Bill Ong Thomas H. Waechter - Chief Executive Officer, President and Director Rex S. Jackson - Chief Financial Officer, Principal Accounting Officer and Executive Vice President David W. Heard - Executive Vice President and President of Network & Service Enablement Alan S.

Lowe - President of Communications & Commercial Optical Products and Executive Vice President.

Alexander B. Henderson - Needham & Company, LLC, Research Division Mark Sue - RBC Capital Markets, LLC, Research Division Troy D.

Jensen - Piper Jaffray Companies, Research Division Michael Genovese - MKM Partners LLC, Research Division Natarajan Subrahmanyan - The Juda Group, Research Division Dmitry Netis - William Blair & Company L.L.C., Research Division Amitabh Passi - UBS Investment Bank, Research Division Kent Schofield - Goldman Sachs Group Inc., Research Division Georgios Kyriakopoulos Mark McKechnie - Evercore Partners Inc., Research Division Patrick M.

Newton - Stifel, Nicolaus & Company, Incorporated, Research Division Richard C. Shannon - Craig-Hallum Capital Group LLC, Research Division James M. Kisner - Jefferies LLC, Research Division.

A very good afternoon, ladies and gentlemen, thank you all for joining. Welcome to the Third Quarter 2014 JDSU Earnings Conference Call. My name is Lisa, and I'll be your coordinator for today. Today's conference is being recorded. [Operator Instructions] And now, I'd like to hand over to Mr. Bill Ong for opening remarks. Please go ahead..

Thank you, Lisa. Welcome to JDSU's fiscal third quarter 2014. Earnings call. My name is Bill Ong, 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 of our Network & Service Enablement business segment, NSE; and Alan Lowe, President of our Communications & Commercial Optical Products business segment, CCOP, joining us for the Q&A session. Please note, this call will include forward-looking statements about the company's future financial performance.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from 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 on Form 10-K filed with the SEC on August 23, 2013.

The forward-looking statements including guidance will be provided 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 to our GAAP financials as well as a discussion of their usefulness and limitation in today's earnings release. The release, plus our supplemental slides and our historical financial tables are available on our website.

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

Okay, thanks, Bill. Our fiscal third quarter 2014 revenue was $418 million, slightly below the low end of our guidance range due to back-end loaded orders in our NSE business and our inability to turn all of them into revenue and the small shortfall in VMI pulls in our CCOP business.

While revenue was lower than expected, it did increase 3% from Q3 last year when we managed expenses to keep operating margin within our guidance range.

Though the calendar year started off slower than expected, I am encouraged by our bookings performance, up 7.5% from the same quarter last year, with total company book-to-bill exceeding 1 in particular strength in NSE at better than 1.2x revenue and up 20.5% over the same quarter last year.

Highlights included another record bookings quarter for our location intelligent software solution and our largest order ever in the cable market for national automated monitoring of advanced cable services using our award-winning PathTrak system.

Within CCOP, book-to-bill was above 1 for the Optical Communications, substantially over 1 for our Commercial Lasers business, which also logged a record bookings quarter.

Our Optical Security and Performance Products business, or OSP, had lighter bookings, primarily reflecting the wind down of certain exited product lines as expected and softer demand in anti-counterfeiting.

As we look at our markets for calendar 2014, the key macrotrends of higher demand, bandwidth capacity and greater intelligence gathering to address traffic volume and complexity remain unabated.

To address these trends, service providers are investing in higher speed, dynamic systems, evaluating software defined virtual network architectures to add the flexibility needed to scale their businesses. The massive disruption these new technologies bring to the network represent opportunity for JDSU.

Our intimate knowledge of how networks are built and services are assured positions us well to capitalize on these exciting but unpredictable technology transition growth trend. On the capacity front, the calendar year started slowly in the Americas, but orders picked up late in the quarter to support 100G and mobile broadband.

EMEA continues to lag, but we believe must pick up to stay competitive. As we have mentioned in previous calls, CCOP began shipping 100G products to China in the first half of fiscal 2014. We see that growing throughout calendar 2014. Demand should follow for NSE as China continues its build-out LTE of 100G networks.

In our previous earnings call, we said CCOP, combined with NSE, could see incremental quarterly revenue of $10 million to $15 million by the end of this calendar year from December levels. We believe we are on track to reach this goal. Additionally, CCOP is developing, it has begun sampling next generation modulators for 200 and 400G applications.

The Datacom market remains a strong opportunity for JDSU, as internet and cloud service providers continue to build out data center and cloud capability. CCOP recorded a healthy third quarter in Datacom and recently introduced our first 100G Datacom optical product, CFP2 LR4.

CCOP had first meaningful CFP2 LR4 revenue in fiscal Q3, and we expect strong growth from this product, and the follow-on CFP4 and QSFP28 products over the next several years, as bandwidth demand within data centers, as well as between data centers continue to grow.

The physical build-out and testing of the network pipe alone does not necessarily ensure a faster, higher capacity network for the user.

Service enablement solutions provide the critical intelligence needed to identify bottlenecks, network use patterns and other characteristics that help our customers deploy and manage networks with precision and optimize for the best customer experience.

To address this need, we recently introduced xSIGHT, a breakthrough mobile assurance solution at Mobile World Congress.

Our solution, which includes technology from a recent acquisition of the assets of Trendium, can gather and analyze mobile network data for multiple sources in a matter of seconds, much faster than traditional methods, and at a fraction of the cost of competitive solutions.

This allows service providers to better respond to traffic bottlenecks and dataflow. We are excited about the future for this new solution. Service enablement solutions, such as xSIGHT, TrueSpeed, StrataSync, Location Intelligence and other products reflect the transformation that is taking place in NSE.

Recently, our network instruments business acquired in January in part of our service enablement portfolio was named a leader in the Gartner Magic Quadrant for Network Performance Monitoring and Diagnostics or NPMD.

These NPMD tools enable our customers to optimize network performance and open up new opportunities for JDSU in cloud and data center applications. We believe we are well-positioned for growth in the service enablement market that has the same opportunity of $3.1 billion, a CAGR of 11% to 13%.

Approximately 80% of overall sales were driven by demand for high-speed networks. The remaining 20% of revenue from JDSU's Commercial Lasers and Optical Security and Performance Products businesses provides revenue diversity and additional end market growth opportunities.

As we turn to the commercial laser business, representing about 7% of our overall sales this quarter, the Gen 2 fiber laser that launched in November are seeing robust demand, our solid-state lasers return to historical levels for revenue, for the positive outlook.

We expect continued growth of our fiber laser business throughout this calendar year as we work to rapidly capture business that has traditionally been serviced with CO2 lasers. We are also pleased with the early progress of our Time-Bandwidth products acquisition, which addresses the ultrafast laser segment.

The solid-state laser complements our Q Series product line is being positively received by our customers. We continue to be particularly pleased with the consistent profitability of our OSP business, which traditionally represents 12% to 13% of our overall JDSU sales.

OSP is the anticounterfeiting business, which accounts for a large majority of OSP's revenue, continues to be healthy and should see growth later this calendar year, as more high-growth markets adopt overt security features under currencies, including our flagship, optically variable magnetic pigment or OVMP product, which is now featured in banknote designs for 48 countries.

JDSU's security pigments are globally deployed in more than 110 countries. We have spoken in the past of our work in gesture recognition and are moving to a more inclusive term of 3D sensing. Three-dimensional sensing is basically identifying tracking changes in an object's characteristics and location over time.

As we expected, 3D sensing revenue declined this quarter, reflecting the seasonality of the current gaming application. However, we have shipped early quantities of our first non-gaming application. We expect this application to become more meaningful in fiscal 2015.

We remain confident in our leadership position in 3D sensing for gaming, computing, home entertainment and mobile applications. We look forward to providing you further updates on this emerging business. March quarter orders are typically slow in January and February, then pick up in mid to late March.

However, despite slightly lower than expected revenue this quarter, we are pleased with bookings and revenue increases of 7.5% and 3%, respectively, from a year ago. I'll now turn the call over to Rex to discuss our quarterly results in greater detail..

Thank you, Tom. JDSU's fiscal third quarter 2014 revenue was $418 million, seasonally down 6.6% from last quarter, but up 3.1% year-on-year and slightly below the low end of our revenue guidance range.

Geographically, the Americas accounted for $196.5 million, up 1.2% from last year; EMEA for $102.3 million, up 7.6%; and Asia Pacific for $119.2 million, up 2.7%. The geographic sales mix was 47% for the Americas, 24% for EMEA and 29% for Asia Pacific.

Gross margin was 47.6%, down 90 basis points from last quarter, but up 170 basis points from a year ago. The sequential decline was largely driven by lower gross margins from OSP. Operating expenses at $171.9 million were up 2.3% sequentially, favorable to our guidance range of up 5% to 6%.

The sequential increase reflects new operating expenses from acquisitions and increased R&D investments as we continue to invest in growth opportunities plus new calendar year payroll tax and benefits cost.

Operating margin at 6.5% was within our guidance range of 6% to 8%, despite lower revenues, as we offset some of our expected investments and cost with lower or constrained spending in other areas. Net income was $23.4 million, down 48% from our second quarter, reflecting lower revenue levels and the aforementioned higher operating expenses.

Net income was down 2.9% from a year ago. Again, reflecting higher operating expenses in the current period. EPS is $0.10 versus $0.19 last quarter and $0.10 a year ago for the same reason. Turning to the segments. NSE's revenue of $172.3 million was down 1.1% from a year ago and below our guidance of $175 million to $185 million.

NSE's book-to-bill ratio improved substantially to over 1.2 versus just below 1 last quarter. On a year-on-year basis, NSE bookings increased 20.5%. Gross margin at 64.2% improved 510 basis points from Q3 of last year, reflecting continued operational improvements despite slightly lower year-on-year revenue levels.

Operating margin at 5.7% declined 180 basis points year-on-year, reflecting an increase in service enablement investments, partially mitigated by spending controls that allowed NSE to stay within its guidance range.

New products, defined as products less than 2 years old, represented 54% of revenue versus 60% last quarter, is still above our target of greater than 50%. We expect new product revenue to increase as a percentage of revenue in Q4.

As Tom discussed earlier, NSE has been investing in its network enablement and software based service enablement portfolios to address customers' needs to keep pace with rapid technology change while still delivering a quality customer experience. Last quarter, we broke out NSE's revenue into network enablement and service enablement.

This quarter, network enablement, or NE, which consist primarily of our traditional communications test instruments business, made up approximately 80% of the mix, similar to last quarter, and continues to be healthy.

This business was recognized by Ciena during the quarter for 100G test innovation and by Frost & Sullivan's for gigabit ethernet leadership for the fifth year in a row.

Service enablement, or SE, which includes software-centric solutions that are embedded in the network, such as the new xSIGHT solution Tom mentioned earlier, again represented approximately 20% of the mix and continues to be in investment mode.

In order to provide better understanding of these businesses, we expect to provide guidance for NE and SE and pro forma NE and SE financials in the near future. We continue to see progress from our 3 most recent NSE acquisitions, all contributing to our effort to build-out SE and bring it to scale.

Network instruments contributed $6.1 million in revenue and was gross margin accretive in the quarter. Trendium was not material to earnings in the quarter but traction with customers has been good. Our location intelligence products from Arieso, which we acquired in March 2013, had a second consecutive quarter of record bookings.

Currently, bookings for location intelligence, xSIGHT, turned to revenue beginning up to 6 months from the booking date and revenue has been largely ratable over approximately 12 months. [indiscernible] remains an investment mode, but customer feedback continues to remain positive on this game-changing technology.

Though SE opportunities typically have a longer time to initial revenue, we are building backlog and deferred revenue we believe validate our strategic direction and at scale will yield a more consistent and predictable business model for NSE. Moving on to CCOP.

Revenue of $194.6 million was up 8.6% from the third quarter of last year and slightly below the low end of our guidance range of $195 million to $205 million.

Optical Communications revenue of $163.7 million rose 7.1% from a year ago, reflecting higher Datacom and 3D sensing revenue year-on-year and steady telecom demand, and absorbing expected seasonally higher pricing declines of approximately 5%. Notable areas of strength are 40G and 100G wireless and submarine products.

The submarine market requires higher reliability optical products that act as repeaters and optical cables to connect the continents. We view this as a leading indicator as increased undersea cable deployment is a typical precursor for land-based network deployment to support transmission speed upgrades from 10G to 40G and/or 100G.

Commercial laser revenue of $30.9 million rose 17.5% from a year ago, driven by the Gen 2 fiber laser, which exclusively supports our partner, Amada, and increased more than 150% quarter-on-quarter to $5.9 million and a recovery in solid-state lasers. Additionally, Time-Bandwidth products contributed as expected, just under $2 million in the quarter.

Gross margin at 32.4% increased 60 basis points from a year ago, reflecting favorable optical components mix, higher commercial laser revenues.

Optical Communications gross margin at 29.4% increased 40 basis points from a year ago, but was down 60 basis points quarter-on-quarter due to lower gesture revenue and the impact of annual price negotiations.

Commercial Laser's gross margin at 48.9% rose by 100 basis points versus last year, declined 50 basis points from last quarter due to the initial cost from the Gen 2 fiber laser ramp.

Operating margin at 11.5% increased by 80 basis points from a year ago on both higher revenue and favorable product mix, exceeding the mid-point of CCOP's guidance range of 10% to 12%, despite lower than expected revenues. New products less than 2 years old represented 64% of revenue versus last quarter's 65%.

Higher-speed transmission revenue, defined as 40G and 100G, continues to grow, representing more than 44% of our transmission revenue, up from 43% last quarter, as we continue to see strength in our 100G telecom business and our 40G Datacom business. We continue to be constrained on our 100G modulator shipments.

We have made progress to improve our capacity and expect to grow this business by more than 25% during the fiscal fourth quarter. Tunable XFP revenue grew by 8% quarter-on-quarter, and tunable SFP+ revenue grew my more than 15%, as our second generation tunable SFP+ is being more widely deployed by our customers.

Design wins for our TrueFlex ROADMs continue to grow as CCOP demonstrates a superior product performance versus our competitors on both our TrueFlex 1x9 and our family of Twin TrueFlex products.

We believe the adoption of these products will continue to strengthen as the carriers deploy the next generation of transport networks, including colorless, directionless and contingentless architectures. Moving on to OSP.

Revenue of $51.1 million was down 1.5% from a year ago, down 6.4% quarter-on-quarter and slightly above OSP's $49 million to $51 million guidance range. The quarter on quarter revenue decline reflects primarily lower demand and inventory corrections in our anticounterfeiting business.

OSP's book-to-bill ratio was well below 1 die to softer demand in anticounterfeiting, expected declines in last-time buys and 3D sensing.

Gross margin at 49.5% declined 60 basis points versus a year ago and 100 basis points quarter-on-quarter, primarily due to an inventory charge in the current period associated with the product line exits we have been executing.

Operating margin at 35.6% declined 20 basis points from a year ago and 190 basis points from last quarter, and the latter case due to lower revenue that remained within our guidance range. Turning to our balance sheet.

We maintained a strong cash position at $926.2 million as of the end of March 2014, down from $1.1 billion at the end of December 2013 and reflecting the 2 acquisitions we closed in January. We delivered positive operating cash flow for the 30th consecutive quarter at $42.5 million versus $54.4 million in fiscal Q2.

Capital expenditures for the quarter were $23.8 million, consistent with guidance and primarily supported manufacturing capacity investments in both CCOP and OSP. Depreciation and amortization was $34.4 million. Now for guidance.

We expect fiscal fourth quarter revenue to be $425 million to $445 million and a non-GAAP operating margin between 7% and 9%.

Mid-point would represent a 3.3% year-on-year increase, a solid increase, given that our Q4 forecast reflects year-on-year declines of approximately $14 million in 3D sensing revenue and approximately $5 million in revenue in OSP from the product lines we are exiting.

At the segment level, we expect NSE revenue to be $195 million to $205 million, with operating margin between 11% and 13%; CCOP revenue to be $190 million to $200 million, with operating margin between 10% and 12%; and OSP revenue to be between $41 million and $43 million, with operating margin between 32% and 34%.

We expect non-GAAP EPS to be $0.10 to $0.14. Please refer to the supplementary slide deck posted on the JDSU website for other fiscal fourth quarter 2014 financial metrics guidance. I'll now turn the call back to Tom..

Thanks, Rex. In NSE, the business remains lumpy, but we expect solid growth in the June quarter, as several macro drivers are in our favor with LTE and 100G China and increasing demand for software-based service enablement solutions to support faster and higher capacity networks and a better quality customer experience.

We believe NSE's product breadth will allow us to expand our market share over time, that is the service enablement business conversion of booking to revenue begins to catch up and scale reaches critical mass. NSE's business visibility and margin profile will improve.

In CCOP, demand remains healthy for our 100G products, particularly the 100G modulator product, as we remain capacity constrained. The Gen 2 fiber laser has been well-received by our partner, Amada, and we expect fiber laser revenue to continue its growth in calendar 2014.

In 3D sensing, gesture business continues to develop and we expect to see incremental new business for gesture in late calendar 2014, a quarter later than our original expectation. We have fundamentally completed the pruning process within OSP, as last of our lower margin last-time buys, approximately $1 million, will be completed in Q4.

While OSP fourth quarter will be light, we anticipate additional adoption spark later this calendar year and higher growth markets and we are developing new opportunities in bank notes with new products, such as ChromaGuard thread substrate.

Also, we are expanding our activities in Consumer Electronics to address opportunities in 3D sensing and other emerging market segments.

Finally, as we look into our fiscal 2015, beginning in July, we believe the blended growth rates of our key served addressable markets will be in the mid- to high-single digit percentages, and that we are well-positioned in those markets. Further, in the near term, we expect our seasonal, quarterly variations to continue.

We will be hosting our Analyst Day event at our Milpitas, California corporate campus on September 11. In conclusion, I'd like to thank our employees, business partners and shareholders for your interest and continued support of JDSU. I'll now turn the call back to Bill to begin the Q&A session..

Thank you, Tom. [Operator Instructions] Lisa, let's begin the question-and-answer session..

[Operator Instructions] And your first question is from the line of Alex Henderson, Needham Company..

Could you step through the progression of improvement in margin associated with the NSE business units around the VSOE network instruments, PacketPortal and Trendium? As those margin pressures that you've been absorbing start to fall back out and particularly focus on the mechanics of one of VSOE's pooling mechanics start to turn those revenues on so you can get that absorption out of the way..

Thank you.

David Heard, you want to take that?.

Yes, sure. Yes, pretty similar to -- not pretty similar, consistent with what we've discussed in the past, when you look at the network instruments business, you saw -- well, when you look at the overall NSE business, you saw we had about 500 basis points better margins than last year, our highest gross margin at that revenue range.

So what will begin to happen is as we get into this next quarter, Q4, Network Instruments isn't yet at full strengths because we have some elements of purchase accounting. It will be accretive to both the gross margin line and the bottom line.

It will be in full effect, as we've discussed, as we get into the first half of our fiscal year, and that's consistent with what we've talked about in the past. Arieso, as Rex mentioned in his prepared remarks, as you get these bookings in, typically, they begin 6 months after, and then are ratable over a year. So again, consistent with what we said.

As we get into the calendar '15 or our back half of '15, we expect to see that material absorption of the expenses that we're paying now for the bookings that we're getting and the cash flow that we're getting where the revenues will indeed catch up.

As we look at the next generation mobile assurance business or the Trendium business, the bookings that we're going to be collecting this quarter and next quarter, that's typically a 6-month flow as well. So again, that is in the calendar year '15 or the second half of our fiscal year as we move forward.

Did I answer your question, Alex?.

Well, so just trying to get a sense of when the margin benefits feather in from this. It sounds like network instrument's about 1.2, NSE going forward in the upcoming quarter, and then you get a couple of points from Arieso in the back half.

Is that the right way to think about it?.

A little bit. Remember that there's the 80-20 split, too, in terms of the network enablement business to service enablement. So you see a particular -- in our guidance, you see our margin uplift already starting in going from Q3 to Q4. So you're right. network instruments begins to help in Q4, as well as the network enablement business.

Our organic bookings were actually up year-over-year, double-digit as well and that includes our network enablement business, which is very, very good news. So that combined, you start to see the impact as we get into Q4.

As we get into next year, I think you'll see a more material impact of the Arieso and Trendium acquisitions as we get into calendar year '15 or our back half of the fiscal..

You didn't mention PacketPortal margin. [indiscernible] you left that one out..

Yes, thanks. Not intentionally.

Again, consistent with what we've talked about with investors over the last quarter, continue to make real progress there, real important with network virtualization but we expect to begin to work down some of the 2- to 3-point delusional impact that, that investment is having in the first half of the fiscal and see the orders come in, in the second half of the fiscal, such that as we're exiting the year, we're in a reasonable shape where we're mitigating the investment and then an accretive approach moving forward..

Our next question is from the line of Mark Sue, RBC Capital Markets..

Tom, I was just kind of looking at your commentary as it relates to the third quarter now and historically. And this current -- in the March quarter, you said you were impacted by later than anticipated carrier orders. Last year, the commentary was the March quarter experienced delayed carrier spending budgets, resulting in lower revenues.

And the year before that, in 2012, was JDSU's lower-than-expected revenues, due to later than anticipated carrier orders.

So I'm just trying to get a sense of what is causing this magnified seasonality and if there's a planning issue that we should assume in terms of incremental seasonality for the March quarter, Just trying to fast-forward to March 2015, so that we don't have this issue.

Or maybe is it execution, maybe it's a share loss, anything -- because throughout the process, the order trends have been very positive but it's just been recognizing and meeting those targets in the March quarter..

No, it's a good point, Mark. We have -- it is becoming a trend. I think the last 2 years in particular, one major network operator, North America. We overestimated what we would get in during the quarter and the timing of it coming in.

I think in both years, they started some new programs, different programs, but new programs started in both of those early calendar years, which just didn't happen as quickly as they anticipated or we anticipated. So I think that was the biggest part of it.

There was, I'd say this year, or this third fiscal quarter this year, was primarily 2 network operators in North America that were very delayed and much lower orders than what we expected. And that seemed to be around metro build-out, which we believe is going to happen. It's intended to happen, but it's been moving out.

And I think that also affected one of our major NIMs. So it also, to some degree, affected their optical components of business as well. So that's what's happened this year. It is somewhat similar to last year. Last year was primarily 1 operator. This year, it was 2, plus the flow-through to the major NIM for us.

So similar, but a little bit different make up..

Okay. I will be reducing the hurdle for you for 2015 just to make it easy for you guys.

And then just on optical components, any competitive shift? Are you -- in some of the areas gives you in Finisar, maybe your thoughts there?.

Yes, this is Alan, Mark. I think, as Rex indicated in our preamble, is that tunable XFP growth of 8% in the quarter and tunable SFP growth of 15%, we think were capturing additional share because we don't believe the market is growing quite that fast, although it is growing.

And I think modulators and on 100G, I think we're continuing to capture share there. And as Rex said, we expect modulator growth this quarter alone to be up 25%, as the capacity that we've been planning on coming on board is coming on this quarter.

And so we expect to catch up with some of the demand but still, we expect to be on allocations through the quarter, even with the 25% increase in modulators. So we think we're capturing share modulators. ROADMs is a little bit hard to say.

I think from our perspective, the legacy ROADMs are going out fine and I think we're maintaining our share of those. I think as we look at the Twin TrueFlex ROADMs, we designed our product into several systems.

Those systems just haven't deployed out into the field yet because I don't think that the carriers are really deploying the colors [ph] contention list and direction with network architecture yet.

So it's a little bit hard to say when that's going to come in full force, but we're pretty happy with our position on the ROADMs and the next generation of ROADMs as well..

Our next question is from the line of Troy Jensen of Piper Jaffray..

Maybe for Tom or for Alan. Just on the CCOP guidance, mid-point here implies flat. Just kind of balance that with your comments about you're encouraged about the bookings, the strength in the 100G. Is the reason it's flat maybe another downtick in gesture products? Just more color on the CCOP guidance would be helpful..

Yes, exactly. It's further reduction in our expectations for gesture. And as Rex said, year-on-year, our gesture for overall JDSU, we're expecting to be down $14 million.

And so we think strength in lasers and other parts of our business will make up for that, allowing us to have a flattish Q4, even with the decline of another, say, $4 million or $5 million in CCOP and gesture this quarter..

Okay, that's helpful. And then how about the -- can you guys give us any color on how much capacity you're adding for the 100G modulators? I think 25% this quarter, but I'm assuming you're going to consistently be adding some aggressive [indiscernible].

Yes, I think what we're seeing this quarter is the pickup from our capital adds, we are also expecting increased output through yield improvement and cost-reduction that will give us more. And then down the road, we have additional design improvements that will pack more devices on a wafer.

So we'll get those latter 2 improvements without adding CapEx. And what we're seeing in the short term this quarter is really due to the CapEx that we've spent. And so I think to give it a number is tough.

I would say that my expectation is that we'll be able to -- those modulators to be more like double from where we are or where we were in the Q3 timeframe over time. And I think, demand -- by the way, I think demand will be there over the next several quarters to consume that kind of increased capacity..

Our next question is from the line of Michael Genovese of MKM Partners..

I wanted to ask first about the OSP guidance for next quarter. And I remember on last quarter's conference call, you sort of told us about a $7 million to $8 million headwind from last-time buys in that business. But I thought at that time, you also said that expected growth, organic growth with the existing customers could offset that.

And I thought we should think about OSP being more flat this quarter sequentially.

So is my understanding there off? Or did something change in the segment in the last 3 months, where the guidance is a little bit weaker than what you saw before?.

Yes, Michael. You heard it right. And that's what we anticipated also, that we'd be able to backfill primarily with the pigment business. We are seeing a short-term downturn in the pigment business, some inventory adjustment, as we have mentioned in the script earlier. We believe that recovers as we get out into the latter part of this calendar year.

We had anticipated that demand to fill in. So you had it accurately, that did change on -- shifted by 1 quarter or 2..

Okay, great.

And then on the 3D or gesture business, I mean, are you still expecting a seasonal ramp related to the gaming business? Or is that gaming opportunity, it sounds like it's smaller than it was previously, so we're sort of waiting for additional applications to come online?.

Yes, it's hard for me to tell. I don't get visibility that far out, frankly. And I think the success of those programs are really based on the applications that drive the demand at the end user. And so at this point in time, it's hard for me to say.

I will say, though, we're excited to have -- started shipping some qualification level volumes of product for other applications that we expect to come on in a more meaningful way later this calendar year. And that's in the computer space. But we also have efforts going on in the mobile space, as well as Home Entertainment.

And we're still very pleased with our progress there. We think our market share and mindshare of those customers is extremely high..

Next question is from the line of Subu Subrahmanyan of Juda Group..

Two questions. First on the Optical Comm side, I just wanted to understand the China comments and maybe that was NSE plus Optical Comm. Tom, did you suggest that by year end, you're expecting a quarterly run rate to be about $10 million to $15 million higher, just wanted to understand that. The other is on NSE and organic growth rate.

Year-over-year revenues are kind of flattish. If you could talk about what the acquisitions that you made in the last 12 months contributed in the March quarter and then kind of how we should think about between our Network Instruments and Trendium.

So I know David mentioned some of that but the figures[ph], and so, how the revenues should play out on the calendar year, that would be helpful..

Okay. Thanks, Subrah. I'll take the first part and then I'll ask David to do the second part of the question. I think as far as China is concerned, definitely the buildouts are happening. We see the real evidence of the base station build-out and the corresponding build-out of the 100G backbone.

So we've seen that through our Optical Components business that flow out to the NIMs. We're supporting the major NIMs that are participating there. That continues to grow. We saw that.

We said in the December quarter when we saw additional growth in this quarter, and then we're starting to see activity, which we would expect trailing a little bit in time with the NSE business.

So we do believe we're on track to see that $10 million to $15 million incremental revenue combined between our 2 business segments as we exit this calendar year compared to the previous December.

David, do you want to cover the NSE?.

Yes, thanks. Yes, so when you look year-over-year, last year was the -- in that quarter was the last year we did kind of our last product line exit. So you want to probably take about $3 million off of last year's number to just do the like-for-like compare when we look at the revenue numbers.

So yes, we were essentially flat on revenue, and that included the $6 million of Network Instruments. Now Rex talked about the bookings growth being up. We bucked the trend from Q2 to Q3. We haven't had a quarter where we've seen bookings in our Q3 up from Q2. And that was not just inorganic, but that was also organic.

And not just the SE business, but the NE business. So we saw -- from our investments we've been making over the last 2 years, we saw a nice growth in mobility. We saw a really, really nice growth in cable, and we saw a nice growth in 100G and fiber just real, real good.

I think where Tom mentioned the overall industry saw a bit of softness was in metro, as people look to the impacts of NFV and SDN on those planning. And I think you saw our competitors, you saw our supply chain all talk about that in terms of the major providers. Ethernet is a place where we're #1 in terms of market share.

So as we roll forward to the second part of your question, you're going to start to see more of the organic growth as we feather into Q4. And that was contemplated into our guidance. You will see materially the Network Instruments business growing quarter-to-quarter from Q3 to Q4.

And then, really, pretty much at full strength as we catch up with the purchase accounting in the first half of our fiscal. The Arieso bookings, as we said, we're getting really, really good bookings and really, really good acceptance of the products. In fact, record bookings.

We believe we'll continue to see nice bookings as we go forward, but you'll see that more material effect as we end out the calendar year and get into the next part of the fiscal year. So we'll continue our investments there. Because if those hit, those are primarily software revenues and margins.

So there's really, really nice fall through to the bottom line. In the next-generation assurance space, you've seen the legacy assurance space in 2G and 3G really shrinking, almost at 15% to 20% per year. And that's something that the industry has been going through and competitors have been going through.

With our next generation kind of 5G solution for Big Data, as we get bookings in now, those will also begin in the calendar '15 or the second portion of our fiscal year. So hopefully, that helps you.

You see from our gross margins in Q3, very, very strong and with the software-type revenues, both in the SE business and more software in our NE business and more mobile business and more ethernet business and the work we've done in the business model, that the gross margin should continue to strengthen and ultimately drop through to the bottom line.

As the revenues catch up, that book-to-bill of 1.2 is an indicator.

Did that help?.

Yes, I got it. Tom, one brief follow up. You mentioned 2 carriers having an impact specifically on NSE similarly in CCOP being a little bit weaker. And you mentioned flow through to 1 NIM.

Was that primarily the impact in CCOP having a little bit below the low end of the range?.

Yes, that was the biggest impact on where we had forecasted. And where we ended up was that lack of pull-through with the NIM based on the metro build pushing out..

Our next question is from the line of Dmitry Netis of William Blair..

I just have one question, gentlemen. Actually, for Tom, maybe. I think, Tom, you had mentioned that you expect your core markets to grow mid-to high-single digits. Just trying to kind of wrap this around a little. I mean, if I go back last year, your core markets were growing 8% to 9%.

So you just like us to temper down expectations here? And what's happening with your core markets, given that you've had some acquisitions and we would normally expect you to grow or your core markets to grow at a higher rate. But clearly, there's been a change.

So can you walk us through what's going on there?.

Yes, you're welcome. I don't think there's a large change. But I think David touched on the biggest part of it earlier, where with the SDN and some of the changes in the network and the needs for more of the service enablement, that's the area that we believe will grow faster.

We said that, that would grow in the 11% to 13% type of CAGR, where as the network enablement will grow more around 4%. So we still have about 80% of our business in network enablement, the rest in service.

So as we transition at a faster growth in service enablement, it's going to take some time, plus we also have the timing of revenue recognition in service enablement, which we typically don't have a network enablement. So I think that's the dynamic. I believe that demands there, out there in the market.

We're moving in that direction with things like -- there's xSIGHT next generation mobile assurance. But it's going to take some time for the revenue to show that growth, especially with the timing of the revenue recognition or the software types of products. That's the largest change that we see happening in the market..

Our next question is from the line of Amitabh Passi of UBS..

Tom, maybe the first question for you. I think even normalizing for the slight reduction in gesture recognition revenues in the June quarter, the overall guidance for CCOP still seems a bit softer than I would have anticipated, and especially relative to your commentary around strength in 100 gig.

So just trying to understand maybe one more time like in terms of what's going on specifically in the optical components piece of that segment?.

Yes, I think, as Alan said, we're -- we believe that we're being successful in covering the downturn in the gesture portion of the business, which is pretty significant by growth in the optical components. Also, within the CCOP, quite excited about the growth in the commercial laser products.

We're seeing both the micromachining and the macromachining, especially with the Gen 2 traction. Again, with the Gen 2 of the kilowatt fiber laser. So we feel that, that's good growth. It's not easy to overcome the seasonality in the gesture side of it, but it's a pretty big number. We're making up for there as we see optical components grow.

And then especially, I think with the business model for CCOP, that growth in Commercial Lasers is extremely important as our target has been to get that to $42 million a quarter, and we're getting much closer to that now..

Got it. And then, Rex, just a follow-up for you.

How should we thinking about OpEx over the next couple of quarters, either in absolute dollars or percentage of sales?.

So you can probably back calculate what's happening in the Q4 guidance. So it's going to be up a bit quarter-on-quarter. We would not expect that to trend northward at a rapid rate. I think we've done the absorption on buying Network Instruments and factoring last year a resell. So the stair steps, I think those are behind us.

So I would trend it up on a kind of a low-ish single digit -- low- to mid-single-digit rate..

Our next question is from the line of Kent Schofield of Goldman Sachs..

Great. Just one quick follow-up on Amitabh's question around OpEx. You mentioned on the R&D side that you've been making some investments.

How much of a factor is that? Is it all about just absorbing the previous acquisitions in terms of being able to get to the run rate that you're talking about there, Rex? Or has there been more aggressive R&D investments over the last few quarters and those -- and that's another lever that you have to pull going forward?.

So it's actually both. The big chunks come in when you have an acquisition. So if you're to look at just the total OpEx for the Network Instruments, it's about 6 per quarter. If you look at Arieso, the Location Intelligence business, that's 4 or 5 a quarter.

And then in terms of R&D, generally, we're making additional investments in both of those businesses and in our pre-existing organic business. So we're being very investment-minded and future-minded on both sides of that ledger..

Your next question is from the line of Simon Leopold, Raymond James..

This is Georgios Kyriakopoulos for Simon. Tom, looking at your current CapEx in North America, for the first 3 months of the year, and also considering expectation for the full year, it appears that CapEx might not exceed the typical seasonality this year. It will be more linear throughout the year.

So now looking at your reported March quarter that was weaker-than-expected and your guidance for June that calls for up 4% sequentially at the midpoint, how are you thinking about seasonality for the component in that business for the remainder of the year? Do you expect a back-end loaded year? And if so, what gives you confidence in that view?.

So I -- we're not giving guidance out beyond the June quarter. But we do believe, because of things like 100G LTE, what's happening in China, that we'll see continued growth through the year.

So -- and we believe, again, the numbers are important as to what's published as far CapEx by the major carriers, but it's really where they're spending the money.

And we believe we are well aligned for that especially as we look out into the second half of the calendar year and what we believe is going to happen with even things like small sales that have been pretty delayed up to this point. So those are really the major drivers or inflection points that we see in front of us.

And we think we'll get a good share of the wallet from the network operators as a result of how we're lined up and also the service enablement part of it..

Okay.

So based on your discussions with the carriers, you have the visibility that would suggest that the second half of the year should be promising?.

I think, in general, I'd say it again, as Alan said earlier, it's hard to have that visibility that far out. And as I had some discussions with carriers right at the end of -- towards the end of December and what we thought was going to happen in the March quarter, and that isn't exactly what played out.

So I think their plan has changed in their ability to execute to what they plan is -- also varies in time. So it's really hard to get that exact looking out. But I think the general trends are there, and we feel comfortable with these trends..

Okay. Then I would like to get your view on the 1 gig access market in North America and those are getting a better understanding of your opportunity in that market. Since your last earnings call, Google announced they're potentially expanding into 34 cities for its 1 gig service.

Also, AT&T recently indicated that would look into offering its GB service to 100 or more cities.

What's the potential dollar value of these projects for you? And with what products you plan to go to this market, would it be traditional PON transceivers or a mix of and the PON and [indiscernible] PON?.

So -- this is Alan. We don't participate in CCOP on the PON market at all. But what I will say is that we have to carry that traffic that comes from higher speeds at the edge of the network through Metro and through the core.

And so that will drive more NG transponders, tunables, ROADMs, amplifiers and things like that, and then drive more traffic at the core of the network, which will drive more 100G products as well.

So while we don't play on the access side of the market per se and the PON business, any time people increase the speed by which a user can use the internet, that's a good thing for us and generates more potential revenue for us and for our customers..

Okay, that's fair. The last question I had is about Metro. Shares from your customers that the Metro opportunity could be worth 2x to 3x as much as a long-haul adjusting for lower ASPs.

Do you think this is also that have the multiple for your opportunity in the Metro? And also, when do you expect to see an inflection point in the Metro? Is it more of a 2015 event?.

Yes, it's a -- we had anticipated that the Metro deployments would happen sooner than they have. So we do believe it's moved out a couple of quarters. Some of that activity will probably happen by the end of this calendar year, heavier into the first part of calendar year 2015.

We will participate, as I mentioned earlier, that was part of our myth on our forecast for revenues, we will participate both through our optical components business with some major NIMs and then also from Network and Service Enablement part, especially through our ethernet leadership and as far as test capabilities.

So we do expect it to be a nice bump up in revenues. Is it 2x to 3x? I don't know if that's the accurate number. But it will be a nice bump up and so we're looking forward to that actual execution of those Metro deployments..

I think on top of that, just on the Metro opportunity, I think you're going to see it gradually build. On top of that with the FCC and what you're seeing with Netflix and others having a multispeed internet.

The need to really measure, not only the true throughput of these services, but the service levels going across, given people are going to be charging premiums for it. That is causing a bit of the pause to the deployment.

But it's a -- it generates a relatively large opportunity for us overall and not only the supply of the components, the intelligent components, the enablement of the pipes, but then the services to go across to ensure those SLAs are met.

So those 2 things combined, I think, are going to be emerging opportunity that I think is a longer play for the industry and especially for JDSU..

Your next question is from the line of Mark McKechnie of Evercore..

So hey, just a couple of clarifying questions on CCOP. Rex, you gave the mix of 100 gig, 40 gig, I believe for this quarter.

Can you repeat that, can you give for March and December, can you give those again?.

Yes, I can. Actually, Alan will answer the question..

one is, transport and transmission. And we don't know what traffic the transport network part of our businesses is carrying. But on the transmission, it's very defined, it's the 10 gig, 40 gig, or 100 gig. So on that part of the business, the Transmission business. It was 44% of our revenue of the transmission business.

And typically, the transport sort of follows that. So that's how we use it as an indicator for where our products are going. So it was up 1%. I think with the added growth we'll see in modulators this quarter, that should continue to increase, as we see 100 gig on the line side grow and 40 gig on the data center grow.

Did that answer your question?.

Well, it's 44% in March.

So what was it in December?.

43%..

43% there. Okay, great. And that's helpful....

So the problem we have is as we grow our tunable SFP+ business, that's 10 gig that offsets some of the growth we see in the 40 and 100 gig..

That makes a lot of sense.

Yes, and did you say you're looking at 25% year-on-year growth for that line of business next quarter?.

No. For our modulators, which is the biggest part of our 100 gig shipments today, we expect that to grow 25% from the March quarter to the June quarter. As, we bring on more capacity and the demand just seems to be far above the worldwide supply..

Great. No, that's helpful. And then, on the price declines. You've talked about a 5%. I believe that is 5% sequential decline that hits you for March.

Is that right? And is that across all at CCOP? Or was that the optical components group?.

Yes, it was approximately 5%, and that's on the optical side of the business, which typically has an annual bidding cycle that takes effect around the first of the year..

Okay, great. Now that's helpful. And the last one is, I missed some of the math around the quarter and then compares on the gesture, the headwinds. You said $3 million to $4 million headwind in June.

And what was the headwind in March there, that quarter-on-quarter headwind?.

Gesture was down about $10 million between OSP and CCOP. And we expect another $4 million to $5 million in the June quarter. So year-on-year, if you compare it versus a year-ago period, June will be down about $14 million, which is what Rex had in his preamble..

Our next question is from the line of Patrick Newton of Stifel..

I guess, first question is for Alan on the fiber laser side. Very good quarter, up about 160%. We saw a similar type of jump when you were kind of priming the modest line with the first-generation fiber laser. You did a $10 million quarter in fiscal 3Q '12.

I'm curious, what is your expectation for growth in this segment? And if we can just kind of annualize this current number that, that's, that kind of -- is the peak 12-month number that you put up in the past? And while on fiber, I'm curious if you think that you'll be able to expand your relationship beyond the cutting relationship and into welding with the model?.

Yes, I think there's no reason to believe that we can't get the similar kind of quarterly volume that we've seen in the past, in the Gen 1. And that's for cutting only, as you say. I think we are actively working to get our 2- and 4-kilowatt laser, as well as higher-power fiber lasers into welding applications as well.

So we think that might be incremental on top of our historic run rate..

And sustainable as it goes up as supposed to last time where it peaked at 10 and then reverted?.

Our business is strong when our customer's business is strong. I don't think there's any reason to believe that it will go down. We believe that there -- that the adoption of fiber to cannibalize the existing CO2 is more compelling today with the Gen 2 fiber laser.

And from that perspective, I think we'll see continued growth and won't see a decline over time on the fiber laser because I think it will continue to eat away the CO2 business..

Great. And then, I guess, shifting gears to NSE for Tom or David. You talked about Metro being soft due to the shift to NSE and STN. And you talked about your Service Enablement portfolio being very well positioned to take advantage of, of I guess, the shift of where carriers are starting to spend.

I'm curious if, as you look at your portfolio and you look at the assets that you've acquired, do you think that you have all of the IT to effectively compete in that margin? Or do you think that there could a need for an acquisition or perhaps even a significant acquisition to help speed the transition from the 80% of your revenue that's tied to this Network Enablement, that's really a low growth and arguably been a no growth for several years into this faster-growing double-digit growth service enablement?.

Yes, I think we have the broad portfolio now. I think there's always strategic opportunities we'll look at out other to see if we can build-out some additional adjacencies. But the end-to-end platform and building this next generation mobile assurance, I think we're in good shape.

And really, our key focus right now is to optimize what we have acquired because we have, over the last 2 years now acquired quite a few businesses. And we really need to make sure we fully functionalize those, given them fully integrated and optimize the solutions and the synergies really at an R&D product levels.

So I wouldn't say there aren't other things that we will do in that space, but we feel pretty good about where we're at today and if we can optimize what we have, that would be the next step forward..

Our next question is from the line of Richard Shannon, Craig Hallum..

I'll just ask one here on 3D sensing. You mentioned a few application areas looking out into the future.

Wondering if you could rank them in terms of importance as you look into calendar '15 or whatever timeframe out in the future you'd like? Do any of them look materially bigger than the others? And specifics in the mobile side, what's the breadth of customer interest areas, is this largely coming from one or a few customers or is it more broad?.

I would say that the mobile applications are more broad. And I think, from that perspective, should -- certainly, the unit volume would be much higher in the mobile side of the business. The timing of that is unclear to me.

I think that in the shorter term, our focus is making sure we're in every application that could possibly want gesture recognition. And then when the ramp of those products comes to fruition, we'll take advantage of our investment.

I do think on the short-term also that computing will be the next major application that we'll see come into the market in the next year..

And the final question is from the line of James Kisner of Jefferies..

I just want to ask a clarification about China. You guys said in the last call, I believe, that you thought -- you'll have an opportunity to generate an incremental $15 million a quarter on average basis. They would ebb and flow that perhaps there could be even $60 million annualized.

I just want to understand, like, are you now saying that you're hoping to ramp to that $15 million during the year, like, is there a change in your petitions for China that pushed out or I'm just misinterpreting what you're saying here?.

Yes, I think, yes, numbers are 1, 5, or 8 and 15 million. And no, I don't think any timing has changed at this point. It's probably just getting firmer than it was when we talked about this after our December quarter because there's more evidence of physical buildout of the BD LTE base station than in the buildout of the 100G backbone.

So that's getting much clearer for us as we're moving through these quarters..

But you clarified there, you said $50 million per -- 1 5 per quarter last call and suggesting perhaps that on an annualized basis, that would be 6 0, your incremental in China in this calendar year.

Did I misinterpret that? Are you -- do you still think you could hit that? Or is it again, you were just hoping to hit this $15 million rate on a quarterly basis spread in the year.

I just want to clarify, it will explicit or [indiscernible] for China?.

No, it's a good question. It's hard -- the exact timing but we're going to -- now that's going to build over the next couple of quarters. We would believe we'll be at a healthy rate as we get into the Q3 of this calendar year. So that is a possibility. It's just hard to see that timing..

I'll now hand back to Mr. Bill Ong for closing remarks..

we will be at the RBC Capital Markets Communications', Technology Investor Day in Boston on May 6 and the B. Riley & Co. Investor Conference in Santa Monica on May 20. Thank you, everyone..

Thank you. Ladies and gentlemen, that concludes today's conference call. You may now disconnect your lines. Have a good day..