash flows.

My decision to leave JDSU reflects the convergence of a unique opportunity presenting itself, as well as my confidence in the JDSU leadership team that is in place to execute the initiatives now underway, and they will result in the best-in-class operating metrics. I look forward to continuing to work with the team to my capacity on the Board of Directors.

Thank you, and operator, we will now take questions.

Question-and-Answer Session


(Operator Instructions). Please stand by for your first question. Your first question comes from the line of Subu Subramanian with Sanders Morris. Please proceed.

Subu Subramanian - Sanders Morris

Thank you. First of all, Kevin, I wanted to say thank you for all of your work and help. Definitely I'll miss you at JDSU, and look forward to working with you in your future capacity. And then, let me follow up with my question. It's really on two things.

First, if you look at the revenue guidance for the next quarter, can you talk a little bit about book-to-bill in all the areas that are lower, but is there no part seasonal spiking contest that you expect?

How would you expect to be for a mid-point of the range being down a little bit? And then, I know there have been a lot of steps of cost reduction, Dave, so can you lay out at this point what's already in the numbers for OpEx reductions, and what are the other factors to follow?

Kevin Kennedy

Hey Subu, let me start, and I'll hand it off to Dave for the second piece. Number one, it's been great working with you. I hope we continue to do so, and thank you for all the great questions and probing. Relative to the guidance and the sense of seasonality that we have observed in the past on the CommTest piece, which is I think precisely what your question is, I think as we went through all of the puts and takes. As I have pointed out, we have had several consecutive quarters of decline in CommTest revenues in North America, and North America field services to be more specific, tends to be the primary impetus behind seasonality. We have judged on the norm that we are unlikely to see a favorable seasonality there. So that's probably the single largest deviation from what would be a historic model.

You are secondly correct that, in general, as we have gone through the quarters, we have tended to see a bit more down side risk, and that's why, frankly we actually expanded the range for guidance this quarter. Dave?

Dave Vellequette

Yes. Subu, you asked about what's built into the operating plan right now for the December quarter. We have slight improvements in our operating expenses, and related in the gross margin, depending on where we are in the revenue range. Going forward, we expect over the next four quarters for there to be from the new initiatives that we're talking about, for there to be about a $4 million per quarter benefit that we will get over the next, we should get full realization at about four quarters from now. We'll get parts of it as we go through the year, and this has to do with the initiatives that we currently have announced to our employees.

Subu Subramanian - Sanders Morris

And will those be between cost of goods sold and OpEx, or will that be primarily in OpEx?

Dave Vellequette

It will be between. It will be probably split between the two.

Subu Subramanian - Sanders Morris

Got it. And final question, what products are you pruning specifically in optical comp?

Dave Vellequette

Two general categories. We had some very low margin circuit pack level products that were not far removed from being a contract manufacturing level of engagement with some specific customers, and then the low speed datacom pluggable. So things like 2 and 4 gig.

Subu Subramanian - Sanders Morris

Got it. Thank you.

Dave Vellequette


Michelle Levine

Next question, please?


Your next question comes from the line of Cobb Sadler with Deutsche Bank. Please proceed.

Cobb Sadler - Deutsche Bank

Thanks a lot, and Kevin, I wanted to extend the same condolences and goodwill as Subu did. So on the quarter-on-quarter decline, how much of that is discontinued businesses? Could you tell us roughly how much of the low speed plugables, which I think is probably two gig and four gig, how much of those businesses will not show up in the December quarter? Thanks.

Kevin Kennedy

Relative to the quarter that we just completed, they're mid-single digit millions of dollars. They could be bought in between mid-single digits to sometimes low double-digit millions in any quarter. All I could really comment about is what they were for the quarter we just completed, there was high single-digit millions of bookings opportunity that we passed on in this area. Those would have been delivered over a quarter, and some of it in the Q2 period.

Cobb Sadler - Deutsche Bank

So the two gig and four gig, did you have a full quarter of those products this quarter, or when should we expect those products to come out of the revenue stream?

Kevin Kennedy

There's less time buy efforts and so forth as we obviously work with our customers and make sure we have the smoothest transition we can with the customer. So there is still a level of revenue, but it's at a lower level than it historically had been.

Cobb Sadler - Deutsche Bank

Got it. Great.

Kevin Kennedy


Cobb Sadler - Deutsche Bank

Is that the last question?

Kevin Kennedy

Yeah. Thanks very much.

Cobb Sadler - Deutsche Bank

All right. Thanks.


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

Mark Sue - RBC Capital Markets

Thank you. Kevin, I was just wondering if you could just comment on the bookings linearity. Was is general degradation throughout the quarter, or was it a steep drop-off? And then separately, if you could just talk about your product pruning, shouldn't the gross margins and operating margin targets actually be higher? And also just your philosophy on product pruning, if you could give us your thoughts on whether that's going to be a continuous part looking at the business? Thank you.

Kevin Kennedy

Sure, Mark. On the linearity, I don't think there was anything unusual other than to say that we are certainly in a market that has evidenced slowing. And so, deals that you expect to begin seeing close in early September, they slide out and some of them get done in the quarter and some of them don't.

So I think, you see more of the strain on the closure of the deals, and that's one of the reasons that we have the same kind of guidance philosophy, and when we end up in the lower end of our guidance range, it's usually in a decelerating market. In a neutral to favorable market, we tend to be in the high end of the guidance range.

Dave Vellequette

The other thing you have in the September quarter is, Europe procurement activity tends to be slow in the July-August timeframe, so there was no noticeable change in the order patterns, as you get into September, and we saw that the decisions would be more drawn out when we start to see the impact.

Kevin Kennedy

Relative to your observation, as we prune things that have lower gross margins, should that be an element of things that ensures that our operating margins improve? The answer to that is absolutely yes, and that's comprehended in some of the kinds of thoughts Dave was giving you.

In terms of the operating philosophy that we’ve had, we started out probably four years ago instituting a process that on average we wanted the company to be able to grow it, and therefore the products portfolio to be able to be in markets that could grow at 10% a year or better, and would be at their target gross margin within say 18 months.

And I would say anything that has sustainably been below that growth, so certainly as it hits 5% and heads negative, and anything that we think is at a gross margin level that because of volumes has virtually no chance of improving, we're pruning it. We have taken these steps with the two categories that we overtly announced today: products that are long in tooth, they are old.

There's not much growth, in fact they are declining in terms of volumes, and the market ASP compressions have been active for many years. So therefore, there's little intellect in investing lots of money to cost reduce, though, obvious candidates relative to that prescription to exit, hope that helps, Mark, thanks.

Michelle Levine

Next question, please?


Your next question comes from the line of Ajit Pai with Thomas Weisel. Please proceed.

Ajit Pai - Thomas Weisel

Yeah, good afternoon.

Kevin Kennedy

Hi, Ajit.

Ajit Pai - Thomas Weisel

Just one question, which is, as I'm looking at your balance sheet and looking at the cash and investments at the end of the last quarter, and then at the end of this quarter, and it has fallen from $873.6 million to $791.1 million, almost an $83 million drop. There isn't a cash-flow statement, but could you give us color as to how that happened, especially when your receivables are down and your payables are up, could you reconcile that for us?

Dave Vellequette

What you have is the two big items we talked about on the call: the current debt payment of $8 million, the stock buyback, which was $86.8 million, and then we did make a $20 million payment, which Kevin noted for litigation costs, so those are sort of the three big disbursements that you would argue are not in the normal operating course of business.

Ajit Pai - Thomas Weisel

Got it. And does that mean that on a go-forward basis, given that you are guiding to a better profitability and better EBITDA, and the fact that the cash flow should actually improve quite materially over the next two to three quarters?

Dave Vellequette

We don't give guidance on cash flow, but it is our desire to continue to improve our cash flow.

Ajit Pai - Thomas Weisel

Got it. Thank you.


Your next question comes from the line of Jeff Evenson with Sanford and Bernstein. Please proceed.

Jeffery Evenson - Sanford and Bernstein

Thanks. I was wondering if you could give us some color on the most important criteria you are looking for in the next CEO.

Dave Vellequette

You know, Jeff that we have a separate committee of the Board whose job it is to deal with the successor. I am unable to provide input into that; I'm not the owner of those requirements. So that’s about all I can tell you. The progress on that, or the update on it will be shared by our Chairman at the shareholder meeting, so...

Jeffery Evenson - Sanford and Bernstein

Which is in about two weeks?

Dave Vellequette

Sorry to dodge the question, but the fact is there is a set of the Board that is tasked with it, and they will provide an up date at the shareholder meeting. Okay?

Dave Vellequette

Great. Thanks.


Your next question comes from the line of Paul Bonenfant with Morgan Keegan. Please proceed.

Paul Bonenfant - Morgan Keegan

Thank you. I have a two-part question. The first part is related to the pricing environment. I'm wondering if you are seeing from your competitors any irrational pricing, given where demand seems to be going this quarter and into 2009, and also from your customers as they begin to look at contracts and year-over-year price declines for 2009.

And the second part of the question is with regard to currency impacts. I think you stated that there would be about a 2% to 4% negative impact on CommTest, and I'm wondering if there will be impact on the segment revenue from other business units. Thank you.

Dave Vellequette

I'll go backwards and, from a currency standpoint, CommTest does more of their business in various currencies, so you’re right its a potential revenue impact of 2% to 4%. And that would also the impact on the operating margin although if OpEx will go down, the gross margin also goes down, but it has a about a one-to-one tradeoff.

Kevin Kennedy

Let me take the question on the pricing environment. I don't remember if we put it in the script, but certainly for this particular quarter, we have told you that in general, we see pricing declines in the range of 2% to 4%. This quarter was no different than any of those quarters in the past, which, for me, I think this is the 21st quarter. So it fits still in that envelope.

Relative to your question in terms of the ferment in the market on competitors and customers right now, do we see any change given the environment, I would say from a competitor's perspective occasionally, and to the same players, but I would say there's nothing very unusual. It's just a specific product to a specific customer. So I don’t see anything out of the norm. But, you are right, occasionally people will become quite aggressive. On the customer side there are some product areas, and some customers, the network equipment manufacturers in particular, that some have become fairly aggressive during contract renewal times.

One of the reasons that we have invest so heavily in R&D, and in the functional integration, is so that we have new platforms, that are actually lower cost, equivalent form, or equivalent function, and lower power, if you will. So we try to migrate people to something that is different, more potent, more functionally innovative rather than to having to have a conversation about the past.

You are correct that it's aggressive. Again one of the reasons we have invested so heavily in new product transitions. Hope that helps. Thanks, Paul.


Your next question comes from the line of Kimberly Watkins with JPMorgan. Please proceed.

Kimberly Watkins - JPMorgan

Thank you. Wanted to ask about the Optical Communications segment, last quarter you talked about $10 million worth of revenue that was pushed out, was that in the result this quarter from extending capacity for ROADMs or if not, how much it was and when does the capacity come on to satisfy that demand?

And then the second part to that question is, I think last week you talked about seeing a little bit of a inventory build at a few of their customers, are you seeing any signs or evidence yet of that happening in the market?

Dave Vellequette

So, on the ROADMs from the previous call, we talked about how $10 million was pushed from Q1 into Q2. As you may recall that the call we had was near the end of August. So we're talking about how in Q1, what have we just finished, we couldn't fulfill all of the orders. We have brought on additional capacity in our WSS ROADMs. We've increased by I think when I look from a year ago, about 40% to 50% more than what it was a year ago.

We plan on continuing to increase the capacity there as the demand is good, and so that's what we have on the ROADMs. We did have increased revenue and the push up was from Q1 and the Q2.

Kevin Kennedy

And the second question was what…?

Michelle Levine

The second question was about inventory, inventory build with the optical components.

Kevin Kennedy

One of the statements that I made was as we looked at the market, we saw some customers being fairly positive on the outlook over the next couple of quarters, and we have some customers who are evidencing some level of pullback, diffidence, and decline in their own business.

I would say that it would be true that there are some customers that have circumstances of either decline. They may have over-purchased because they thought that they were going to win a particular operator build-out, and they didn't. There are two camps out there. I would say the majority of the network equipment manufacturers have a more favorable outlook than the minority. But, you are correct that there are two camps. Hope that helps.

Kimberly Watkins - JPMorgan

Okay. Yes, it does. Thank you.


With no further questions in the queue, I would like to turn the call back over to management for closing remarks.

Michelle Levine

Thank you for your participation, and if you have any further questions, please call us in the investor relations department. Thank you.


Thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.

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