Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Tom Waechter - Chief Executive Officer

Dave Vellequette - Chief Financial Officer

Michelle Levine - Director of Investor Relations

Analysts

Mark Sue - RBC Capital Markets

Jeff Evenson - Sanford Bernstein

Kevin Dennean - Citi

Paul Bonenfant - Morgan Keegan

Todd Koffman - Raymond James

Michael Genovese - Soleil Securities

Ajit Pai - Thomas Weisel Partners

Dave Kang - B. Riley

Joel Achramowicz - Blaylock Robert Van

JDS Uniphase Corp. (JDSU) F2Q10 Earnings Call February 2, 2010 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2010, JDSU earnings conference call. My name is Louisa, and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the call over to Ms. Michelle Levine, Director of Investor Relations; please proceed.

Michelle Levine

Thank you, operator and welcome to JDSU fiscal 2010 second quarter financial results conference call. Joining me on the call today are Tom Waechter, 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 factors section of our report on Form 10-K filed August 24, 2009, and 10-Q filed November 12, 2009.

The forward-looking statements, including guidance provided during this call, are valid only as of today’s date, and JDSU undertakes no obligation to update these statements as we move through the quarter. Please note that all numbers are non-GAAP unless otherwise stated.

A detailed reconciliation of these non-GAAP results to our GAAP results, as well as discussion of their usefulness and limitations, is included in today’s news release announcing our results, which is available on our website at www.jdsu.com.

In addition, our current and historical financial tables are posted in the Investor portion of our website at www.jdsu.com\investors under the Financial Information section. Finally, and as a reminder, this call is being recorded and will be available for replay on the Investor section of our website.

I would now like to turn the call over to Tom.

Tom Waechter

Thank you, Michelle and good afternoon everyone. I would like to begin by providing a brief summary of our fiscal second quarter results. JDSU’s revenue of $343.8 million and operating profit of 8.2% came in at the high end of our guidance. These results reflect increasing customer demand and the leverage in our operating model. Our book-to-bill for the quarter was greater than one.

Our balance sheet and working capital structure continue to strengthen. In Q2, when compared to Q1, we generated over $27 million of free cash flow, decreased our inventory by $11 million, resulting in inventory turns above six, which historically is the highest level for the company, and reduced our day’s sales outstanding to 60. These results evidence our continued focus to improve our operating model.

Now let’s move on to our individual business segments. First, the Communications Test & Measurement segment, fiscal Q2 revenues grew 23% compared to last quarter and book-to-bill was greater than one. This is the third consecutive quarter of growth as we continue to see customer demand improve. All geographies grew quarter-over-quarter, with particular strength in North America and EMEA.

We had one of our strongest quarters for fiber optics test in North America and Q2 was the largest quarter ever for shipments of the T-BERD 6000, one of our modular field optical test solutions. Other areas of strength in this region were wireless backhaul, 100 Gig, 40 Gig and cable. Europe grew over 45% compared to Q1, where recovery is underway in Western Europe.

Asia grew more than 10%, as we saw increased demand in the region. We saw strength in Hong Kong, Japan, Malaysia, Korea, Australia, the Philippines and India. Build out of fiber plants for transport and FTTx continues to present good opportunities across the region. Our bookings growth in China and India mirrored the positive economic growth in these two countries.

As you can see, we continue to strengthen our leader market position in Test and Measurement across all of our addressable markets. On a year-over-year basis JDSU grew faster than the market, with particular strength in North America and our Test and Measurement business maintains the leading market position worldwide for field test in Ethernet, fiber field, DSL and cable networking markets, as well as storage network tests for the lab and production market.

This quarter JDSU was awarded the Frost & Sullivan 2009 worldwide growth strategy award for capturing the highest annual compound growth rate for the last three years for our portfolio of Gigabit Ethernet test equipment. Our portfolio provides the industry’s deepest set of test features, providing end-to-end testing for carrier Ethernet, products and services, including lab and service verification, development and production, installation and maintenance, troubleshooting and overall service assurance.

JDSU continues to support our customers with a portfolio of technology that is aligned with key market trends. For example, this quarter we experienced strong growth in Ethernet backhaul and monitoring tests for wireless service providers. I mentioned earlier that we had our largest quarter ever shipping T-BERD 6000 and in fact, a large percentage of these were for Ethernet backhaul applications. Bookings related to Ethernet backhaul projects for Tier 1 North American operators were particularly strong this quarter.

Continuous growth of mobile services and requirements for improving network efficiency is driving wireless operators to migrate to Ethernet services for mobile backhaul. Third party research show mobile backhaul equipment investment jumping more than 50% in 2009 to nearly $6 billion worldwide, with projections for the market to more than triple from 2008 levels to $11.3 billion in 2013.

Operators not only need to make this transition from TDM to Ethernet, they need to do it quickly, with the ability to efficiently turn up and manage service using their existing work force. JDSU understands the operators’ needs and provides a full solutions transition to Ethernet with not only the right products and systems, but with the expertise and services to effectively transition with the current workforce, providing training, consulting services, and outlining methods and procedures to deploy Ethernet and manage it through the entire lifecycle.

In another example that demonstrates JDSU technology leadership, we continue to lead the market in 100 Gig lab and production testing. JDSU was the first to demo error free 100 Gig test transmission. This quarter we shipped 100 Gig systems to six customers across all geographic regions.

Our leadership in technology for managing fiber optics networks is also evident in continued increasing demand in Q2 for our ONMS, or optical network management system. The ONMS increases customer workforce productivity and facilitates management of fiber optic networks with fewer technicians through fiber remote testing and documentation. Finally, JDSU continues to lead the 40 Gig testing in both the lab and field services’ global demand increase for 40 Gig this quarter.

Moving on to our Communications and Commercial Optical Products segment, first our Optical Communications business in fiscal Q2 revenue grew by 11% quarter-over-quarter and book-to-bill was again over one. We continue to gain market share as we see demand increasing not only for our ROADM and 300 pin tunable, but also for our newer products such as the Super Transport Blade, the mini 50 gigahertz ROADM and the tunable XFP.

All geographic regions grew quarter-over-quarter, and we had record revenue in China, driven primarily by Huawei. As I noted, our ROADM demand is clearly recovering. ROADM revenue in Q2 grew by over 50% compared to the last quarter, and is well over 20% of total optical revenue. ROADM bookings continue to be strong with a book-to-bill greater than one. Also, we have started to ship our next generation 50 gigahertz ROADM.

Production volumes are happening in the third quarter. The revenue breakdown between transport and transmission was 60% and 40%, respectively. Trends we are seeing in transmission include the disruption of the 10 Gig market with our tunable XFP, and more demand for the 10 Gig transceivers and VCSELs for wireless backhaul and data center applications.

For transport we continue to work closely and collaborate with our customers on 40 Gig and 100 Gig solutions. In one example, we are supplying a key customer with our product, including our next generation 50 gigahertz ROADM and modulators in the network that is carrying live 100-gig traffic. In fact, we are the first and only vendor supplying ROADMs and modulators carrying 100-gig traffic in a deployed network.

Our focused strategy of technology leadership, cost leadership, and functional integration enables us to continue to differentiate ourselves in a very competitive market. As you know, we have introduced a number of platforms that possess high functional integration, which have been very well received by our customers.

The tunable XFP, the first tunable made available in an XFP form factor, is a new and disruptive technology to the fixed wavelength XFPs and 300 pin 10-gig tunable transponder markets. The product was released into production in September, and to-date we are engaged with 26 customers, and have shipped product to 13 customers.

Our Super Transport Blade’s unique architecture provides substantial footprint savings to our customers. We received significant production orders to-date from two customers, with multiple designs at each customer and we have been designed into a third customer. We are currently working with most of our other customers, who are excited about the Super Transport Blade that allows them the opportunity to take full advantage of the smaller footprint and open up valuable real estate in their chassis.

Current revenue for new products less than two years old is approximately 40%, compared to 30% last quarter, in part due to the new products mentioned above. Our lasers business experienced over 10% sequential growth. Recovery is currently concentrated in a few key customers in North America and Japan.

We saw strength in our solid-state lasers and gas lasers, mainly in the semiconductor and micro machining industries. We also continue to make progress on our lean initiatives, as evidenced by a six percentage point improvement in lasers gross margins.

Finally, onto our Advanced Optical Technologies segment. Q2 revenue grew 1% compared to the previous quarter. Strength was in our Custom Optics business, including 3-D products. Our currency business was relatively flat, and we saw continued softness in our transaction cards business, as new credit card issuances remain depressed. Book-to-bill was approximately 1%.

Positive trends for this segment include customers seeking more complex integrated design features, utilizing multiple JDSU security technologies to combat counterfeiting, 3-D and growth in aerospace. Finally, JDSU and SICPA extended an already long standing relationship by signing a new long-term agreement for our anti-counterfeiting products.

On to our corporate priorities, we continue to capitalize on the positive long term growth opportunity in our markets. JDSU will continue to focus on four priorities. These priorities will enable us to further differentiate ourselves, increase our leadership position in the markets we serve, and further improve our financial model.

First is our focus on profitable market based innovation. As you know, we have taken considerable steps to lower our cost structure and improve our financial model. As our top line continues to grow, our profitability would benefit from the leverage in our model. JDSU’s innovation engine is the driver that will enable long term top line growth and profitability.

We will continue to collaborate with our customers and invest in profitable market based innovation to drive market share gains and revenue growth. It is our goal to increase the percentage of revenue from products that are less than two years old to greater than 50% over the next three years.

Highlights of innovation and future revenue opportunities include the following. For Optical Communications business has developed a substantial number of new products over the past year. In Q2 alone, we began shipping the following new products. First, our next generation 980 nanometer pump, the new pump laser is designed to help network equipment manufacturers lower cost and power consumption within optical networks.

Second, we are supplying a next generation tunable laser assembly or ITLA to market, which is also incorporated into our 310 transponders. This product provides lower power and lower cost options to the market, optimized for all the flexibility required in agile optical networks.

Finally, and as mentioned earlier, we began shipping our next generation mini 50 gigahertz WSS ROADM, which currently has multiple wins at nine customers and we are gaining good traction in the market with our tunable XFP and Super Transport Blade, both of which are in volume production.

In AOT segment, JDSU is currently in customer trials for the HoloFuse authentication technology. The HoloFuse technology is a newly, highly integrated product that helps protect government issued identity documents, such as passports, national identity documents and drivers licenses, against counterfeiting and tampering.

The partially transparent and customized hologram within a polycarbonate film includes overt, covert and forensic security features. HoloFuse has been recognized by its industry peers, having won several industry awards, most notable a Sesame award during 2009 and the excellence in Holography award from the International Hologram Manufacturers Association.

Also developed in the AOT segment is optical coating technology for 3-D solutions. Since the launch of the movie, Beowulf, in 2007, JDSU has provided a full spectrum color wheel, which captures light from a digital movie projector to deliver premium 3-D images. Most recently JDSU has provided the color wheel technology, along with 3-D glasses, with JDSU optical coatings for the viewing of the currently popular movie, Avatar.

Moving forward, we expect to 3-D to continue to be a growth opportunity for JDSU, with a current focus on cinema and large venue video viewing. The AOT segment and optical communications business have been working together to develop technologies for use in gesture recognition, a new market for JDSU.

We are all familiar with home gaming and television remote controls, what if you can control these electronics without the use of devices, by using human gestures. This is exactly what gesture recognition technology can accomplish. JDSU has developed a solution for gesture recognition applications with the unique advantage of providing two of the most critical system components, filters and diode lasers.

JDSU will begin shipments to a major home gaming provider in Q3, and we are in discussions with other potential customers. This new market represents future growth opportunities as new applications develop, such as automotive controls, lighting control and home security. AOT and optical communications have also been working together to develop concentrated photovoltaic cells for the solar market aimed at large commercial and utility scale installations. In the coming quarters we will update you on our progress.

For our laser business our product development is focused on advanced solid state and fiber laser platforms. These new products are expected to increase our served available market by more than threefold by end of the current fiscal year and in our Communications Test & Measurement segment JDSU was selected by BT Group for our industry leading HST-3000 handheld tester, which supports triple play and FTTx testing.

BP selected JDSU for our collaboration and development of new features for the product. JDSU is well positioned to support our cable customers with the DOCSIS 3.0 technology rollout with hardware and software upgrades to support our market leading installed base of DSAM and PathTrak customers with new standalone products.

Our second corporate priority is increasing our global market presence. We are placing more emphasis on expanding our market penetration and receiving our fair share of business outside of traditionally strong North American and Western European markets. We continue to see this emphasis paying off.

Latin America revenue increased by over 38% quarter-over-quarter, with particular strength in the Test and Measurement segments. Our Optical Communication Asia bookings in Q2 were the highest in over a year. Our third priority is Lean. Much of the heavy lifting to reduce our costs and improve our financial model is complete, and we are seeing evidence of the model working as the top line improves. Lean is part of the JDSU culture, and we will continue to improve our cost structure.

Finally, maximizing utilization of our assets, we are focusing on the utilization of our assets in order to maximize shareholder value, as evidenced by the improvement in our DSO and in our inventory turns. Our priorities for cash remain generating cash, and strategic accretive acquisitions in our core or adjacent markets.

As I conclude my formal remarks, I’d like to thank our employees, as we begin to realize the benefits of their efforts and dedication through the economic downturn, evidenced by our improving business model. I would also like to thank our customers, partners, vendors and long term shareholders for their continued support for JDSU.

With that, I will hand the call over to Dave, who will take you through the details of our financial performance in Q2 and discuss our Q3 outlook.

Dave Vellequette

Thank you, Tom. Before I start, please note that all numbers are non-GAAP unless I state otherwise. Second quarter revenues of $343.8 million were up 15.1% from the previous quarter, and down 2.9% compared to the second quarter of fiscal 2009. Revenues increased sequentially in each of our business segments.

For fiscal Q2 our Test and Measurement segment contributed 51% of total revenue. Our CCOP segment contributed 33% of total revenue and our AOT segment contributed 16% of total revenue. Second quarter gross margin of 44.6% was up from the previous quarters gross margin of 44%, from the second quarter fiscal 2009 gross margin of 43.5%. This improvement was primarily due to favorable segment revenue mix and improved margins in the CCOP segment.

Operating expenses for the fiscal second quarter of $125.3 million were up from the previous quarters $121.2 million, and were lower by $9.6 million from the prior year’s second quarter operating expenses of $134.9 million. The sequential increase resulted primarily from higher sales compensation due to higher revenues, selective strategic R&D investments, and a partial reinstatement of employee benefits

Due to our higher revenues and improved gross margins our operating income for the quarter was $28.1 million, or 8.2% of revenue, which compares to an operating income of $10.2 million, or 3.4% of revenue, for the previous quarter. Net income for the second quarter of $26.6 million, or $0.12 per share, compared to the previous quarter’s net income of $9 million, or $0.04 per share, a detailed reconciliation of our non-GAAP results to our GAAP results is available in today’s press release.

Our second quarter non-GAAP results exclude among other items, $23.2 million of amortization of acquired technology, intangibles and imputed non-cash interest on convertible debt, a $12 million charge related to stock based compensation, and an $8.7 million charge for restructuring and non-recurring expenses, including the noted items, the second quarter fiscal 2010 GAAP net loss narrowed to $19.5 million, or a loss of $0.09 per share, from the previous quarters GAAP net loss of $31.9 million, or a loss of $0.15 per share.

Now looking at revenue by region, America’s revenue of $173.6 million was 50% of total revenue, up $21.9 million from the prior quarter. The increase included approximately $10 million from service provider, budget flush and growing demand from Latin America service providers.

Latin America revenue grew over 38% quarter-over-quarter. EMEA revenue of $94.8 million was 28% of total revenue, up $14.8 million from the prior quarter, as CommTest and CCOP products saw a rebound in demand from their seasonally low Q1 levels. Asia-Pac revenue was $75.4 million, up $8.5 million from the previous quarter, and represented 22% of total revenues. Asia-Pac revenue increased across all three business segments.

Moving to the segments, in the Test and Measurement segment second quarter revenue of $176.9 million was up 23.4% from the previous quarter’s $143.4 million, and up 2.3% from the prior year’s $173 million. As previously noted, the calendar year and budget flush from North America service providers was approximately $10 million. From a product standpoint our field test revenue grew by 16%.

Lab and production revenue grew by 70%, and service assurance grew 8%, as compared to the previous quarter. Geographically revenue increased across all regions sequentially. Book-to-bill for the quarter was greater than one. Fiscal Q2 gross margin for Test and Measurement of 56% was down compared to the previous quarter. The decrease in gross margin percentage was primarily due to an inventory write-down, and transition costs associated with our move to contract manufacturers.

These charges totaled approximately $4.3 million in the quarter. As a result of the higher revenue, the Test and Measurement second quarter operating profit of $31.5 million, or 17.8% of revenue, increased 75% when compared to the prior quarter’s operating profit of $18 million, or 12.6% of revenue. In Test and Measurement we continue to make progress on our transition to contract manufacturing.

We have completed the transition of our Indianapolis product lines and our Germantown, Maryland transition is expected to be largely complete by the end of fiscal 2010. Once we have completed this transition, over 70% of our CommTest product revenue will be manufactured by contract manufacturers. We maintain that the above initiative provides the structure to support gross margins in the 57% to 61% range, and sustainable operating margins between 20% and 23% at a quarterly revenue level of $175 million or greater.

Now moving on to our CCOP segment, the breakout of the key metrics for Optical Communications and Lasers is as follows. Optical Communications revenue in fiscal Q2 was $95.6 million, up 11.2% when compared to the previous quarter’s revenue of $86 million, and down 12.7% when compared to the prior year’s $109.5 million. Gross margin for the quarter was 22.5%, up from the previous quarter’s gross margin of 19.7%.

The improvement in gross margin is attributable to reduced manufacturing costs, higher utilization of our fabs, and a more favorable product mix. Book-to-bill was greater than 1 for the quarter. ASP decline was in our historical quarterly range of 2% to 4%. Looking at the product lines, growth was strong for our datacom and telecom product lines, including our ROADMs, circuit packs, pluggables and tunables.

For example, ROADM revenue increased over 50% sequentially, and demand also increased for the third quarter in a row. With the completion of the consolidation of our optical fabs, our gross margin improvement initiatives are now focused on increasing factory utilization. Our target is for sustainable margins in the 25% to 30% range. We believe we can operate in this range by the end of fiscal 2010.

In our Lasers business second quarter revenue of $16.7 million was up 10.6% when compared to the previous quarter and gross margins for the quarter improved to 32.4%. Book-to-bill was also greater than one. On a total segment level, due to higher revenue and improved gross margin, operating income for CCOP was $3.2 million, which compares to an operating loss of $1.5 million in the prior quarter.

We believe the CCOP operating model supports operating margins of 10% to 15% at revenue levels of $150 million or greater per quarter. For the advance optical technologies or AOT segment fiscal Q2 revenue was $54.6 million up 0.9% compared to the previous quarter and up 2.8% compare to the prior year. Our custom Optics and Authentication Solutions groups delivered sequential growth of 10% and 15%, respectively.

Currency was relatively flat, and custom color products were down from the previous quarter. AOT book-to-bill was approximately one for the quarter. Fiscal Q2 gross margin for our AOT segment was 50%, down from the previous quarter. The decline in margin was due to factory utilization, as we executed against our inventory reduction plan. AOT operating profit for the quarter was $19.6 million, down from the previous quarter’s $20.6 million. The operating margin of 35.9% is in our targeted sustainable operating profit range of 34% to 37%.

Moving to the balance sheet for fiscal Q2 2010 the company reduced inventory levels by more than $11 million, and reduced its day’s sales outstanding by more than 3 days. As a result, the company was free cash flow positive $27.1 million for the quarter. The headcount as of January 2 was 3,944.

Moving to our operating model, we maintain that our cost structure is such that we can sustainably realize 10% operating margins when quarterly revenues are between $375 million and $385 million and gross margins are 46%.

Now to our Q3 guidance, first some points to consider, as you think about our financial performance over the coming quarters. Lead times from our component suppliers have increased and could impact revenues in the quarter. In Q2, due to supply constraints, we are unable to ship between $8 million of $10 million of customer demand.

Test and Measurement revenue is historically seasonally lower in the March quarter, as the December quarter revenue includes calendar year end budget flush spending from the carriers and carrier budgets are not typically released at the beginning of the March quarter.

Optical Communications ASP decline is expected to be above our quarterly range of 2% to 4% due to just completed pricing negotiations. Total operating expenses are expected to increase as we increase our investment in the AOT segment. Employer payroll taxes increase with the new calendar year and we will not have a companywide shutdown in Q3. The increase in operating expenses is estimated to be between $4 million and $5 million for the third fiscal quarter.

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 third quarter revenues to be between $325 million and $350 million; and non-GAAP operating margins to be between 5% and 7.5%.

Operator, we’ll now take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mark Sue - RBC Capital Markets.

Mark Sue - RBC Capital Markets

Considering the different seasonality of each segment, the Test and Measurement book to bill greater than one, should gross margins actually hold sequentially near term? Are there enough actions left, such as increased utilizations and other things that you’re doing to help gross margins to improve further from here?

Then just on Optical, it is there added confidence of sell through of optical components, and that we won’t have another ROADM inventory situation that we did several quarters ago?

Dave Vellequette

On the question of gross margin, we don’t give guidance on the gross margin; we just give it on the operating profit level. So we consider the fact of how the Test and Measurement revenue typically has lower seasonality. So that was taken into consideration with the range that we gave.

Tom Waechter

The manufacturing outsourcing, as Dave mentioned in his part of the discussion, was that we’re still completing the Germantown, Maryland transition for CommTest business. Also, I’d say on the gross margin side, that we have some additional supply chain opportunities to reduce costs. I think as far as the sell-through of the optical components, we don’t believe that there is any buildup of inventory in the supply chain at this point.

Operator

Your next question comes from Jeff Evenson - Sanford Bernstein.

Jeff Evenson - Sanford Bernstein

I was wondering if you could give us a little bit more color on the ASP declines that you anticipate. What segments are they in? Why do you guys feel some pressured to lower the prices a bit more than you have been doing?

Dave Vellequette

The ASP decline, I was noting was about our Optical Communications Group when I made those points, and that is because, at the December quarter we are negotiating quarterly, semi-annual and annual contracts all at once. Historically, we’ve noted that we expect the March quarter to have usually a greater ASP decline.

Two years ago, we did see that. Last year we didn’t happen to see that, but historically we do, because of the fact that you’re negotiating all of your supply agreements at the same time for the optical customers.

Operator

Your next question comes from Kevin Dennean - Citi.

Kevin Dennean - Citi

I just want to talk about CommTest; it looks to me like you exceeded your target, or the range of the target model of $175 million. I understand there was a bit of an impact from gross margins. If we add back the $4 million roughly impact to the gross margins, it looks like it would have been about 20% operating margin, which I think puts you at the lower end of the target. What are the puts and takes as far as sustainability to achieving your operating model and sustaining it in that segment?

Tom Waechter

In the CommTest segment, it has a lot to do with what we’re doing at the gross margin line around the outsourcing and the manufacturing, fine-tuning that, as we did a lot of heavy lifting over the last few quarters to get the majority of our manufacturing outsourced. Now it’s a matter of fine-tuning that and getting more cost out of the supply chain, and then obviously continuing below the gross margin line to continue to control our operating expenses.

Kevin Dennean - Citi

So, Tom, how much upward pressures can you put on that gross margin line from here, with revenue levels being where they are? It sounds like; you have talked about most of the heavy lifting being done on the restructuring. I’m just trying to get a sense for where we can range here going forward.

Tom Waechter

I think part of it is the new product mix. So as I talked quite a bit in the discussion earlier that innovation, the product mix will definitely help us, because we generally get higher gross margins out of those newer products. The amount of sales from products less than two years old is continuing to increase.

I noted that our goal is to get to 50% or greater for the company. I think CommTest rolled out a lot of new products this past year, having good success with those. So that will help us also as far as the mix in the newer products.

Operator

Your next question comes from Paul Bonenfant - Morgan Keegan.

Paul Bonenfant - Morgan Keegan

I’m wondering if you have a sense for what, if any, of the CommTest expectations in the March quarter reflect catch up spending following the Q4 budget flush, and your thoughts for sustainability beyond the March quarter. Just a housekeeping question, you talked about leadtimes being increased, and $8 million to $10 million shortfall in what you could ship versus demand. Is that specific to the Optical Communications segment?

Dave Vellequette

First, on the catch-up spending, the budget flush that happened in December was at the low end of the range that we talked about. As we look at, for example, two large carriers out there, AT&T and Verizon, Verizon’s forecast for CapEx is about flat, if you take the midpoint of the range they gave year-over-year. AT&T is actually saying they’re going to spend more.

So if we look at those two data points as positive points for the Test and Measurement business. Also the issues that you’re seeing on some of the wireless areas as far as the backhaul and people having trouble, so we’re seeing that our Ethernet backhaul is a good bit there. So the guidance took all that into consideration when we came up with the range that we provided the second half of…

Tom Waechter

Paul, can you repeat the second half of the question for us?

Paul Bonenfant - Morgan Keegan

Sure. You talked about lead times increasing, I guess, in your supply chain, leading to an $8 million to $10 million shortfall in what you could ship in the quarter. I’m asking if that was specific to the Optical Communications segment.

Dave Vellequette

No, it was across multiple segments. It’s really the availability of some of the ICs that is really an industry-wide shortage. So it’s really mostly a result of that, and it’s across multiple business segments for us.

Operator

Your next question comes from Todd Koffman - Raymond James.

Todd Koffman - Raymond James

Just a clarification, when you called out the book to bill, I think you called it out for the bigger segments, CommTest and Measurement and the Advanced Optical, but then when you got into your Communications and Commercial Optical products, I think you only called out a sub-segment, the Optical Communications book to bill. Did I mishear you?

Dave Vellequette

Book to bill is greater than one in both. So if I only mentioned one, nope, I said Lasers’ book to bill is also greater than one. So it was greater than one in both Lasers and in the Optical Communications.

Todd Koffman - Raymond James

Just a follow-up to that, so then basically the bulk of your business has the vast majority of your business is book to bill greater than one. Advanced Optical you said is approximately one. What is the timeline that the bookings you are receiving are going to be shipped against, since your guidance doesn’t reflect a sequential up tick that the book-to-bill would suggest? How far out are your bookings going?

Dave Vellequette

So the best way to look at it is when we enter a quarter the coverage typically represents historically less than half of the revenue that we end up shipping in the quarter. So that is how we look at that, and how we judge the guidance. Typically in the optical area we will look at specific bookings that don’t extend beyond 12 months, same for lasers. In the test and measurement, which is a high turns’ business, we look at orders that are shipping within the next 120 days.

Todd Koffman - Raymond James

Then just a last follow-up question that is unrelated. In your Optical Communications segment the industry has kind of done some consolidation around you. You’re no longer the guerrilla that you were a number of years ago. How has that impacted you? Has it been beneficial or you are talking about some pricing pressure and you somewhat lost some share overtime? Thank you.

Tom Waechter

I think in general the consolidation of suppliers has helped the industry, because the customer base has also consolidated. So they need to say keep pace to some degree. So I think it has helped to rationalize more than go the other way through those consolidations. So it has mostly been a benefit, I believe.

Dave Vellequette

Also, when you talk about the size of our revenue and positioning, our focus, as we have noted, is on the innovation and keeping focused on products that have higher levels of integration. So that gives us, we believe, a better position in the portfolio that we are selling. If you recall, a little over a year ago we removed a number of products from our portfolio that provided revenue, but did not provide profitability. So we’re being more selective in the product portfolio selection.

Operator

Your next question comes from Michael Genovese - Soleil Securities.

Michael Genovese - Soleil Securities

Just first a few numbers that I missed. Actually, as I was scribbling my notes, I missed some key numbers. Could you give me the Optical Communications gross margins, the CCOP gross margins, and the AOT gross margins in the quarter?

Dave Vellequette

The Optical Communications gross margin was 22.5%. The Lasers was 32.4%. We did not provide a CCOP gross margin, but we gave you the revenue and the gross margins for each. So I’m sure you’ll be able to calculate that. What were the other items?

Michael Genovese - Soleil Securities

The Advanced Optical gross margin?

Dave Vellequette

That was 50%.

Michael Genovese - Soleil Securities

So the $8 million to $10 million, where you were constrained on the componentry, is that all expected to ship in FY 3Q?

Dave Vellequette

Yes, that will primarily ship in this quarter.

Michael Genovese - Soleil Securities

I understand why it looks like the test and measurement margins were a little bit below target, because of the inventory write-down and excluding that, they would have been sort of at the lower end of your target range there, but why were the Advanced Optical margins down sequentially?

Tom Waechter

As I think Dave mentioned, we brought down our inventory level based on some lean programs we had running, so there was lower absorption in certain product lines for that division, and that had an impact negatively on the gross margins.

Operator

Your next question comes from Ajit Pai - Thomas Weisel Partners.

Ajit Pai - Thomas Weisel Partners

There are two quick questions. The first is just looking at the impact of 40G and 100G. You provided encouraging commentary in your prepared remarks, but could you give us some color both on your Optical Communications components business, as well as the test and measurement business?

How material it is as a percentage of the overall revenues for 40G and higher, is it past the 5% of the overall threshold and over the next two years what do you expect the ramp to look like, and what percentage of revenues it could be? Then the second question would be just look at the M&A environment, whether the pipeline has gotten richer, or is it just flat, and can we expect more activity over there over the next couple of quarters?

Tom Waechter

I think on the 40-gig and 100-gig, as far as CommTest product lines, as we mentioned we shipped into six different customers’ 100-gig solutions and that really will not be in large volumes for some period of time, but it gets us early on into those customers, helping them to develop their products and then our plans are that that would then be deployed out into the field, and more a field solution as we look out over the next couple of years.

So it is an important win for us from a technology standpoint, getting us in with key customers early on, but it is not a very large portion of our revenue today. 40-gig continues to be a reasonable part of our overall revenue for CommTest, as we’re seeing volumes of sales around 40-gig test solutions.

I think as far as Optical components, we are just starting to see some delivery of 100-gig componentry, again pretty small volumes and 40-gig is that at reasonable level. So we believe 40-gig continues to pickup momentum as we look out over the next quarters and next year, year and a half, and 100-gig follows that. With the capacity constraints in the network, if those continue at the level they are at today, there could be a quickening of the deployment of the 100-gig product lines.

Ajit Pai - Thomas Weisel Partners

Then acquisitions?

Tom Waechter

We continue to look actively at the market, across all of our business segments. We do believe there’s opportunities out on the market and continue to drive our key priorities there of immediately accretive, good gross margins, good profitability for the company.

Operator

Your next question comes from Dave Kang - B. Riley.

Dave Kang - B. Riley

First of all, regarding these supply chain issues. So do you think the shortages will improve in the March quarter, because I’m hearing they may not be or alleviated in the current quarter, the March quarter?

Tom Waechter

We believe the shortages will continue through the March quarter. It is a pretty widespread issue. It is difficult to say whether they get better or worse during the March quarter. We believe beyond the March quarter they do start improving, as the IC manufacturers are able to bring up their capacity and return it to more of a normal level.

Dave Kang - B. Riley

Just a follow-up on the ASP decline for this quarter, I’m hearing that more and more customers are demanding one year pricing negotiation, rather than six months. Are you seeing that from your side as well?

Dave Vellequette

No, some of our customers, depending on what the product is, prefer to renegotiate every quarter and then some of them are six-month and some of them are annual. That has been our experience, and we haven’t seen a change from that for us.

Operator

Your final question comes from Joel Achramowicz - Blaylock Robert Van.

Joel Achramowicz - Blaylock Robert Van

I was wondering if you could just give us an update on the competitive complexion out there and across the product line and just maybe give us an indication, which competitors you are most concerned about in each sector?

Tom Waechter

I think as far as the CommTest product line, I’ll start out first. As we mentioned, we believe we continue to do very well in the fiber optics test, and we continue to grow market share there. We continue to see a fairly fragmented market, reasonable amount of competitors out there. There’s probably two or three that we see more in the various opportunities.

As far as Optical Communications there has been some consolidation in this space at the supplier level. It continues to be strong competition for the component level. We believe we’re starting to separate ourselves with the integrated products, the Super Transport Blade, the tunable XFPs. We are moving up the food chain, and we’ve separated ourselves a bit from the competition with where we are at on the technology front and then from an Advanced Optical Technologies side, we have a large share of the market in a number of areas, and it’s pretty fragmented as far as the players in that market.

Operator

At this time we have no further questions in the queue. I would like to turn the call back over to Mr. Tom Waechter for any closing remarks.

Tom Waechter

Thank you, operator. As our call concludes, I’d like to reiterate some key points. First, our Q2 results demonstrate improving customer demand, reporting quarterly revenue growth of 15%. The improvements in leverage in our financial model are becoming increasingly apparent.

We continue to focus on innovation to achieve long term, sustainable growth. We are seeing momentum with our recent product introductions, and see new opportunities in markets, such as gesture recognition and 3-D. Finally, our employees executed on our strategy during the downturn, and as a result, we are starting to see the benefit of their hard work and dedication.

Thank you again for joining us today. We appreciate you taking the time and for your interest in JDSU. Have a great evening.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: JDS Uniphase Corp. F2Q10 (Qtr End 01/02/10) Earnings Call Transcript
This Transcript
All Transcripts