Bill Ong - Senior Director, Investor Relations Tom Waechter - Chief Executive Officer Rex Jackson - Chief Financial Officer David Heard - President, Network & Service Enablement Business Unit, NSE Alan Lowe - President, Communications & Commercial Optical Products Business Unit, CCOP.

Michael Genovese - MKM Partners Patrick Newton - Stifel James Kisner - Jefferies Mark Sue - RBC Capital Markets Simon Leopold - Raymond James Alex Henderson - Needham and Company Amitabh Passi - UBS Kent Schofield - Goldman Sachs Dmitry Netis - William Blair Subrahmanyan - The Juda Group Mark McKechnie - Evercore.

Good day, ladies and gentlemen. Welcome to the Q4 2014 JDSU Earnings Conference Call. My name is Whitney, and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Bill Ong, Senior Director of Investor Relations. Please proceed, sir..

Thank you, Whitney. Welcome to JDSU's fiscal fourth quarter and year end 2014 earnings call. My name is Bill Ong, Senior Director of Investor Relations. Joining me on today's call are Tom Waechter, CEO; and Rex Jackson, CFO.

David Heard, President of our Network & Service Enablement Business Unit, NSE; and Alan Lowe, President of our Communications & Commercial Optical Products Business Unit, CCOP will join us for Q&A. Please note, this call will include forward-looking statements about the company's 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 review our most recent filings with the SEC, particularly the risk factors in Part I, Item 1A of our annual report on Form 10-K filed with the SEC on August 23, 2013.

The forward-looking statements including 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 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 historical financial tables are available on our website.

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

Thank you, Bill. Our fiscal fourth quarter 2014 revenue at $448.6 million exceeded the high-end of our guidance range. Book-to-bill was greater than 1 for JDSU with both CCOP and Optical Security and Performance Products or OSP above 1 and NSE at parity on a strong quarter.

Gross margin at 50% is a 15-year record high for JDSU and NSE’s gross margin at 65.5% also achieved a new high. I was also encouraged to see both OSP and commercial laser at approximately 50% at the gross margin line.

Fiscal year 2014 revenue grew 4% year-on-year to $1.74 billion, what turnout to be a challenging telecom spending period, mostly due to major architectural changes in play in the industry focused on software defined networks and network function virtualization into significant industry consolidation.

The JDSU team achieved a number of key milestones in fiscal 2014. I just mentioned, gross margins improved up 160 basis points year-on-year. We continue to innovate at a rapid pace the products less than two years old generating 61% of revenue for our network-related businesses.

We continue to invest significant R&D in key product areas, important to growth in fiscal 2015 and beyond in area such as SDN, virtualization, enhance security and faster broadband access. The company generated $177 million of operating cash and repurchased $160 million or 12.7 million shares of stock.

We completed three acquisitions as part of our continuing strategy to diversify beyond our core telecom customer base and enter new growth markets such as enterprise and applications management. We establish CCOP as the leader in the Datacom market and commercial lasers exceeded $40 million in quarterly revenue for the first time.

I’m pleased with these accomplishments which I believe position JDSU well for sustainable revenue growth and growth in operating margin expansion over the longer-term. As we look forward into fiscal 2015, we remained encouraged by the strength of key network demand drivers that bode well for our products and services supporting this customer base.

Our network-related businesses make up 75% to 80% of our total revenue.

According to market research firms 12.5 billion devices were connected to the internet in 2010, this figure is expected to double by 2015 and to double again to 50 billion devices by 2020, creating enormous wired and wireless data traffic demand and massive network management challenges.

Network architectures, management solutions and business models are evolving rapidly. This evolution creates opportunities for carriers, service providers, network equipment manufacturers, enterprise Web 2.0 players and key enablers like JDSU to capitalize on these trends.

We have transformed our CommTest business of 2010 into the network and service enablement business of the future. The network enablement or NE, we have a strong focus on cloud-enabled field and lab instruments, hardware centric solutions and empowering workforce efficiency.

Service enablement or SE consist of software centric solutions and support that ensures the applications and services customer’s demand are delivered.

This year, NSE’s network enablement business maintain it’s number one position in field test instruments gaining share and turning in strong performances in fiber, broadband access and wireless network enablement solutions, all of which saw solid growth year-on-year.

In service enablement, we have invested heavily to support our customers move to SDN and NFV technology and to increase software content. We saw bookings growth in next-generation mobile assurance from the recently acquired enterprise focused network instruments business.

As expected, SE legacy wireline and wireless assurance platform revenue declined as customers scaled-back mature product lines and invested in leading-edge solutions.

CCOP's Optical Components business also turn in a good year, maintaining its number one position in telecom and achieving further penetration in Datacom, which was up approximately 28% year-on-year for fiscal 2014. Geographically, fiscal 2014 revenue from the Americas was essentially flat as key U.S.

customers spending was restrained or carriers wrestle with major architectural decision in consolidation activity. European spending has lag for several years, but bookings recovered somewhat in fiscal 2014 as EMEA revenues increased 8% year-on-year.

Asia-Pacific, notably, China continued to build out network infrastructure and invest in the latest technologies, our revenue in this region grew about 7% from year ago. Turning now to overt anti-counterfeiting, this is an important market for JDSU, as we have a significant leadership position and operating close partnership with our customer base.

This past year we completed the pruning of low-margin non-strategic products, representing approximately $24 million a year in annual revenue, which will enable the OSP leadership team to further increase its focus on anti-counterfeiting market, as well as high growth markets of optical coating including consumer electronics.

We see healthy market demand for optically variable magnetic pigment, OVMP product as new banknote design continued to adopt the security technology. OVMP is now featured in banknote designs for 51 countries, up from 48 last quarter and from 43 a year ago with overall security pigments globally deployed in more than 110 countries.

In our Commercial Laser business, we ended the year with record revenue and gross margin of $40.7 million and 49.9%, respectively.

Commercial laser revenue for fiscal 2014 grew 5.9% year-on-year with our fiscal Q4 growing 44.3% year-on-year driven by the successful adoption of our Gen 2 kilowatt fiber laser, as well as strength in the semiconductor industry. JDSU at Zurich our Time-Bandwidth Products ultrafast lasers also experienced increased demand.

We are very excited about the market pull that has resulted from the combination of this innovative technology and JDSU's infrastructure and market reach.

JDSU was an earlier enabler of gesture recognition or 3-D sensing technology in 2010 beginning with gaming consoles as recognize as a leader in this field through its expertise and laser diodes and optical filters, two critical elements for implementing the technology.

3-D sensing turned in a strong fiscal 2014 following nominal revenue in fiscal 2013. Looking forward, we do not expect meaningful 3-D sensing revenue over the next two quarters. However, as new applications for mobile devices, home entertainment and personal computing are adopted, JDSU is well-positioned to capture high-volume opportunities.

The major PC-related customer is taking delivery of free production units of our 3-D sensing offerings. We are working closely with our other customers and consumer electronics as they look to develop their own usage for 3-D sensing.

While market size, timing of deployment and rate of adoption remain unclear, we believe this new applications represent a meaningful future business opportunity for JDSU. At 4% revenue growth in fiscal 2014, JDSU do not see the robust topline we had expected entering the year.

We did, however, expand gross margin significantly with an exit rate of 50% due to strong acceptance of our new products and improved operational performance. Cash flow from operations remained strong with 31 straight quarters of positive operating cash flow contributing to a healthy balance sheet.

We are confident that our investments will position us to meet our customer’s future requirements and to further differentiate JDSU from our competitors.

Although, disruptive in the short-term, we see the radical technology shift taking place in the network, rapid expansion of data centers and the movement to the cloud is opportunity for growth as we enter into fiscal 2015. I'll now turn the call over to Rex for further details on our quarterly and year-end results..

Thank you, Tom. JDSU's fiscal fourth quarter 2014 revenue was $448.6 million, up 7.3% from last quarter and up 6.5% year-on-year, and exceeded our revenue guidance range of $425 million to $445 million.

Geographically, the Americas accounted for $216.5 million up 5.9% from last year, EMEA for $100.7 million up 16% and Asia-Pacific for $131.4 million up 1.1%. The geographic sales mix was 49% for the Americas, 22% for EMEA and 29% for Asia-Pacific. Gross margin at 50% was up 240 basis points from last quarter and up 390 basis points from a year ago.

All three business segments contributed to the improvement. Operating expenses at $185.1 million were up 7.7% sequentially from $171.9 million higher than our previous commentary and reflecting increased R&D investments in both NSE and CCOP strategic growth areas and higher sales commissions and bonuses.

Our GAAP results included $20 million in restructuring expenses from Q4 plans adopted by NSE, CCOP and shared services to reduce our operating expenses longer term. We anticipate future annualized cost savings of more than $30 million as a result of restructuring activities initiated in fiscal 2014.

Operating margin at 8.7% was at the high end of our guidance range of 7% to 9% on higher revenue and gross margin, up from Q3 of 6.5% and up year-on-year from 7.2%. Net income was $34.2 million, up 46.2% from our third quarter, again due to higher revenue and gross margin levels and up 12.5% from a year ago.

Similarly, EPS was $0.14 versus $0.10 last quarter and $0.13 a year ago. For the year, revenue at $1.74 billion grew 4% from fiscal 2013’s $1.68 billion. Our gross margin improved by 160 basis points to 48.1% versus 46.5% a year ago. Operating margin at 8.7% is flat year-on-year.

Our net income at $133.1 million improved slightly from last year's $131.8 million and non-GAAP EPS improved to $0.56 versus $0.55 a year ago. In all cases, due to incremental operating expenses from acquisitions in fiscal 2014 and higher organic R&D investments that offset increase revenue and gross margin.

For the full fiscal year, GAAP net loss was $17.8 million, or an $0.08 per share loss versus $57 million net income or $0.24 per share in fiscal 2013. The current period reflects $23.8 million in restructuring expenses in the absence of last year's Q4 $113 million tax benefit.

Turning to the segments, NSE's revenue of $209.1 million was up 10.2% from a year ago and exceeded our guidance of $195 million to $205 million. NSE's book-to-bill ratio was approximately 1 to 1. Gross margin at 65.5% improved 540 basis points from last year, reflecting continued operational improvements and better mix.

Operating margin of 13.9% improved 440 basis points year-on-year, exceeding our guidance range of 11% to 13%. New products defined as those products less than two years old represented 60% of revenue versus 54% in Q3.

Moving into fiscal 2015, we have determined to break out NSE into two new reporting segments, NE and SE, to provide shareholders of better understanding of these businesses, which are very different in terms of size, maturity, margins, investment requirements, revenue timing and business models.

Network enablement is again principally our traditional communications test instruments business. NE revenue for Q4 was $165.5 million, or 79% of NSE with strengthened fiber, broadband access and mobility test products offset by weakness in storage network testing from a year ago levels. Book-to-bill is approximately 1.

As shown in the 2014 pro forma financials we are providing today, NE has consistently improved its gross margin in the last 12 months with its operating margin reaching approximately 20%, the bottom of our published NSE business model range in Q2 and Q4.

This reflects operational improvements and evolving product mix focused on customer needs, high-speed applications in mobility and product pruning. Recall, the NE market opportunity is about $2.7 billion with a 4% CAGR.

Service enablement consists of software centric solutions that are embedded in the network and includes Arieso network instruments and Trendium acquisitions, as well as our PacketPortal platform. In Q4, SE had a book-to-bill ratio of approximately 1 and generated $43.6 million in sales or 21% of NSE.

Notable booking strength came from location intelligence in next-generation mobile assurance. Our enterprise performance management solutions from the network instruments acquisition were gross margin accretive in Q4 and are expected to be earnings accretive this quarter.

Looking forward, we expect to continue SE’s forward progress in fiscal 2015 as new higher-margin business from R&D investments made in high growth market segments and from recent acquisitions to replace our legacy service insurance businesses, enabling SE to have an expected zero to low single digit operating margin as we exit fiscal Q4 of this year.

We continue to believe SE as an attractive revenue and margin growth opportunity for JDSU in a $3.1 billion market with a 12% growth rate. We continue to collaborate closely with many tier 1 customers and several NIM customers on PacketPortal.

PacketPortal addresses the industry’s need for new more cost effective methods of gaining critical network visibility and intelligence at the edge of the network where most service impairment issues occur.

The significance of this technology has increased within our customer base as they are faced with the reality of a multi-speed Internet and huge strain of traffic in big data running on their networks. As a disruptive solution, adoption will be gradual but we are pleased with the feedback we continue to receive from existing and potential customers.

Moving onto CCOP, bookings were well above 1 to 1. Telecom, Datacom and lasers were above one with lasers posting a second consecutive record bookings quarter. Book to bill was substantially below one and is expected in our 3D sensing products.

CCOP revenue of $196.9 million was up 8% from the fourth quarter of last year and above the midpoint of our guidance range at $190 million to $200 million.

Optical Communications revenue of $156.2 million rose 1.4% from a year ago, reflecting higher telecom and Datacom revenue levels and offsetting our expected 3D sensing revenue decline of approximately $12 million.

The optical component pricing decline was approximately 2% quarter-on-quarter, which is at the lower end of our typical 2% to 4% expectation. Commercial laser revenue was a record $40.7 million, up 44.3% from a year ago and 31.7% from the prior quarter driven by strength from both solid state Q-series lasers and Gen2 fiber lasers.

The Q-series is experiencing healthy demand from the semiconductor capital equipment sector while our partner, Amada, continues to ramp our Gen2 fiber laser used for industrial cutting applications. In Q4, our fiber laser revenue was $11 million, up 86.4% from the prior quarter.

JDSU Zurich continues to gain traction with our ultrafast lasers generating more than $2.5 million in the quarter. CCOP’s gross margin of 33.3% increased to 250 basis points from year ago, reflecting primarily higher commercial laser mix and favorable optical components mix along with operational improvements.

Optical communications gross margin at 28.9% increased 70 basis points from year ago but was down 40 basis points from the prior quarter due to lower revenue. Commercial laser's gross margin reach record levels of 49.9% and rose by 450 basis points versus last year and by 100 basis points compared to the prior quarter.

Operating margin at 10.2% increased by 20 basis points from a year ago on both higher revenue and favorable product mix but was at the lower end of the guidance range of 10% to 12% due to higher operating expenses. New products less than two years old, represented 57% of optical components revenue versus Q3 at 64%.

In an effort to better align our product reporting to end markets, going forward we are grouping the optical communications sales mix into three end markets telecom, Datacom and consumer and other. The consumer and other grouping includes 3D sensing and industrial diode revenue.

Fiscal Q4 sales mix for telecom was 74%, Datacom was 17% and consumer and other was 9% versus a year ago 70%, 16% and 14% respectively. The telecom Datacom sales mix ratio has been about 80-20 for the past several quarters. Datacom revenue grew 9.6% year-on-year but fell 15.4% sequentially due to lumpy demand from a large Web 2.0 customer.

We expect our Datacom revenue to rebound in the first half of fiscal 2015 as we recently secured a significant new share award at one of our larger customers. Moving onto OSP, revenue of $42.6 million was down 13.4% from year ago, down 16.6% quarter-on-quarter but above the midpoint of our guidance range of $41 million to $43 million.

The quarter-on-quarter revenue decline reflects our exit of several lower margin thin-film coating businesses, with last time buys in the quarter at $1 million versus a historical average of $6 million per quarter for these products and latter demand for our core anti-counterfeiting products. OSP's book-to-bill ratio was well above 1 in the quarter.

Gross margin at 50.7% improved 150 basis points versus a year ago even on lower revenue levels as we exited the aforementioned lower margin businesses. Historically, we have achieved 50% gross margin levels at a $50 million rate of quarterly revenue run rate.

So we are pleased we are now able to achieve 50% plus gross margin at a low 40s million revenue rate and we thus expect margin expansion on higher sales.

Operating margin at 33.3% declined 170 basis points for a year ago on modestly higher operating expenses but significantly lower revenue levels and was just above the midpoint of the guidance range of 32% to 34%.

Turning to our balance sheet, we maintained a strong cash position at $881.3 million, down from $926.2 million at the end of the March quarter. Operating cash flow at $50.2 million improved from the prior quarters $42.5 million as we delivered our 31st consecutive quarter of positive cash flow.

Capital expenditures for the quarter were $31.7 million consistent with guidance and primarily to support manufacturing capacity investments in both CCOP and OSD. Depreciation and amortization was $34.7 million.

From our 100 million stock repurchase plan announced on May 27, we purchased 60 million or 5.25 million shares in Q4 at an average price of $11.43 per share with $55 million settling in quarter. Looking forward to Q1, we expect fiscal first quarter revenue to be $405 million to $425 million and non-GAAP operating margin to be 6% to 8%.

At our revenue midpoint of $415 million, this reflects a 3.3% year-on-year decline from last year's $429 million.

Our first-quarter fiscal 2015 midpoint estimate reflects year-on-year improvements in revenue from networking and laser end markets which are more than offset by approximately $30 million of year-on-year revenue decline from lower 3D sensing sales in the absence of OSP revenue from the product lines, we exited in fiscal 2014.

NE revenues expected to be $120 million to 130 million with an operating margin between 10% and 12%. SE revenue is expected to be $40 million to $45 million, with an operating margin loss between 7.5% and 4.5%.

NE faces typical fiscal Q1 seasonality compounded by expected continuing customer end decision as they consider the transition to increase network virtualization and more software centric solutions.

NE revenue from Q1 of fiscal 2014 was $145.1 million with an operating margin of 15.5% with approximately 14% year-on-year decline at midpoint of the current range, reflects primarily lighter North American tier 1 carrier spend. SE revenue in Q1 of fiscal 2014 was $26.8 million, a low topline quarter that drove more than 30% operating margin loss.

The SE revenue guidance midpoint at $42.5 million reflects nearly 60% of year-on-year growth which reflects investment in key areas such as enterprise and location intelligence and substantially narrows SE’s operating loss. We expect CCOP revenue to be $200 million to $210 million with operating margin between 12% and 14%.

Our CCOP revenue midpoint is $205 million versus $204.6 million in Q1 of last year. The flat year-on-year revenue change again reflects the expected $22 million lower year-on-year 3D sensing revenue offset by the better performance of other CCOP product lines, especially our commercial lasers business.

We expect OSP revenue to be $42 million to $44 million with operating margin between 34% and 36%. Our OSP revenue midpoint is $43 million versus $52.5 million a year ago. The decline is largely from exiting low-margin product lines, but also reflects some continuing near-term softness in anti-counterfeiting demand.

We expect non-GAAP EPS to be $0.08 to $0.12. Please refer to the supplementary slide deck for other fiscal first quarter 2015 financial metrics guidance, posted on the JDSU website. I will now turn the call back over to Tom..

Thanks, Rex. Historically, the September quarter is seasonally soft for the NE business. Moreover, the traditional test and measurement business has been particularly challenging for network test equipment providers during the past several years. Especially, in the last four quarters, we expect these challenges to continue in the immediate future.

North American carrier have ratcheted down wireline spending while redeployed investments in wireless infrastructure have been tepid due to rapid changes in network technology architectures. Given our leadership position in many of these markets, we are also subject to these macroeconomic industry forces that have adversely impacted the NE business.

However, these changes in technology validate our focus on identifying emerging technologies that allowed us to meaningfully grow the SE business. As a result, the industry becomes increasingly more focused on SDN and NFV technologies.

We believe the service enablement business will play a larger role in supporting our service provider and enterprise customers to improve network service application performance in fiscal 2015 and beyond. In CCOP, optical component demand remains healthy with notable strength in Datacom, 100G modulators and China's infrastructure spend.

Our Gen2 kilowatt fiber laser customer, Amada, is enthusiastic about this new generation of product along with this differentiated variable cutting head and continues to ramp the industrial metal cutting production as the industry accelerates its conversion from traditional CO2 lasers.

In OSP, we have repositioned the business to focus on higher growth and higher-margin business opportunity.

Looking ahead in fiscal year 2015, with robust booking from incremental anti-counterfeiting businesses, we believe OSP's revenue should return to the $50 million level by fiscal Q2, with corresponding margin improvement driven primarily by further adoption of our OVMP product for the banknote market.

We’re also expanding our development efforts in consumer electronics with technologies targeting 3D sensing applications using our optical filters, as well as applications in the government and healthcare markets that can leverage our optical coding expertise.

We believe the addressable end markets that JDSU serves remain on track with the blended growth rate in the mid-to high-single digit percentage range in fiscal year 2015, with typical seasonal quarterly variations. I would like to thank our employees, business partners and shareholders for your interest and continued support of JDSU.

I'll turn the call over to Bill to begin the Q&A session..

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

(Operator Instructions) Your first question comes from the line of Michael Genovese with MKM Partners. Please proceed..

Great. Thanks very much. Tom, you seem to be (indiscernible) that the technology transitions have been hurting the NE business in the wireless market.

Can you just squash that idea more and tell us what were you’re referring to?.

I think, there has been a tradition transition going on obviously in the wireless, the LTE and you got TD LTE in China et cetera. And most of our play comes once the networks are actually installed and get equipment -- subscribers across the equipment and get the capacity usage up.

So that transition initially as 2G and 3G have dropped off significantly, have created a bit of a low in that spending, we normally see out in those operators..

Okay.

And can you comment specifically if you’re seeing any changes recently in the level of demand in NSE related to both the major cable merger? And then secondly, the major wireless merger that people thought were going to happen and now looks like it's not going to happen in that fallout? Have you seen a recent downward revision in like 3Q because of …..

No. On the cable side, our business has been real healthy. So I don’t think that up to this point we’ve really being impacted by what’s being discussed as far as the merger out there. I think on the telco side with major North American operator, we have seen some pullback as a result of both the architectural changes going on and also intended merger.

So I think that has impacted the telco side of the business in North America..

Okay.

Then final question for me is, looking at all your guidance here and sort of plugging it through, it look like there's a big sequential decrease in our backs and are those here more accounting related things or is that coming from some underlying cost-cutting going on?.

It comes from a couple of impacts, one is just basic cost controls as we’re trying to hold, OpEx down for the first quarter. And you'll see slightly lower bonus and sales commission accruals as well because it’s a lighter quarter..

Okay.

But that sounds right to you that -- idea that CapEx will be down say high single -- sorry, OpEx sort of high-single digits sequentially?.

That’s in dollars?.

Yeah..

Maybe quite that much or less than that -- yeah, 5 to 10..

Okay. Thank you..

Thanks..

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

Yeah. Good afternoon. Thank you for taking my questions. I guess, jumping right into the NSE business. Alan or Tom, I think you talked about your moment towards service assurance business declining in the quarter.

I’m trying to get an understanding where that business stands on a annualized revenue basis? And then if we think about that from a gross margin contribution, I think the thing that was kind of surprising on your breakout of NE and SE, is that your NE business is actually above the high-end of your long-term gross margin target range, while SE is supposed to be the tailwind and should be the tailwind on a go-forward basis.

So if you could give us your thoughts around what our longer-term gross margin target could be looking like?.

Okay. So, I think for the service enablement business or service assurance business, I should say the legacy SS7 is definitely coming off pretty rapidly now. We really haven't split out the size of that revenue. We will go down to that level but it has been a significant regional revenue level for us in the NSE business.

So we’re expecting with the next generation of mobile assurance. We believe that we have a unique platform that we had now brought to market. The combination of the Trendium acquisitions and some of our other capabilities that we will see some nice growth as that starts to trend up as new architecture is required.

I think as far as the gross margin levels between NE and SE, we do expect over time that the SE gross margins will be higher than NE. But we have seen a nice improvement in NE, both through mix and operational improvements. So we want to continue that moving in the right direction as well.

But SE, once we are more through the initial stages of the some of those revenue recognition where we don't see the revenue but you do -- some of the cost to drop into the cost of sales, that’s causing some of that depressed level on the gross margins for SE.

I would expect when we get out in time that the SE gross margins would be well above our average today, which we were at almost 66% this last quarter. I’d expect with SE would be up in the mid-70s plus range as far as gross margins as we get out pass some of this initial revenue recognition timing, et cetera..

Okay.

So I guess, we could maybe look to your Analyst Day for an updated long-term target there?.

We will do that, yeah, that’s what we plan for across all of our businesses with the split out of NE, SE, the other two businesses. We’re going to give you an update on our models. These models all are from about three years old now so time to update..

Perfect. And then I guess, shifting to the fiber laser. Alan, I asked a very similar question last quarter, very nice number on that $11 million revenue for the Gen2 fiber laser. I’m curious though last time on your Gen1 you saw revenue ramp up to about $10 million a quarter on a selling basis and then the sell through, just wasn’t all that exciting.

As you see here today, can you talk about how you feel about the Gen2 fiber laser ability to grow from here? And then also in the past you talked about your ability to target customers outside of Amada.

Is there a chance we could see a material ramp and customers outside Amada in your fiscal 2015?.

Yeah. I think as far as peak revenue, I don’t think we’ve seen it for sure on Gen2. The ramp and the adoption by our customer of the Gen2 has gone extremely much, much better than our Gen1 and therefore, the field deployment at their customers is going quite well and the sales guys are all excited at Amada.

So I think, we’re going to continue to see growth at Amada. We’re focused on supporting them through this ramp as well as expanding our footprint within Amada, both in higher power lasers as well as different applications within Amada. So that is what our focus is for fiscal ‘15. I don't think you'll see meaningful revenue outside of Amada in ‘15..

Great. Thank you for taking my questions. Good luck..

Thank you..

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

Thanks. I guess, I just wanted to again look at the guidance a little bit and just understand perhaps gross margin, which you’re assuming there. I mean, I’m also noting here that the optical component margin or communications margin was down quite a bit. Is that all leverage or are there some mix issues there.

Could you elaborate on the strategic service margin and their performance in the quarter?.

Yeah. Gross margin was down just slightly from Q3 on lower revenue. I have the numbers here, just a second. Gross margins were down by 40 basis points on a drop in revenue attributable to as Rex pointed out in his part of the script. Datacom dropped by one of our large Web 2.0 customers as well as the expected drop in gesture.

So I don't think there's anything out of what we expected from the gross margin standpoint and outcomes. And I think, going forward, we’re expecting that to pick back up as revenue levels do increase..

Okay. So that’s going to be up a little bit.

So in general, the overall gross margin could be down here, perhaps kind of 200 bps sequentially, is that a fair assumption perhaps?.

Maybe little bit more than that, call it a point..

Okay. And just final question, I’ll pass here. Just curious about the optical communications weakness, a little light, [bizarre] (ph) expectations. Are you guys seeing any impact here from second sourcing under the assessment of tunable XFP. I’m just curious how those products performed and what the outlook is for those? Thanks..

Yeah. I will give you a couple of data points, one is, our Tunable XFP revenue grew 16% quarter-on-quarter. And so, I don’t, I think, we are gaining share as a result of really and that includes our tunable SFP+ as well. So we launched our generation tunable SFP+ and that’s contributing to our growth in the tunable business.

I think kind of broader base, I would say that networks are being deployed with at the core at 100 G and the spending at the service provider is really at the 100 G core deployment as oppose to new greenfield. And so, I think, directionally we saw a drop in rhodium revenue. Although, I don't think we lost substantial share with any.

I will say that one of the areas of keen strength was the business of submarine cables and our growth in submarine bookings we had book-to-bill of over 3 to 1 in our submarine business and expect that to really contribute to the balance of our fiscal ‘15 growth..

Yeah. Thank you..

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

Thank you.

Tom maybe your thoughts on just the duration of the customer a decision at the moment and the impact of the consolidation? How long things might last beyond the near-term, should we think about the fourth quarter? Should we think about lingering thoughts into the early part of next year, just a duration please?.

Yeah. So, obviously, I’ve not given guidance out past this next quarter, but I would say, a couple of quarters is the likelihood that, I would suspect, we will no more as we could progress this next quarter, but I would expect there is couple of quarters with the change in technology and then also making plans on potential acquisition..

Okay. That’s helpful.

And then, Tom, if we step back and look at the industry, carrier consolidation, it's usually -- it's rarely a good thing for the vendors and they consolidate, so they have more purchasing power? JDSU has been able to deflect some of the pricing pressure by higher gross margin acquisitions and lower margin pruning? As we see this big larger acquisitions on the carrier side? Are there consideration to kind of looking at business and say, we need more scale here, we need, we don’t really need to be in this business, to look it from a aggregate profit contribution point of view, so that when you look at it you say that the industry is changing, maybe the company -- should we composite its assets or to ask simply does JDSU need to be in so many businesses?.

Yeah. It’s a question we always review and ask ourselves, I think the actual consolidation in the carrier space won’t have a huge impact on looking at the composition of our portfolio of businesses.

But it does, I think give us some opportunities with this consolidation that continue move up to food chain and offer some of these higher-end solutions and that’s what we are doing.

And part of the restructuring charges that you saw this quarter are really addressing some of that mix change and things we need to do to get out of certain areas and more focus into other areas that we think will benefit our future growth. So we have taken some of those charges this past quarter as we prepare for that..

That's helpful. Thank you and good luck gentlemen..

Thanks Mark..

Your next question comes from the line of Simon Leopold with Raymond James. Please proceed..

Great. Thank you. Just wanted to check in a couple things.

One, I appreciate the new segmentation particularly around the network service enablement, it is helpful? I want to try to get a sense of the guidance of how much of this is reflective of kind of lumpiness and how much of the implied decline of the network enablement sequentially is related to consolidation versus the bigger picture trend you’ve talked about the mix shift towards the more software centric business? And as a follow-up, if you could provide some comments on the longer term, meaning calendar ‘15 and your thoughts on the 100 gig market? Thank you..

Okay. David Heard, do you want to take the first part of that..

Yeah. Sure. I think it’s a good question. So, I think, we finished Q4 in the NFV reasonably strong as carriers and especially the North American carriers. We brought in about $5 million to $7 million more than anticipated as evidence in the guidance range.

I think as we look at the summer and we look at the carriers looking at how they are going to test their networks for SDN and NFV. We are seeing one particular in the U.S. that’s doing that and looking at some M&A and so the timing of that impact, I think, is just creating some choppiness in that NE market.

What we have done over the last two years is really try to focus the fundamentals on where that change isn’t going to have an impact. So we've increased our investments in LTE based station test fiber, which continues to grow year-over-year and that wide broadband access.

And so, I think, overall, we still see that as a $2.7 billion market that’s going to grow in that 3% to 4% range continuously and over the last year we have continued to take share in that space and in Q4 we actually have had some organic growth go as a result of our investments.

To the second part of your question, I think, absolutely that 3 billion plus market that Tom reference in his prepared remarks, that’s where we see the carriers going and that’s where we see consolidation in the enterprise all moving up to stack and that's why we're putting, we are continuing to invest our R&D resources because that’s all in line with where virtualized networks are going, where software is defining the network.

Did I answer your question there?.

You did. That’s helpful.

And then the other one was longer term kind of 2015, calendar ‘15 thoughts on 100 gig market particularly as metro ramps?.

Yeah. This is Alan. Good question. I think we are still seeing strong demand that outstrips our capacity for what I'll call the long-haul 100 gig and we expect that to continue through calendar ’15.

We do see that getting into the regional area metro probably more late calendar ‘15 as the costs and volumes need to and power consumption need to really go down to keep up with the competitive market of say our Tunable XFP. So I think from JDSU perspective on the carrier side modulators are going to continue to grow.

We just transferred back in production to ACM in Asia so we are expecting to continue to grow our modulator business for 100 G.

We are starting to ramp now our narrow line with laser for 100 G and we expect that to really continue to take off and then as we look at the data center market that's still predominantly 10 and 40 G and we expect 100 G, well, it’s small to grow dramatically through calendar ‘15 and ‘16 in a meaningful way the data center..

Thank you very much. Thank you..

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

Thanks. Just a couple of quick clarifications, the -- I think the one comment you made was that your Datacom Web 2.0 customer had a falloff in the quarter? Are you implying that that’s the temporary one quarter thing and that Datacom Web 2.0 players are going to come back on track? I did -- I miss the context around it.

I was wondering if you could clarify it?.

Yeah. I think the main comment is that we see lumpy demand, because the nature of the build-out of the data center themselves. So we think this will be kind of a repeat pattern where we will see the lumpiness, but we don’t think the business itself is going way..

Yeah. And I think, what we are trying to do is to expand our footprint within those Web 2.0 customers so that the lumpiness at anyone customer is not as painful as we saw last quarter and we are making good progress on that front..

Are you expecting still growth out of the Web 2.0 players, in terms of their aggregate spending, as well as your share within it?.

Absolutely..

Okay.

And then can you outlined where you are in terms of the Arieso revenue recognition process and the PacketPortal progress metrics that you guys have been promising to talk about in terms of whether it's been included in some of the RFPs by the major network operators and where you are in getting the OEMs to sign up to carry it and similarly with the network instruments.

So where are you in the integration and dilution from that?.

Yeah. Rex will take the first part on the rev rack and David will talk about the business itself..

So the timing on -- this is applies actually both to Arieso and also to a product that which include our Trendium acquisition earlier this year. Currently, we are assuming that bookings in those two areas take about three to six months to turn to initial revenue and when you get to initial revenue is recognized ratably after that.

So there is not a significant inflexion that we are anticipating. Though later in this year, we’re expecting to get -- later this fiscal year, we are expecting to get to what they call VSOE on one more or products and that would contribute to greater strength in the back half of the year..

So could you just give us some sense what we’re not recognizing in revenues that you are absorbing costs on still.

I mean, there must be some scaling of this to give us some sense what it would look like?.

I think we’re heading -- we've got two things going on right now. The SE business which you can now see on an broken-up basis includes both the new growth opportunities we’re investing heavily in but also some legacy assurance products that are rolling off.

So you’ve got -- you're basically replacing older revenue with new higher-quality revenue going forward. So our goal this year is to build a meaningful backlog and then, of course, deferred revenue on the balance sheet through this fiscal year and really hit our stride in SE in FY ‘16.

There was comment in the script that we’re looking to breakeven or better on the SE business late this year, that’s still in my record..

And then, one other question on the pricing out of China, can you talk about the magnitude of the price delta between what you're selling in other geographies and in China? And if that’s a higher rate of growth area, is there any impact on margins as a result of that shift?.

I’d say when there is a allocation decision to be made and 100-gigs is where we’re seeing a lot of the main growth across all regions, pricing becomes a lot more friendly. So 100-gig modulators, there’s not much if any price difference, regardless of where we sell it. And then there’s also specification differences that didn’t come into play.

So I wouldn’t say there is a radical difference on those types of products. I think if you looked at pluggable product for supreme base station, that’s probably pretty ugly because there’s a lot of people competing for that business and that’s one that we’ve historically stayed away from..

Okay. Thank you..

David, do you want to comment on the PacketPortal milestone?.

Yeah. Sure. Good question Alex. I think we talked about couple milestones, one continuing to see tier 1 included in RFPs which -- that has continued in the quarter.

We’ve had another tier 1 service provider, certified PacketPortal is their solution of choice going forward as they face the challenges of the SDN and NFV, I think that's great but obviously you then have to scale that. In addition to the tier 1, we also have NEM certification from our first major NEM partner.

So we are progressing on those fronts and can continue to believe that that is going to be a great solution for SDN and NFV and are aiming to offset the dilution of that investment that we’ve talked about in prior periods, still by the close of our fiscal year.

And those results are included in the SE results and we’ll further get through them in our Analyst Day..

Great. Thanks..

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

Hi. Thank you. Tom, my question again was around NSE. We had two years of declines in 2012, 2013, barely grew in 2014 and we’re starting to hear again down 10.5%. I understand the pressures in NE but even if I look at SE over the last three quarters plus the guidance, we're basically hovering around $40 million a quarter.

So just trying to understand, can anything aggregate even grow in fiscal ‘15 or should we just plan for another year of declines in overall sales?.

No, we do plan on NSE growing. We did say that in general, the SE part. We believe the market will grow 10% to 13% and we think we’ll grow at least as well as the market. So any -- although we’re going through a period right now with North American operators, we did see demand pickup as we said in Europe and EMEA and we’re seeing some pickup in Asia.

We do think that the operators will get through this period. As I mentioned, I think, it’s a couple of quarters, don’t know for sure. But that would be my best estimate right now. So we would expect somewhat around the market growth rate to be about 4% for the NE business. And again we do believe we’re taking market share there.

So we should be overgrow lease with the market plus again we’re growing market share because of the additional software content for the NE products but also the combination of NE and SE, we believe positioned us very well with the operators..

Okay. And then just a follow-up for Rex. Rex, just on the OpEx line, revenue is up 6%, 6.5% year-over-year, OpEx was up almost 13% and even if I look at it sequentially, there was basically no leverage in the model. So I’m just trying to understand some of the OpEx gyrations both in fiscal 4Q and then obviously in fiscal 1Q.

Do we get to slightly more smooth trajectory?.

No, I think there is a couple of things going on there. Obviously, it is meaningfully year-over-year. As you look out into 2015, I think you should assume an increase in operating expenses that’s commensurate with the topline.

There’s not a lot of leverage and there might be even little bit of non-leverage in the FY ‘15 outlook but they are going to be very close to each other..

Okay. Thanks..

Your next question comes from the line of Kent Schofield with Goldman Sachs. Please proceed..

Thank you. Thank you for the granularity on the CCOP business around the different business lines there.

Just as we think about modeling those, are there significant gross margin differences that we should keep in mind and are -- is one business more susceptible to changes around, for example, the lumpiness that you referred to in Datacom, meaning doesn’t see a bigger impact or less impact as -- again as we think about modeling those three lines?.

Are you talking within CCOP?.

Yeah.

So I think about telecom, Datacom consumer and just kind of the gross margin differentials there and kind of lumpiness how that impacts those three lines?.

I think it depends a lot about, which product within each of those groups meaning no a pluggable product for radio base station where there's seven competitors, gross margins or typically much lower than 100 G modulator and both of those are in well, one in Datacom and one in telecom. But if you looked at CFP2 margins, I’d day those are higher.

So as we look forward, we’re really focused on generating revenue from less than -- products less than two years old, higher than 50% to be able to continue that gross margin improvement. So I wouldn’t say that you can make a general statement about Datacom or telecom or other being radically different in gross margin.

It’s the products within -- and where we have good strong products like tunable XFPs, those are margin products that are strong because of our long history of driving cost reductions and learning curve. And so I think if you through it all into blender it, it’s really hard to say. The blended rates are probably pretty, pretty equivalent..

Okay.

And then as a follow-up, can you give us an update on China in terms of how you seem to be progressing towards the $10 million to $15 million that you guys have discussed in the past?.

Yeah, we see probably the optical components side being a little bit stronger because we roughly said $10 million of the incremental comes from optical components and about $5 million from NSE.

So I think on the path, we’re on right now and where we’re seeing the spending probably a little bit healthier in optical components and probably not as quick in NSE. Although we think we are making good traction there.

So I think blended, we come out about the same but it’s going to be a little bit higher mix as we go to the last part of this calendar from optical components and less than what we expected in NSE..

Thank you..

Welcome..

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

Yes, thank you. On that last question, how long does this China buildout last.

Do you guys have a sense of -- is this a couple of quarter scenarios or this could be kind of a few year type of buildout deployment model?.

Okay. It’s hard to judge but we believe it’s going to last at least through the end of the calendar year as far as the base station buildout. I would suspect with the numbers they put out there originally, it should last longer than that. But we would see a path at least through the end of calendar year.

And then I think all the backbone buildout to support this base station is really just pretty early stages and that would go on longer as you start filling up capacity on the TDLT networks that drives back through the backbone. So from my perspective, it’s still in a pretty early stage.

Although, they build out quite a few base stations, a smaller percentage of those have been actually turned out with volume on them. So I think there is quite a bit still to happen in China..

Great. I appreciate the color. And then, my other would be on VoLTE still kind of sticking to the wireless side.

One of your direct competitor is actually talking about significant order flow, with some major operators in Asia, where are these stand on that, where is, what products do you have that target this market if any and how do you kind of take that market on..

David, do you want to comment on the VoLTE market and our product alignment..

Yeah. Sure. Yeah..

And revenue for that matter, you have it, yeah..

Yeah. Good question. While we are not breaking it out by solution in terms of revenue, our next-generation mobile assurance platform handles VoLTE, our base station test platform handles VoLTE, ran optimization. It's really a more delicate application that’s going across the network.

And so substantial portion as we look at our mobile pipeline is people preparing the network not just for the raw capacity but delicacy of then putting VoLTE across the network. So we face up against those competitors and our players like and with others we’ve been taking share here recently. To the question on China, yeah, it's just multiyear.

The Chinese are building out that network and as they have the capacity they are finding out the complexity they need. We’ve had some early design wins there in the NSE market.

The China tends to be very, very late in terms of the utilization of test turn-up and optimization, that tend that get shorter and shorter as if technologies become more complex and we’re certainly there partnering with them in a multiyear build out in China..

Thank you. And then last, just a quick one on the two operator customers that you have last quarter that didn't come into revenue.

Did you book these customers? I think one order was a pretty significant one around $8 million to $10 million, which was related to metro project? Did that come in this quarter or was that extended out again?.

So just to clarify your question there, there was a next-generation mobile assurance. We did close two Tier 1 players in Q4. As a result a very unique solution and that pipeline continues to build and it will be included again in that SE guidance.

But as Rex had mentioned earlier, you're going to see, for example, we look year-over-year Q1, we expect bookings to be up quarter-over-quarter in year one, those revenues tend to then happen in the back half of the year and the early half of the year following, depending on the quarter they booked. They’re anyway from 6 to 12 months lagging..

Yeah. No.

I though there was any opportunity which was a pretty significant ones, somewhere in the order of $8 million to $10 million last quarter, which didn't book or didn’t close for revenue last quarter and I was just asking if you booked it or recognized it for revenue this quarter and if not, when do you expect to get that?.

Yeah. I'm not sure the origin of your question. In Q3, we had some slowness in the metro market..

Yeah. That’s right..

And we were able if you look at the NE numbers that Rex broke out. We were very strong in any in fact, some of the opportunity from Q1 actually pulled into Q4. And so yeah, we did see some significant strength in the NE market in Q4..

Okay. Great. Thank you..

You’re welcome..

Thanks..

Your next question comes from the line of Subrahmanyan with The Juda Group. Please proceed..

Thank you. I have two questions, first on fourth quarter or I should say the December quarter for carrier side. You normally see some CapEx on test and I’m wondering if you expect to see a strong fourth, December quarter for test. Tom, you had mentioned, you think, there could be a couple of quarters more of the impact in these transitions.

I’m just curious how you think about seasonality in December? And then also to verify kind of your comments on the mid to high single-digit growth, similar question was asked earlier but is that applicable you think to fiscal ’15 or given some of the transitions both on the carrier side and in your business side? Is that more from long-term view for market growth?.

Yeah. I think as far as the December quarter, we do expect it to be a seasonally up quarter. So there will be that improved revenue and bookings based on seasonality. I don’t know that we can quantify that at this point. But we do believe it will be seasonally up.

The comment on the mid to low single-digit growth for FY ’15, yes, we believe that we are in that range as we look out through the fiscal year, although, we’ll see some slowness in the Q1 seasonally, which is pretty normal but also on NE side, probably bit softer than usual because of the consolidation in the architectural changes..

Your next question comes from the line of Mark McKechnie of Evercore. Please proceed..

Oh! Great. Thanks. And thanks for the segment detail on CCOP. Just might be for Rex or even Bill, but could you give the mix between telco, Datacom and consumer for the market.

I think you gave for as year ago, but trying to figure out how that telco business trended quarter-on-quarter? I think, I recall last quarter, you had a delay in 100 gig metro deployment that kind of slow things down and I want to get sense for the status of that as well? Thanks..

Yeah. I think you could probably back into it because the telecom, Datacom mix was still approximately 80, 20 to give you that so it would be reasonably consistent with Q4 at least from a mix perspective I would think. Alan, do you have any other thoughts on that..

Yeah. I mean, I think, while we saw 3-D sensing drop as expected, we did see some strength offsetting that in our industrial diode business that is in that other category. So not a big shift overall between the two. But I think apples-to-apples, not much shift between the March quarter and the June quarter on the Datacom versus Telecom..

Our last question comes from the line of [Raj Pal] (ph), JP Morgan. Please proceed..

Yeah. Hey, guys. Thanks for getting me in there. Just a couple of quick questions, I guess, EMEA growth accelerated quite a bit 16% in the quarter.

Do you think that that’s a sustainable growth rate? Do you think growth continues to accelerate? I just wonder if you could comment on what you think happens in EMEA over the next few quarters? And then I also wondered if you could, there seem to be a lot of misperception in the market about the linkage between optical systems and 100 gig in particular, and some of CapEx slowdown that we’re seeing in North America in the second half of year, which seems mostly linked to wireless? I wonder if you guys could comment on whether you think optical systems is infected at all by that or do we see pretty normal seasonality through the calendar year on optical systems spending in the U.S.? Thanks..

I’ll take the EMEA and maybe ask David and Alan to comment on the optical systems 100 G. We do -- we think EMEA is definitely coming off the bottom and we did see that approximately 8% growth year-on-year. So we are seeing some improvement in EMEA. And more consistency, I think of the order flow, where as, if I go back to last year was very lumpy.

It seem like they’re just spending, when they absolutely had to now it seems like to be in a bit more proactive in building out the technology. So, I think, its probably too early to call as the trend but from what we’re seeing, we do think, we’re going to continue to see some strengthening there in the EMEA..

And as far as optical systems are concerned, I think what we’re seeing is a continued deployment of upgrades of existing networks from 10 G and 40 G to 100 G, and less so the deployment of greenfield as network architecture still being sorted out. There was an interesting analysis by Ovum done about CDC architecture and flex grid stuff.

And well, carriers say they wanted to deploy it. There is only a small percentage of want them deploying today, but in -- at the end of this calendar year and into calendar ’15, the majority of those surveyed said that that was the time for the network deployments of call less direction was type network.

So today as mostly the transmission over existing network at 100 G..

There are no further questions in queue. I’ll now turn the call back over to Mr. Bill Ong for closing remarks..

Thank you, Whitney. JDSU will be participating at the following Investor Related events. There are three Silicon Valley, first, was taking place at our corporate campus. MKM Fund is on August 20th, B. Riley on August 25th and RBC on August 27th.

We also hosting a 2014 Analyst Day event on September 11th here at our corporate campus in Milpitas, California. We hope to see many of you here. Thank you, everyone. .

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day..