Bill Ong Thomas H. Waechter - Chief Executive Officer, President and Director Rex S. Jackson - Chief Financial Officer, Principal Accounting Officer and Executive Vice President Alan S. Lowe - President of Communications & Commercial Optical Products and Executive Vice President David W.

Heard - Executive Vice President and President of Network & Service Enablement.

Amitabh Passi - UBS Investment Bank, Research Division Ameet Prabhu - RBC Capital Markets, LLC, Research Division Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division James M. Kisner - Jefferies LLC, Research Division Mark McKechnie - Evercore Partners Inc., Research Division Joseph Wolf - Barclays Capital, Research Division Simon M.

Leopold - Raymond James & Associates, Inc., Research Division Kent Schofield - Goldman Sachs Group Inc., Research Division Dave Kang - B. Riley Caris, Research Division.

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 JDSU Earnings Conference Call. May name is Britney, and I'll be the operator for today. [Operator Instructions] At this time, I would now like to turn the conference over to your host for today, Bill Ong. Please proceed, sir..

Thank you, Britney. Welcome to JDSU's Fiscal Second Quarter 2014 Earnings Call. My name is Bill Ong, JDSU's new Senior Director of Investor Relations. Joining me on today's call is Tom Waechter, CEO; and Rex Jackson, CFO.

We also have David Heard, President and General Manager Network & Service Enablement business unit; and Alan Lowe, President and General Manager of our Communications & Commercial Optical Products business unit during the Q&A session.

Now please note, this call will include some forward-looking statements about the company's future financial performance. These statements are subject to risk and uncertainties that could cause actual results to differ materially from our current expectations.

We encourage you to look at our most recent filings with the SEC, particularly the risk factors in Part I, Item 1A of our annual report in Form 10-K filed with SEC on August 23, 2013. The forward-looking statements includes guidance we will provide during this call are valid only as of today. JDSU undertakes no obligation to update these statements.

Please note also that unless otherwise stated, all results are non-GAAP, which excludes, among other items, amortization of acquired technology and other intangibles, stock-based compensation and restructuring charges.

We include a detailed reconciliation of these non-GAAP results, as well as a discussion of their usefulness and limitation in today's earnings press release. The release, plus our supplementary slides and historical financial tables are available on our website.

Finally, we are recording this call today and will make the recording available by 6:00 p.m. Pacific Time, this evening on our website. I would now like to turn the call over to Tom..

Thank you, Bill. Bill joined JDSU 2 months ago after 17 years as a Wall Street analyst preceded by 12 years of semiconductor industry experience, first as an engineer then in finance and investor relations.

As our new head of IR, he will be working with many of you in the coming months in various investor events and at an Analyst Day event we are planning for the fall. Welcome, Bill. We are pleased to have you on the JDSU team.

I'm pleased with our fiscal second quarter 2014 financial results, with the revenue at $447.6 million, gross margin of 48.5% operating margin of 11% and EPS of $0.19. Both revenue and operating income exceeded our guidance for the quarter.

The quarter's top line reflects a stronger-than-expected finish in NSE despite no budget flush, a solid performance by our optical security and performance products segment the results from CCOP just below the end of our guidance range.

Better top line performance, operational improvements and favorable mix improved our gross margin to the second best quarter in the last several years and yielded a strong bottom line. As I mentioned last quarter, a number of key trends continue to drive our business.

The first is a global need for significantly increased bandwidth and network intelligence to support ever-increasing network traffic and complexity. On the network expansion front, CCOP's core optical business continued to benefit from NEM demand tied to additional deployment and upgrades by its service providers.

NSE's best-performing areas where fiber and transport, both supporting carrier-capacity increases. In the Americas, we continue to see the build-out of 100G and mobile broadband driving LTE deployments.

The carrier spending was uneven in calendar 2013 due to industry consolidation, as well as the time required to work through architectural and technical decisions to address new technologies like small cells, software-defined networks and network function virtualization.

EMEA continues to be more cautious in spending, but after China's slow start in 2013, we're seeing increased activity in their 100G, 4G/LTE build-out that should benefit JDSU in calendar 2014.

We continue to see strong Datacom market demand, particularly in the data center and cloud segment as Internet and cloud service providers expand their infrastructure.

Datacom was healthy for CCOP's 10G and 40G portfolio in the first half of FY '14 and is expected to continue being an area of growth for CCOP as we expand our product offering for this space and penetrate new accounts.

In addition to driving network expansion, carrier service providers and enterprises are also striving to address increasing network complexity caused by greater traffic, an ever-increasing array of applications, the demand for higher speed and security and reliability challenges.

Providing solutions to these challenges is central to NSE's service enablement strategy. During Q2, we agreed to acquire Network Instruments, a leading developer and provider of enterprise network and application performance management solutions for Global 2000 companies, adding to our service enablement portfolio.

The transaction, which closed on January 6, provides a competitive position in the applications-aware performance management network and opens opportunities for NSE's existing products and services and network instruments enterprise sales channel.

NSE is also continuing to gain traction with its service enablement software portfolio, which includes PacketPortal and PacketInsight. In December, we completed this portfolio by acquiring Trendium, a mobile assurance software provider and JDSU partner supporting 4G LTE networks.

This month we won a $10 million-plus tender from one of the top 5 mobile operators in the world for our new JDSU Trendium solutions. Expect to see associated bookings this quarter. We're very pleased with this first multimillion award for these advanced solutions and look forward to accelerating our Service Enablement business in calendar 2014.

As we turn to the commercial laser industry, the high-powered fiber laser market is a significant opportunity for us with an estimated TAM of $1.6 billion and a $420 million SAM by 2015. High-speed laser cutting and laser welding are still early and growing market opportunities for JDSU.

During Q2, with our key partner, Amada, we released our second-generation fiber laser. We also released a proprietary beam-shaping capability, which provides a flexibility to cut both thick and thin metals by changing the beam configuration electronically.

This capability provides customers significant savings in time and cost and improved productivity versus CO2 or other fiber tools. Our second-generation fiber laser accounted for approximately half of our fiber laser revenue in Q2 and we're working hard to increase our production of this product to meet the demand.

As many of you know, our target business model for CCOP assumes a 20% revenue contribution from our Laser business. To advance our solid-state laser product lines, we also announced today that we have acquired Time-Bandwidth products, a Zürich-based provider of high-powered ultrafast lasers.

Use of ultrafast lasers for micro-machining applications is being driven by increasing use of consumer electronics and connected devices globally. With the addition of Time-Bandwidth, we now have a broader portfolio, the micro-machining market, which complements our Q Series solid-state family of products.

A third major area for us is anticounterfeiting, which accounts for approximately 65% of OSP's revenue.

OSP's focus on developing a manufacturing over technologies used principally by consumers to visually authenticate bank notes and other secure documents gives it a SAM of approximately $450 million in a market with an overall TAM of approximately $3 billion.

OSP's flagship and anticounterfeiting technology, optically variable pigment, or OVP, has been adopted by central banks issuing banknotes for more than 110 countries around the world.

Additionally, OSP's optically variable mimetic pigment, OVMP, is continuing to add its market wins with 47 countries now incorporating OVMP in their banknote designs, up from 44 last quarter. Looking forward, high-growth economies such as China, represent opportunities for growth in calendar 2014 and beyond.

Additionally, we expect to formally launch our newest anticounterfeiting product, our ChromaGuard banknote security thread substrate, with our lead customer this quarter, confirming our commitment to developing new solutions for this market.

Turning to gesture recognition, this technology continues to receive a lot of attention in gaming, computing home entertainment and mobility as demonstrated at the recent Consumer Electronics Trade Show where a number of leading industry players announced new product and applications.

JDSU has established itself as a key supplier of proprietary components supporting this trend, including supporting the Kinect system and Microsoft's new Xbox One gaming console with optical technology that enables the console to provide highly precise 3D imaging capabilities.

We continue to work with customers on other applications with expected revenue opportunities in computing by the second half of calendar 2014 and in home entertainment in calendar 2015. Overall, we are pleased with our diverse and expanding technology portfolio and see attractive opportunities for growth this year across our 3 business segments.

I will now turn the call over to Rex to discuss our quarterly results..

Thank you, Tom. JDSU's fiscal second quarter 2014 revenue was $447.6 million, up 4.3% from Q1 and up 4.2% from the second quarter of last year. Geographically, the Americas accounted for $213.8 million, up 7.3% sequentially; EMEA for $104.8 million, essentially flat; and Asia-Pacific, $129 million, up 2.5%.

The geographic sales mix was 47.8% for the Americas, 23.4% for EMEA and 28.8% for Asia-Pacific. Gross margin was 48.5%, up 220 basis points from Q1 and up 50 basis points from a year ago, our best since Q2 of FY '11. Gross margins improved across all 3 business units with the largest contribution coming from NSE.

Operating expenses at $168 million were up 3% sequentially from $163.1 million, reflecting primarily annual LIBOR rate increases and higher variable compensation.

Operating margin was 11%, 270 basis points above Q1 but slightly below 1 year ago due primarily to increased investments in R&D and NSE and CCOP, and incremental expenses from the Arieso acquisition. Net income was $45.3 million, up 50% from Q1 on higher revenues and better margins, and up 7.1% from 1 year ago on better revenue.

EPS was $0.19 versus $0.13 in Q1 and $0.18 a year ago. Turning to the segments. NSE's revenue of $195 million was up 13.4% sequentially and exceeded our guidance. NSE's book-to-bill ratio was just below 1, substantially improved from the first quarter.

The revenue's strength was driven by good bookings activity late in the quarter and an increased book-ship efficiency due to improved order execution and collaboration with our outsourced manufacturers. Though we had anticipated some budget flush form cable operators what we did not receive any meaningful budget flush during the quarter.

NSE achieved a near record gross margin of 64.4%, up 230 basis points from Q1 and reflecting a combination of higher revenues, improved operations and better mix.

Operating margin at 14.7% improved [ph] 740 basis points over Q1, reflecting the significant leverage in NSE's business about $175 million in revenues, better gross margins and continued operating expense management. New products defined as those products less than 2 years old, represented 60% of revenue consistent with Q1.

As Tom alluded to earlier, NSE has been investing consistently in maintaining and advancing its long-standing leadership in field test instruments to enable the network. This network enablement part of NSE is the clear leader in a $2.8 billion SAM, growing approximately 4% per year.

At approximately 80% of NSE's total revenue, the Network Enablement portfolio is hardware-centric, book and ship, carrier dependent and cash-positive and currently drives NSE's profitability. Most easily, NSE has invested significant R&D and capital resources to offer solutions to allow operators to manage increasing network complexity.

These service enablement solutions address a SAM of nearly $3 billion growing at approximately 11% to 12% per year and include PacketPortal, PacketInsight and Arieso, Trendium and Network Instruments acquisitions. Service enablement currently represents approximately 20% of NSE's total revenue.

But because we've been investing significantly in R&D resources and product development and sales resources in opening up new software solution opportunities, it's not yet accretive to NSE's business model.

However, if we are successful with our initiative in [ph] service enablement, we believe the gross and operating margins for this portion of the business can be superior to the current NSE blended business model we have published.

Given the differences between our Network Enablement and Service Enablement product portfolios, in terms of revenue, time to revenue, revenue models, R&D investment levels, margins and current places in their business life cycles and to enable investors and analysts to better understand NSE, we're planning to break NSE's financial results out of the basis of these 2 portfolios later this calendar year.

Moving on to CCOP. CCOP revenue of $198 million was down 3.2% from Q1 and slightly below the low end of our guidance range. Optical Communications revenue of $174.5 million was down 1% sequentially, reflecting the anticipated seasonal drop-off in gesture recognition revenue, partially offset by increased telecom business.

Commercial Laser revenue of $23.5 million was down, as expected, 17.3% sequentially due to softer semiconductor sector demand and the transition from Gen 1 to Gen 2 of our fiber laser product. The CCOP and Optical Communications book-to-bill ratio was below 1. Laser book-to-bill was above 1, reflecting increased demand for the Gen 2 fiber laser.

Gross margin at 32.3% improved 30 basis points from Q1, reflecting favorable product mix and operational improvements despite sequentially lower revenue. Optical communications gross margin at 30% improved 50 basis points over Q1, while laser's gross margin at 49.4% improved by 190 basis points.

Operating margin at 12.1% declined by 120 basis points versus Q1 and reached the low end of guidance of 12% to 14%. The decline was impacted by lower revenue and increased R&D investments. New products less than 2 years old represented 65% of revenue, down slightly from Q1's 68%.

Average selling prices in the Optical Communications business declined about 3% sequentially in line with our expectations. Demand for 100G line side telecom components was strong in the quarter, representing 26% of our telecom transmission revenue.

Our TrueFlex ROADM revenue doubled and our tunable XFP and SFP+ product revenue grew by more than 14% sequentially. Amplifier revenue increased 10% and provides a good leading indicator for continued transmission product growth for tunable XFP and SFP+ in the build-out for more Metro and EDGE 10G applications. Moving on to OSP.

OSP revenue of $54.6 million was up 4% from Q1 and within our guidance range. Sequential revenue growth was driven by higher last-time buy activity of approximately $9 million, which offsets an expected decline in gesture recognition. Anticounterfeiting sales remain flat. OSP's book-to-bill ratio was above 1.

Gross margin at 50.5% improved 60 basis points versus 49.9% in the prior quarter, driven by both higher revenue levels and better factory utilization. Operating margin at 37.5% improved by 110 basis points and exceeded our guidance range. Turning to our balance sheet.

We maintain a strong net cash position at $571.5 million as of the end of December 2013. We delivered positive operating cash flow for the 29th consecutive quarter at $55.4 million versus $29.5 million in Q1, driven by higher sales and better margin performance.

Capital expenditures for the quarter were $31.9 million, higher than expected, due to the $14.7 million purchase of our largest fabrication facility in California, which protects our significant capital investments in this facility, reflects our long-term commitment to the site and provides operational flexibility and cost savings.

Depreciation and amortization is $30.5 million. Now for our guidance. We expect fiscal third quarter revenues to be $420 million to $440 million and non-GAAP operating margin to be 6% to 8%. The Network Instruments acquisition closed earlier this month.

We expect it will contribute approximately $7.5 million in revenue in Q3, lower than its recent run rate, due to the loss of substantially all preexisting deferred revenue under purchase accounting rules. For Network Instruments, this typically represents approximately 25% to 30% of its quarterly revenues.

Network Instruments comes to JDSU with strong momentum with record shipments in its December 2013 quarter. We expect Network Instruments to be accretive to NSE's gross margin this quarter and NSE's operating income business model target late this calendar year.

As Tom mentioned, our Trendium solution, combined with other JDSU offerings recently won a large tender with a major mobile operator that is expected to translate into bookings this quarter. But there's no material revenue included in this guidance from this win due to the timing of delivery and revenue recognition rules.

Trendium is not expected to add incremental operating expenses to Q3 since we are absorbing its costs into our existing operations. We expect the time bandwidth to contribute less than $2 million revenue in Q3 and to be approximately neutral to earnings.

At the segment levels, we expect NSE revenue to be $175 million to $185 million, CCOP revenue to be $195 million to $205 million and OSP to be $49 million to $51 million. Operating margins for NSE are anticipated to be 5% to 7%; CCOP, 10% to 12% and OSP, 34% to 36%.

Please refer to the supplementary slide deck for other fiscal third quarter 2014 financial metrics guidance. Starting with NSE, entering a typically seasonally lower fiscal third quarter, with the last 6 months book-to-bill ratio below parity, revenue is expected to decline sequentially.

Operating margin will be impacted by lower revenues and by M&A-related operating expenses, while associated revenues will lag somewhat as NSE builds backlog and corresponding revenue recognition. In CCOP, the sequential decline reflects an expected decline in gesture revenue offset by expected improvements in telecom, Datacom and Commercial Lasers.

Fiscal third quarter optical communications ASPs are expected to decline at the higher end of our slightly -- higher end of or slightly above our typically quarterly target range of 2% to 4% as a large portion of our annual pricing negotiations take effect in the first calendar quarter.

However, we expect our full year 2014 pricing declines to be within our typical annual range of 10% to 14%. In OSP as we announced in June 2013, we are exiting certain legacy product lines associated with the Thin Film Cutting business that serves the office automation, custom display and solar markets.

We're expecting to receive approximately $8 million in last-time customer buys in the third quarter, up from our initial estimates, and offsetting a sequential decline in our anticounterfeiting business that is tied to short-term softness and overall demand. Last-time buys in the fiscal fourth quarter are expected to be approximately $1 million.

We expect organic revenue from our existing customers to substantially make up the difference as we complete this exit. I'll now turn the call back over to Tom..

Thanks, Rex. In NSE, both organic and inorganic investments made in the past few years are now taking shape, enabling and supporting an even faster, higher capacity and more intelligent network.

Our portfolio provides our carrier and enterprise customers both network hardware and software insurance solutions to meet the insatiable demand for reliable, high-quality broadband content. We are very pleased with NSE's execution in evolving and adding to its solutions base, aligned with customers’ needs and market trends.

In CCOP, we see a healthy demand for our 100G products and are working to increase reduction capacity on these products. We're excited about the early success of our tunable and TrueFlex product lines and pleased with our penetration into the Datacom market with our 10G and 40G products.

And as we said, early response to our Gen2 fiber laser has been very positive and we have additional opportunities later in calendar 2014 for the gesture recognition. We're optimistic that OSP's long-term demand drivers in the anticounterfeiting security pigments market will drive growth in that business.

We continue to see adoption of our OVMP technology by central banks globally, are now releasing our threat solution and continue to leverage OSP's optical coating technology and new applications in consumer electronics, government and healthcare markets offering growth opportunities in calendar 2015 and beyond.

Before we turn the call to Q&A, I would like to thank our employees, business partners and shareholders for your interest and continued support of JDSU.

Bill?.

Yes, thank you, Tom. [Operator Instructions] Britney, let's begin the Q&A session..

[Operator Instructions] And your first question comes from line of Amitabh Passi with UBS..

I guess my first question was, looks like optic is going to trend back up again in the March quarter, almost up $20 million year-over-year.

How long do you think you'll continue to be in this investment mode and when can we actually start to see the fruits of your M&A strategy as well these investment you're making in the business?.

Good question. So I think we are seeing a benefit of a number of those R&D investments, especially around the service enablement and also the new products we've rolled out like TrueFlex, ROADM's and the tunable products. So we're definitely seeing that traction.

I think with the really dramatic changes we're seeing in the technology out in the, and especially, in the network space, we've really have accelerated our investments. But I think it's really required. And I think in talking directly with our customers, we're very well-aligned with our future needs.

I think it's a little bit exaggerated with the investments we've had in PacketPortal which we are now starting to see some good milestones in that area and also with the revenue recognition timing on the Arieso products and acquisition. So I think now that we've added network instruments, that has increased our operating expenses somewhat.

As we go into next quarter, I would expect that they will start flattening out and we'd start seeing in a few quarters out the flow-through of the associated revenue..

And then, Tom, just as a follow-up, I didn't hear you guys talk much about China or maybe I missed it.

I would love to get your thoughts, how do we think about the potential opportunity for you in China this year across both your major business segments, CCOP and NSE?.

Yes. I think I'll start and then ask Alan to talk about the CCOP and David on NSE. But overall, we are encouraged by what we're seeing now in China. They are building out the TD/LTE base stations that's actually happening and we're seeing the associated back -- 100G backbone happening.

So we do believe, where it was very lumpy in calendar 2013, we're actually starting to see that flow through. I'll ask Alan to give a little bit more specifics and then David on his business..

Yes. So we're starting to see and have seen revenues realized in Q2 and ramping in Q3 with respect to the 100G core build-out, as well as some of the optical interconnects between the base stations, radio base stations in the Metro edge of the network. So that's happening now.

I think if you look at and try to size it, it's really hard to say because who knows how fast the deployments will happen? I think on the current course and speed, we can see incremental revenues on a quarterly basis of $5 million to $10 million in the calendar year and I think the question is, do have capacity? Because we still are having some capacity constraints in order to ramp up some of our 100-gig products today.

They're becoming more and more our percentage of our business as Rex has said in the script.

David?.

Yes. I think Alan hit it on the head. I think as we talked in the first quarter earnings call about us seeing that delay ship in mobility overall and in particular in China, 100 gig is definitely off to the races. We've seen our initial lab deployments of 100 gig along with Alan.

We're beginning to see that flow in the field, we'll see that in Q3 and Q4. Based on China's historical use of tools -- test and measurement tools, they typically would put labor in, and I think that's got everybody confused, cheap labor in place of high-tech tools.

And that was okay when you had 2G and 3G technology but with labor rates moving at kind of 20% high churn and now LTE technology, we're beginning to see that grow. So we expect to see that begin to hit us in Q4. We've got some great design wins. We've got some MOUs signed with the strategic carriers there.

We're very well-positioned with local production, local R&D. And as we look to next year to the network enablement portion of our business, I think I'm kind of with Alan.

I think together -- I think when Alan and I were talking about it, we could see $15 million together, a quarter between CCOP and NSE in the early phases, and we are in the very early innings at China. I mean, you have 1.1 billion subscribers and nobody on LTE yet. So this game is going to go into extra innings and we're very early.

Did that answer your question?.

Yes.

Just to clarify, the $15 million combined between CCOP and NSE, is that a sort of a fiscal 4Q-, fiscal 1Q-type phenomena? Or do you think it plays out -- it takes longer to get to that $15 million?.

Yes, I think when we look at it over the year, I think we're looking at it on an average basis. You'll have ebb and flow based on -- but we're giving you a rough area of sizing. It's been difficult for everybody to size it, but that's kind of our wet finger number, it'll ebb and flow. Could it accelerate beyond that? Sure. Could it go a bit slower? Yes.

But I think long term, the trends are right, we're well positioned..

And your next question comes from the line of Mark Sue with RBC Markets..

This is Ameet Prabhu on behalf of Mark Sue. Our questions are focused on test and measurement.

The positive trends in the business, yet [ph] we are still flat year-over-year? Sort of recognizing the lumpy nature of the business, would you say that the bookings late in the quarter, are they sustainable heading into -- further into 2014? And I understand you don't want to provide annual guidance, but what would you think will it take for us to sort of get back to the $210 million, $215 million run rate?.

I think, as far as the general environment, we do think it's improving across the -- primarily across the various regions. So we think there is a tide that's rising. It's, again, hard to predict quarter-to-quarter but we do believe that's happening and we should see that continue to improve.

And David, you might want to talk specifically about the level of bookings and kind of that trend?.

Yes, sure. While you got it correct, we certainly don't want to provide the annual. I think we had such a slow start in the industry. I think you saw that, and we even took share in that period to the first half bookings. That's why you see a bit of a muted guidance.

I think based on the bookings pace we saw in our Q2, our current contemplated pace, or our current pace that we've seen already this quarter. I think we're kind of reloading the backlog, getting the design wins, loading up on bookings in the Service Enablement business that will pay off quarters down the road.

So you're seeing kind of a crossing of the chasm in terms of the OpEx gap. The good news is, the bookings that we're taking in the cash flow that we're rolling in, a, healthy and b, down the road lead to accretive margins for the business and we have a lot of operating leverage on the top side to get.

Did that answer your question?.

It did. Also, on sort of given the recent challenges in the NSE business, one of the approach would have been to narrow the focus. The other was to amass scale and JDSU is obviously focused on the latter. So it's a broad fragmented market, lots of competitors, some of them subscale and potentially even distressed.

Do you see additional opportunities out there that you think you could draw [ph] up or any areas of business that probably need -- in the portfolio, that need reinforcing? Or are you mostly done at this point?.

I was going to say, we're very focused on our customers and their needs. While we're never done with our portfolio, I think we've added some really substantial things to our portfolio of late. Made network enablement, our instruments and network enablement, much more mobile-ly focused with the rollout of LTE that we're in early innings on.

With bringing Trendium into the business, it adds a increasing market for Big Data LTE assurance that gives us kind of 10x performance scale in a market where we were positioned to bid in the 2G, 3G decline. And so, I think we're very excited about that, rolling forward. And as you look at Arieso, we had record bookings in Q2.

Again, the revenues trail. But in that location, intelligence business and service enablement, again, we feel tremendously comfortable that that's a big portion of what the carriers are looking for.

And lastly, we have now diversified into the enterprise and moved up the stack in application performance that has big applicability, not just in enterprise but in the carrier world. So that's quite a lot to swallow. I think our customers are very pleased with the portfolio approach we're seeing.

One -- those products drag in each other with the total solution. But we're always keeping our eyes open because we're very close to our customers in these deployments..

And your next question comes from the line of Patrick Newton with Stifel..

I guess my first question, or it's actually a clarification from Rex. I missed some of the data you provided. You gave us quite a bit of items to chew on. One is, I heard that your Gen 2 fiber laser was half of Fiber Laser revenue but I didn't hear the Fiber Laser revenue number.

Two is, did you provide your ROADM revenue for the quarter? And then, I think, lastly, did I hear you say correctly, that the 100G was 26% of optical revenues? So just those clarifications first, before I jump to questions..

Okay. So the fiber laser revenue, I did not give it. I'd be happy to. It was $2.3 million for the quarter and the Gen 2, was just under half of that. And then you asked about 100G and you asked about ROADM revenue. ROADM, I don't think we gave -- we did not give a number.

But on 100G, we broke that out as far as transmission data rates are concerned, because when we sell ROADM, it could be a 10G ROADM or 100G ROADM or 40G ROADM. And so 26% of our transition products were 100G. And that probably reflects on the rest of the business as well, but it's hard to tell.

And then on ROADM's, we didn't give specific revenue but did say that our TrueFlex revenue -- maybe we did or didn't say, but our TrueFlex revenue tripled in Q1 and doubled again in Q2. So we're really, really encouraged with the positioning of that. And again, that's still in early stages as well..

Okay, great. And then I guess jumping into my questions. Tom or Alan, you did discuss continued momentum with Datacom and the expectation of growth over the coming quarters from a combination of new products and customers in that market.

Could you discuss your level of visibility in the segment, your confidence and your continued momentum? And then is your growth more predicated on the share gains and new products? Or is the general market expansion enough to continue to drive growth for you?.

Yes, I think our visibility is pretty good and I would say that we are growing faster than the market in the first half of fiscal '14. But I think the market is growing at a much faster rate than telecom. So we're pretty excited about our existing product line and our existing customer base where we think we're gaining share.

I think the second thing is that we're introducing many new products both at 40G and 100G that we expect to gain new slots and new customers as a result of these new leading-edge products that will further accelerate our market share gains on the Datacom business. So it's a very keen focus that we've had for the last 3 years and it is paying off.

I'm excited about the portfolio and customer base today..

All right. And then I guess just one geographic question. Tom, the strength in North American business has been up about 7% sequentially seems to be a significantly better performance than some of your peers.

Were there any segments or [ph] product lines that drove that upside?.

I would say we mostly saw fiber growth and transmission growth on the NSE side. So it's very consistent with what Alan has seen in optical components. It's really building out the infrastructure and then we think the next move is out to the edge of the network. So that was really in the -- North America, specifically, the U.S, That's what we saw..

And your next question comes from the line of James Kisner with Jefferies..

Yes, I just wanted to clarify something you said about the offset NSE being driven by your increased book-ship efficiency. I was hoping you can maybe quantify that and just -- to some degree, and also just give us a little more color on what exactly that means..

Yes, I think on the NSE side, we continue to improve our operational efficiencies. So the ability to book and ship quickly, we saw that really come to full fruition, I think, this past quarter. And we've been building on that quarter-over-quarter.

But with the December quarter end, back end-loaded, the holidays, et cetera, and all the bad weather that was being experienced, we felt the execution was very, very good by the operations team and we believe that's going to continue in that vein..

So, I mean, does -- that your lead times have shortened significantly? I mean, are you able to do this in backlog? Can you just give me a little bit more on what you meant here?.

Well, we depend a lot on book-and-ship during the quarter as we normally do, so its ability, really, to get that in and turn around quickly. So in essence, it would reflect on reduced lead times or cycle times..

Okay. And one last follow up. Just on the outlook. I know you said the $15 million quarter to become an average for China as they come online with LTE. I'm just wondering, are there any kind of obvious places? Like in North America, we've already kind of deployed LTE broadly that perhaps there could be an offset to some degree.

I mean I'm just wondering if there are any regions that you might expect might moderate or even slow from a test perspective in 2014..

I don't really -- we're not envisioning any real slowdown. We think, even in North America, there's still a lot of network fill to happen in LTE and there's been a lot of the infrastructure build-out, but not a whole lot of 4G users on the network. And we think it's going to expand. So we primarily see expansion across the globe.

David, any other specifics around that?.

I just think -- real quick, I think we saw that slow and pause that we talked about in our fiscal Q1.

And so actually, with the advent of rolling in the small cell architecture and folks looking to connect via fiber and Ethernet, we don't see a slowdown in the U.S., in EMEA or in Latin America, at least based on our current pipelines and projects with customers..

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

A couple of questions. One on the -- you beat a sub-seasonal bar here for revenues and it sounds like it was in bookings in NSE at the end of the quarter.

Can you talk about what geographies and customers may have driven that rush at the end of the quarter, or do you have the strong bookings? And on the seasonality front, would you do expect a more normal-type year next year or this year with the budget flush? And I have a quick follow-up on the 100-gig side..

David, do you want to address the order inflow towards the end of the quarter?.

Sure. I think that Tom's comment on reduced lead times and operating efficiency, I think the bookings came in as we saw them. They came in a bit later than we would like. I think it was just a slow start to our fiscal year based on the trends we talked about with the service operators. No budget flush we called. There was no budget flush in the year.

I would tell you that I see operators releasing their budgets a bit earlier than normal based on that starvation in the first half of the year. In terms of my contemplated guidance towards Q2 next year and budget flush, no comment..

Okay, that's helpful. And then on the 100 gig component side, you had a lot of commentary there. But I don't know if you could give a broader overview on the geographic pole, globally. And you did mention some potential tightness that can hold up your businesses in China. I wanted to know if you think, where the tightness is.

Is it with your production capacity? Is it with your supply chain? Where would you see tightness and how long would be -- would take to loosen that up?.

Yes. This is Alan, thanks to the question. I think the demand from 100G are primarily from the customers of ours, the NEMs, who manufacture their own line cards or modules for 100G, which is the vast majority of the business today and deployments for 100G. I wouldn't say it's any one particular. We're seeing strength across the board.

And as you talk to the NEMs, you can figure out which ones are having more strength than others, so I can't really comment specifically on individual customers. But I will say that it is a global phenomenon and that's driven some tightness, as you say.

And just to give you one example, on our modulators, I think we've been constrained over the last couple of quarters and it just takes time for us to order equipment, bring it online, train people and we've been hiring and training people and ramping the volume production of that.

And in fact, we've delayed the transition from our U.S.-based manufacturing to Asia as a result of it because demand has been so strong. So this is 100% controlled by JDSU, one of our facilities here in the U.S.

that is getting's more and more attention as the demand continued to strengthen, and the outlook continues to look like it's, as David said, in the very early innings of an extra-inning games. So that's our focus.

I think you'll see an uptick in our ability to respond to those customers, but I would say that we'll in a constrained environment through the balance of the fiscal year at a minimum..

And your pricing there, I got to imagine your pricing on 100 gig, when Rex talked about the sequential declines a little bit more.

I'm assuming he's not referring to the 100 gig, or are you getting some good price bargaining in that environment?.

Well, I think we're in the business of making our customers happy and sell our sort of portfolio of products. And so we typically look at our pricing as a package with our customers and our customers have expectations for how that package looks going forward.

And so as Rex said, we saw a 3% reduction in the December quarter, which is pretty typical and then we'll see just over our typical 2% to 4% in the March quarter. But as we look back over time, the March quarter is typically on that high end. And so I would say it's nothing out of the norm.

Where we give the price reduction is less relevant than what that absolute number is. And so I think as our customers ask us for price reductions, we try to give them what they want, where they want it. And at the end of the day, we focus on overall gross margin and how to maximize that, while at the same time, meeting our customers' requirements..

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

I just wanted to know if I heard correctly on the CCOP book-to-bill being less than 1 with x lasers. If you take gesture out of there, could you talk about the bookings in telecom and Datacom? And then specifically, any color on geography or vertical markets where you're seeing better or weaker performance in the Datacom would be helpful..

Let me look at some of the numbers. The laser's book-to-bill was higher than 1 and the rest of the business was lower than 1, making overall CCOP less than 1. Frankly, I don't have what book-to-bill looks like by region. We did see strong growth in both Asia and North America.

But to be honest, I don't know if we saw that similar booking strength in Europe. Gesture, we knew Gesture was going down. So bookings were lower and we expect, in fact, revenue this quarter on Gesture to be down more than $10 million.

And so with respect to our guidance as we go forward, we're expecting the rest of those 3 parts of our business to strengthen, Datacom, telecom and lasers, and that's where we ended up with our guidance..

Okay. And then I guess just on the variability as you integrate the acquisitions on your NSE side of the business, with the operating margin. I know you got the target of -- get that back at $210 million. But if you get back to the $195 million level, you'll also have some variation.

Where would the current business be in terms of operating margin?.

I think on the NSE business, when we get over $175 million a quarter, we see significant drop through and I think you'd see -- if you just go back the last few quarters, you'll see that significant drop through to the bottom line. We're estimating it's $0.50 to $0.60 on the incremental dollar. It depends on the mix but that's probably a good average.

And so I think the model, in our mind, is working. The gross margins, are probably at or, we should do at least -- we're at on the model, probably a little bit better based on mix, the operational improvements.

And as the volume picks up, it's really, I think getting through this period of heavier spend on R&D because of the technology shifts and then bring in some of these new businesses where we have timing issue with the revenue to offset some of the additional OpEx. And I think David gave earlier a sense of the timing of when that starts kicking in..

Okay.

So the new business should all fit together with that same model you have in place?.

Yes. The newer business that we're....

Or should be even better?.

The newer business we're bringing in is tending to be on the service enablement side and more software, so it typically is above our average today for [ph] the model we set. So that should -- as we're able to recognize the revenue, that will bring the model up..

And your next question comes from the line of Simon Leopold with Raymond James..

First, I wanted to see if we could maybe get a little bit of context around some particular markets in terms of, let's call it typical sizing, not necessarily for the quarter.

What I'm trying to get a sense of is, how much revenue do you typically get from China, the cable TV vertical and data centers? And then I've got a follow-up after that if you can give us those numbers..

We have not broken out in those verticals in the past and really don't intend to. We will give general guidelines as far as what we're seeing in China as we talked about some incremental revenue based on 100G build around TD/LTE, but we don't give specifics by these regions as far as what the absolute revenue is..

Anything that you can give in terms of quantification so that -- obviously, these are areas where you're getting some good growth trends and I'm really trying to figure out what the baseline is..

I think if you look at our overall business, Asia was, let's say, 29 -- a little bit over 29% of our total revenue in China. 28% to 29% in China is a the major part of that. So that may give you a better sense of the magnitude of that business coming out of China..

Okay. Let's try to shift gears then. In terms of how well your business is correlated to operator telco CapEx, we're seeing some interesting trends, particularly on the back of Time Warner reporting today.

It looks like cable TV operators are growing their capital spending nicely, whereas the North American traditional telcos may be a little bit slower. China, probably pretty good. Europe, some good spending trends in wireless, particularly maybe not everywhere else.

If you could give us some sense of how you view the correlation of your businesses to global CapEx, that would be helpful..

I think the CapEx, as it's increasing, definitely benefits us. But really, it's how you're aligned with that CapEx because in total aggregate dollars, the size of those budgets we're talking about and what they spend in our space is fairly small.

That's really being aligned with where those operators NEMs, et cetera, are spending, cable operators, telco. And what we believe now is what we're seeing is we're better and better aligned to a point we've been doing organically and inorganically, and that's starting to show up in our models as well.

So for us, it's do they spend more than is helpful, but it's really worthy spending in. We think our alignment's very good, probably better than we've ever been as we're moving forward now..

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

First off, clarification. Rex, I think you mentioned giving us more granularity on the NSE business at some point.

Should we be thinking about that in FY '14 or the first half of FY '15?.

I think the most likely timing, it would be as we're exiting FY '14 going into FY '15..

Okay, okay. And sort of in line with that question. As we've kind of closed out 2013, you've obviously made a lot of changes in the NSE business through acquisitions, product pruning, grow the wireless over wired, software push, everything else.

Can you talk a little bit about as we look over the last year or 2, and going through that process, I mean do you feel like at this point, you're well-positioned in terms of aligning to some of those CapEx trends you were talking about specifically in the NSE business?.

Yes, I do believe -- and Dave will get in some more specifics.

But if I just look at it and what we've been doing on our, I'll say, traditional side of the business with the instrumentation, we've added a lot more software content and a lot more capabilities to help the operators to really manage their networks and reduce truck roles and as a result, we believe we've taken market share there and we'll continue to do that.

And then by adding the service enablement side, I think it even makes that hardware stickier as we give them full end-to-end solutions. And I think -- I'm not saying we're 100% build-out, but if you look at us against our competition, we believe we have the most robust end-to-end solutions.

And as we're seeing, as our customers are going to more virtualization in their networks, more of the Advanced Technology, they really want that one provider to give them the visibility end-to-end solution.

So I think the transition, if I look over the last 3 years, in NSE has been fantastic, going from really a core wireline instruments company to adding mobility, adding a lot more software content now, a big focus on network visibility.

So I believe it's not 100% done but we've got the vast majority of it behind us, both what we've needed to develop organically, the acquisitions, and I think the transition David's taken his team through in order to make sure that the skill sets are right for some of those new products and capabilities that we added.

David, additional comments?.

Yes. I think you covered it well. I think it's important to recognize that both in that network enablement business and the service enablement business, we designed this over the last 2 to 3 years with the whole thought of SDN, software defined networks, and network functional virtualization in mind.

And the larger customers in the world, guys like AT&T who are issuing their domain 2.0, is a must-have as they spec in products, to handle a cloud application-driven mobile world. So I think we're a lot better invested in the portfolio.

And as Tom said, we've improved our operational turns by over 2.5, which means when we've outsourced the model, when we get cost reductions in with these new technologies, we can flow it in to continue to invest and take share, which is what we're doing..

And your next question comes from the line of Dave Kang with B. Riley..

First of all, I was wondering if I can get the gesture recognition numbers. I believe it was $21 million in first quarter.

What was it second quarter? And did I hear correctly that it's going to down $10 million in third quarter?.

Yes. We don't give specific numbers with respect to the actual dollars shipped just because our customers don't want us to do that and they've been pretty clear about that. Giving relative numbers is okay. So as I said, we expect, in our fiscal Q3, to have Gesture be down a little bit north of $10 million.

But with the strength we're seeing in ROADMs and tunables and Datacom products, we -- and lasers, we expect it to be able to make that up in the other parts of the CCOP and that's where we ended up with our guidance..

So if Gesture does go down $10 million in third quarter, then will it become almost negligible then, or....

No. I mean, as we expected, this will be the low point. After the holiday season. We expect it to go down in the March quarter. It was down in the December quarter as well. But we expect that to pick back up starting in the rest of the year..

So it sounds like September will be the peak quarter again in the seasonally speaking. I mean, should we expect kind of similar number in this year's September quarter versus last year, or....

I think the difference this year is that we are working with multiple customers on multiple applications. And so the timing of those initial ramps will really depend upon when we start seeing a broad proliferation of gesture recognition on computers, on mobile devices and on TVs that we believe are coming within this year, specifically on computers.

So the timing of that makes it unclear. But I would say, typically for a gaming application, you would expect the September quarter to be the peak. But given we are working on several applications, we're open to kind of smooth that out over time..

Got it. And just a couple of more, if I could. Telecom optics bookings were up 60% in first quarter. What was that number in second quarter? And moving on to NSE.

What is the mix between wireless and wireline? And within wireless, what is the mix between 4G versus 3G and below, and how should we expect in terms of growth rate for 4G and the tapering of 3G and below?.

Yes. I'll take the telecom bookings. We don't really break out the specifics. I thought it would be it relevant in Q1 because it was such a strong booking quarter, but I don't think there's anything that's noteworthy in the bookings for telecom versus Datacom in the Q2 time period..

Got it.

And then the NSE question?.

David, do you want to address the mix between wireline and wireless?.

Sure. We're still -- as you look at our total portfolio, we're still looking at about 40 -- roughly 40% of the portfolio on wireless. To your question on 2G, 3G. The 2G and 3G technologies have really been falling off.

The good news is, given we've been doing most of our investments in mobile over the last 2 to 3 years, most of our investments have been in LTE technologies. I think the most notice -- notable shift for us is, our legacy assurance business of 2G, 3G, you'll see that in competitors declining at -- the markets declining at 16% to 18%.

By doing Trendium and having Big Data LTE next-generation assurance, you're going to see that grow up in the 20s in terms of a percentage basis with a lot of need being pulled from the carriers as they scale their LTE networks..

And we have a follow-up question from the line of Mark McKechnie with Evercore..

Just a quick one for Rex.

I'm not sure -- can you give some direction, if you haven't already, on gross margin from March?.

I'll expect the overall gross margin to be a little bit lighter than it was this quarter. I won't give a specific number but you can back into with the other information that we gave you. But I would it expect it to be, as a company, slightly down..

And there are no further questions in the queue at this time..

We will be at the Stifel Technology Conference in San Francisco on February 10, the Goldman Sachs Technology Conference on February 13, Raymond James in Orlando on March 5, the OSP Trade Show in San Francisco March 11, the Piper Jaffray TMT conference in New York City on March 12, and the Cowen and Company Network Communications Forum in New York City on March 13.

So thank you very much, everyone. Bye..

Ladies and gentlemen, that concludes the presentation for today's conference. You may now all disconnect and have a wonderful day..