Bill Ong - Senior Director of Investor Relations Tom Waechter - President and CEO Rex Jackson - EVP and CFO Alan Lowe - EVP and President, Communications & Commercial Optical Products Chris Coldren - VP, Business Development.

Amitabh Passi - UBS Mark Sue - RBC Capital Markets Patrick Newton - Stifel Alex Henderson - Needham Rod Hall - JPMorgan Troy Jensen - Piper Jaffray Simon Leopold - Raymond James Dmitry Netis - William Blair Kent Schofield - Goldman Sachs James Kisner - Jefferies Richard Shannon - Craig Hallum.

Good day ladies and gentlemen and welcome to the Q3 2015 JDSU Earnings Conference Call. My name is Alex, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct the question-and-answer session towards the end of this conference presentation.

(Operator Instructions) As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to Mr. Bill Ong, Senior Director of Investor Relations. Please proceed..

Thank you, Alex. Welcome to JDSU's fiscal third quarter 2015 earnings call. My name is Bill Ong, Senior Director of Investor Relations. Joining me today on today's call are Tom Waechter, CEO; and Rex Jackson, CFO.

Also joining us on the call are Alan Lowe, President of our Communications and Commercial Optical Products Business Segment or CCOP and CEO-designate of Lumentum, [indiscernible] JDSU Global Controller and CFO-designate of Lumentum and Chris Coldren VP of Business Development for CCOP and Lumentum's Investor Relations-designate.

Please note, this call will include forward-looking statements about the Company's financial performance and plans to separate the business into two independent publicly traded companies. 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 described in those filings. The forward-looking statements including guidance we provide during this call are valid only as of today. JDSU undertakes no obligation to update these statements.

Please also note that, unless otherwise stated, all results are non-GAAP. We include a reconciliation of these non-GAAP results to our GAAP financials, as well as a discussion of their usefulness and limitation in today's earnings press release. The release plus our supplementary slides and historical financial tables are available on our website.

Finally, we are recording today's call 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 and welcome to everyone on the call. Our fiscal third quarter revenue was at the lower end of our guidance range at $410.7 million, while operating margin of 7.6% and EPS of $0.12 exceeded guidance. CCOP and network enablement achieved their midpoints.

Service enablement and the Optical Security and Performance Products segments were below revenue guidance. NE and OSP both exceeded operating margin guidance at 20.1% and 39.5% respectively on strong gross margins and effective expense controls, enabling us to surpass our EPS expectations. The carrier spending environment continues to be challenging.

Revenue from our traditionally largest Tier 1 U.S. carrier customer is down by more than 30% for the first nine months of this year versus last year driving a decline in overall NE SE revenues. We limited this decline through our continuing efforts to diversify our solutions in our customer base.

This particular customer spend volatility is not unique to JDSU and has had widespread impact on the industry's supply chain. The reported Q1 2015 CapEx was particularly late, down more than 30% from a year-ago level. However if their capital plans holds for full year 2015 we may see a better second half spend. We remain cautious until it happens.

I am pleased with the progress we are making on our next generation products and technologies which continue to gain traction.

To continue diversifying our customer base and the markets we serve, we’re focusing our investments on location intelligence, mobile assurance and analytics, application aware network performance management and cloud enabled evolved instruments.

Deferred revenue and backlog for next generation service enablement products is improving as SE deferred revenue and backlog mix shifted from a 45 to 55 growth versus mature product mix a year-ago to 70-30 product mix this past quarter. We illustrate this portfolio shift in our supplementary slides.

Looking ahead to our planned separation, we filed our Form-10 in February and recently filed our first amendment in response to SEC comments. We have also announced the new names for both companies. We look forward to the formal introduction of our Viavi Solutions and Lumentum brands later this year.

We continue to expect to complete the separation by the calendar third quarter and believe it will provide a catalyst for increased shareholder value. I will now turn the call over Rex. .

Thank you Tom. Consistent with prior earnings calls, we have slides posted on jdsu.com supporting today's commentary. To allow more time for Q&A I will keep my comments brief. Revenue of $410.7 million was below our guidance midpoint of $418 million.

SE was $6 million below our guidance midpoint of $45 million, due largely to lower than expected Enterprise Solutions revenue, the primary book and ship component of SE and timing in our radio access network, location intelligence and packet portal solutions portfolio. NE revenue of $128.1 million achieved our guidance midpoint.

OSP revenue of $48.4 million was below our $50 million guidance midpoint due to timing of bank note redesign printing campaigns and its anti-counterfeiting segment. While both NE and SE saw seasonal sequential declines in revenue, gross margins for both segments increased sequentially due to favorable product mix and operational efficiencies.

NE operating margin improved 330 basis points sequentially and 630 basis points year-on-year from higher gross margins and better expense controls. SE's below target revenue materially and negatively impacted its operating margin.

Despite OSP's sequential and year-over-year revenue declines, operating margin improved 230 basis points and 390 basis points respectively due to favorable manufacturing variances, stable operating expenses, and the exit of lower margin business lines last year.

For JDSU overall favorable product mix and operational improvements drove better than expected EPS at $0.12, up from $0.10 a year-ago.

At the end of FY14, we separated NSE into NE and SE to provide greater transparency in to the expected continued profitability of NE, and the continued transition of SE towards growth in areas consistent with our strategy.

Despite an approximately 12% decline in NE revenue in FY15 versus FY14 using the midpoint of Q4 guidance, NE's operating margin percentage for this year should be approximately flat versus last year; while SE has demonstrated year-over-year revenue growth even with the expected decline in mature products below target model revenue this quarter and next is delaying operating profitability in the FY16.

However, as Tom discussed earlier, we’re pleased to see SE's backlog and deferred revenue mix steadily and favorably shifting. SE's growth products backlog and deferred revenue grew by nearly 60% year-over-year, offsetting SE's mature products decline of approximately 45% year-over-year.

SE's growth products are defined as location intelligence, enterprise, excite, internet assurance, packet portal and JMAB and mature products are defined as legacy assurance in wire line, protocol and RAN test.

Though we continue to work on top line growth, we’re pleased to see progress in migrating our portfolio to solutions that enabled our customers' moves to new network architectures and have better growth potential. Turning to the balance sheet cash remains healthy at $815.5 million.

Operating cash flow was negative $22.9 million in Q3, because our quarters are typically materially lighter on cash flow. We incurred separation expenses as expected and we've reduced our accounts payable in preparation for the spend.

Looking forward, we remain on track to achieve net $50 million in cost reductions and are also on track to take substantially all associated charges in FY15. We expect $8 million to $9 million of savings at Lumentum with the balance coming from Viavi through reductions in corporate G&A expenses and COGS operating expenses in NE and SE.

We will continue to invest in our go forward strategy as we make these changes in FY16, and thus expect to substantially meet our combined $50 million target as we exit FY16 measured by comparing our Q4 FY16 annualized exit rate versus our FY14 total operating expenses plus 12 million to normalize for the fact that we acquired Network Instruments in mid fiscal 2014.

With regards to our pre-separation operating model targets reflected in our supplementary slides, we have demonstrated that at or slightly below target revenue levels, we can achieve our growth and operating margin targets for all four business segments.

We now need to demonstrate as separate companies, we can deliver on the model's top-line requirements consistently. Looking forward to Q4, network enablement revenue is expected to be $132 million, plus or minus $5 million, with an operating margin of 17%, plus or minus 1 percentage point.

Service enablement revenue is expected to be $39 million plus or minus $2.5 million with an operating margin loss of 18% plus or minus 2 percentage points, again below our previous expectations due to a lower than expected revenue level for Q4.

This segment needs to approach $50 million a quarter in revenue to achieve breakeven or better on its bottom-line. We expect Q4 OST revenue to be $50 million plus or minus $1 million with operating margin of 37%, plus or minus 1 percentage point. We’re pleased to see OSP returning to the $50 million per quarter revenue level.

I'll now turn the call over to Alan. .

Thank you Rex. As Tom stated earlier, we filed our Form-10 in late February and last week we filed our first amendment. We've announced our new name, Lumentum which reflects light, power and driving forward, the core of our products and of our business.

Our team is excited by the opportunities in front of us and the significant progress we have made toward the separation. Now on to our Q3 results. CCOP Q3 results revenue was $195.2 million and that’s the midpoint of our guidance range of $190 million to $200 million.

Optical Communications revenue of $163.7 million was flat versus last year, while offsetting a net $7 million decline in 3D sensing revenue from the year-ago period. Excluding 3D sensing, Optical Communications revenue increased 4.5% year-over-year, driven by datacom growth, which was up 23.2%.

Datacom strength was led by higher speed 40 gig and 100 gig transmission products including 40 gig QSFP plus, 100 gig CFP2 and 100 gig CFP4 products. More recently, the sampling of our 100 gig QSFP28 products position us for continued leadership and growth.

Telecom revenue in Q3 was down 1.4% from last year, primarily impacted by ASP declines which were greater than unit volume increases. However within telecom, we are seeing strength in our ROADM, modulator, pump laser and submarine product lines, which are all up more than 10% year-over-year.

In our ROADM product lines we have seen particular strength from our newer TrueFlex products, which are moving from lab trials to new network deployments. Our TrueFlex products are key to recently announced North American metro deployments, which could support continued growth for us in the coming year.

3D sensing revenue fell below $2 million during the quarter. Optical Communications revenue mix was 71% telecom, 23% datacom and 6% consumer and other, as compared to Q3 of last year at 72%, 19% and 9% respectively. Our higher speed transmission defined as 40G and 100G increased to 48% of our mix versus a year-ago at 44%.

100G revenue doubled versus last year. Turning to commercial lasers, revenue of $31.5 million grew 1.9% year-over-year but declined 21.3% sequentially, due to seasonal weakness from solid-state laser products and softness in our fiber laser business. Fiber laser sales were down due to customer inventory management.

Q3 fiber laser revenue was just under 10 million, following three consecutive record revenue quarters. We did however see growth in our ultrafast and gas laser product lines and expect our second generation PicoBlade II to fuel growth in fiscal year 2016 in applications such as glass cutting.

In Q3 both Optical Communications and commercial lasers had book-to-bill ratios below 1 due to a combination of orders that pushed into Q4 and having a higher than usual proportion of revenue from customers who previously placed longer-term orders with delivery dates spanning multiple quarters.

CCOP gross margin at 30.3% declined 210 basis points from a year-ago due to an unfavorable product mix from both Optical Communications and commercial lasers. Optical Communications gross margin was 27.9% and declined 140 basis points due to lower 3D sensing revenue from a year-ago level.

Q3 Optical Communications ASPs declined 4.7% sequentially, consistent with historical trends versus a 4.9% sequential decline in Q3 last year. Please note that the March quarter is seasonally weak as it typically experiences the largest quarterly price decline during the year.

Commercial laser's gross margin was 43.2% and declined 570 basis points due to a less favorable product mix.

CCOP operating margins of 8.9% was below the midpoint of our guidance range 8.5% to 10.5% and was down 260 basis points from a year-ago period, largely driven by lower margins versus Q3 of last year and higher than anticipated payroll related accruals. Looking forward to Q4, we expect CCOP revenue to be $202 million plus or minus $5 million.

We expect Optical Communications revenue to be up sequentially, driven by continued growth in datacom as well as growth in key telecom products. Commercial lasers are expected to be up modestly with solid state lasers coming off a seasonally weaker period and expected growth from our ultrafast laser products.

The lower proportion of higher gross margin commercial lasers in the overall CCOP revenue mix limits blended gross margin. This along with continued growth in critical R&D puts us at a segment operating margin in the 8.5% to 10.5% range for Q4.

As we look further ahead, there are several growth drivers we expect to benefit Lumentum over the intermediate to long-term. Datacom demand is expected to remain robust, particularly at higher data rates.

We are well positioned with our high data rate datacom portfolio, including QSFP plus CFP2, CFP4 and now our QSFP28 products which have strong customer traction.

Telecom metro build outs expected to begin in late calendar 2015 and into 2016 should drive significant ROADM and transport line car demand as well as demand for 100G transmission components and modules. Demand for our commercial laser products is also expected to be strong.

Our newly introduced kilowatt class direct-diode and high power fiber laser products including turnkey systems complement our existing solutions and position us well in the macro materials processing market.

Higher power version of our successful Q switch solid state lasers and ultrafast lasers specifically designed for OEM machine tool applications are being designed into our customers' tools now. Manufacturing these lasers using our low cost contract manufacturing model position us well in the micro material processing market.

We expect 3D sensing revenue to gradually recover as we have started to shift production units for new PCs and other electronics device applications. We believe this business could strengthen further over the longer-term as more consumer electronic devices increasingly incorporate 3D sensing capabilities.

As we transitioned from CCOP to Lumentum, we expect to be a more agile and greater business flexibility. We are well along in the efforts to establish Lumentum as a standalone company with separate dedicated facilities, dedicated IT, finance, marketing, HR, and other support functions.

Had the expected Lumentum standalone and public cost been borne by CCOP over the past 12 to 24 months, we estimate that our reported operating margins would have been approximately 4% plus or minus 0.5% lower than our historically reported CCOP segment operating margin.

Finally I would like to thank our employees, business partners and our customers for their strong support to get us to this point as well as we approach operational readiness in the coming months. Now I'd like to turn the call back over to Tom. .

Thanks Alan. We expect JDSU's fiscal fourth quarter revenue to be $423 million, plus or minus $10 million and non-GAAP operating margin to be 7.5% plus or minus 1 percentage point. Our non-GAAP EPS guidance is $0.11 plus or minus $0.02.

Caution continues to characterize carrier spending, impacting any segment results with most of the spending attenuation coming from one major U.S. Tier 1 service provider. However we are pleased with the gross margin expansion reflecting new adoption during the past year.

As we look ahead, we believe the Viavi Solutions is well positioned to capture opportunities created by the industry's transition to new network architectures and the need for increased network and application visibility.

NE is expected to be flat to low growth business as we strive to improve operational efficiencies and drive incrementally higher operating margins. The SE business represents a strong growth opportunity and we are striving for more consistent deferred revenue flow, which in turn would expand operating profitability.

USP business provides cash flow predictability and is pursuing growth opportunities in the consumer electronics, healthcare and government markets.

Our teams are excited as we approach our launch date as two independent and more agile companies poised to capitalized on the opportunities of advanced optical network adoption, fiber supplanting CO2 industrial lasers, the need for network and application visibility driving demand for NE and SE solutions and the continued adoption of optically variable magnetic pigment and other solutions for bank note anti-counterfeiting.

I would like to thank our employees, business partners and shareholders as JDSU enters an exciting new phase as Lumentum and Viavi Solutions. I'll now turn the call over to Bill to begin the Q&A session. .

Thank you Tom. I would like to ask everyone to limit their discussion to one question and one follow-up. Alex, let's begin the question-and-answer session. .

(Operator Instructions). Your first question comes from the line of Amitabh Passi with UBS. Please proceed. .

Tom, I guess if I look at just the financials at a high level, it looks like fiscal 2015, we’re going to exit again with revenues roughly flat from fiscal 2012. Earnings are now stuck in this $0.50 to $0.60 range.

Yes, you're going to down the path of separation, you streamline businesses, you've rid of flow, profitability segments, but yet we’re not seeing any incremental leverage in the model.

Is it time to maybe perhaps rethink that beyond separation there's something bolder or different acquired within the context of larger scale consolidation or divestitures or some other way to unlock value?.

Yes, obviously we haven’t been getting the top-line growth overall for the business. So that’s one of the main focuses. And as you saw probably in the package that went out with the earning slides, we are seeing quite a bit of growth in the deferred revenue and backlog for the -- the growth section of SE.

So we expect as we look out in time, does that start contributing more to the revenue line. So that will definitely help because we've been making pretty heavy investments in those areas. As well we have the $50 million net of cost coming out of the business structure, combination of about $8 million for Lumentum and the rest coming out of Viavi.

So that will help. But I think you can see the leverage in the model. The main thing is getting that top-line growth and I think we're well aligned in those areas where we believe that the operators and the data center folks, hyperscale guys are going to be spending money..

Okay. And then may be just as a follow up, so given that you have a backlog of over $100 million in SE, how do we think about revenues being recognized on the P&L, and then just on the $50 million of OpEx savings, should we expect that to start kicking in your first fiscal quarter i.e.

total OpEx on a combined basis down $9 million, $10 million may be more?.

Yes, I think as far as the 50 million you saw a little bit of it this quarter. It's a small amount. We expect most of it to start happening in Q1 of FY16 and it will cume over the quarters as we move through. In '16 there will be a little bit of a spillover into the first quarter of 2017 but the bulk of it will happen in FY16 is what our plan is.

And you can see a little bit of trickling out already but we do in some cases have additional spending going on just to get prepared for the separation et cetera. .

And the SE revenues?.

Yes, we are -- we will give more detail on how the SE revenues, the deferred and backlog will build and what part of that will be dropping in.

We did put, as I mentioned a slide in the deck that went out with the earnings package, that helped I think to understand how quickly the legacy products are dropping off and the kind of growth rate we're seeing in the higher growth of SE products for the next generation.

So I plan with FY16 as to give more granularity on that as far as how that's going to grow and what part is going to drop into revenue in each quarter..

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

Tom, I appreciate the growth in deferred revenues and how that should flow into the top-line for the SE business. On the NE side, it doesn’t seem to be growing. If anything, it's actually contracting and we recognize the CapEx cycle.

So there's some cyclicality in there, but also structurally very challenged here for the traditional NE business, considering it's still a large part of the organization and maybe your thoughts of reversing that trend for the traditional NE business as the SE business ramps?.

Yes, so as I mentioned and again showed in the slides, we have a large tier 1 customer in North America that has cut back their spending significantly. It's down about 30% approximately. So if you take that out, we're up in NE about 2.6% or approximately 3%.

So not the growth rate we want to see there, but we are seeing growth in other customers and we are diversifying.

And I think also the steps we're taking around virtualization of the instruments, what we call evolved instruments, tying those into the cloud and then those being grouped into our overall platform as instruments is going to also help with the sales.

But we don’t see that as a high growth area, but we have been seeing degradation there, especially around that largest customer. If that picks back up that will be beneficial. We're not planning on that right now. Again, we're looking at how do we grow in other areas as we move forward..

Okay, that's helpful. And Alan, maybe a question for you. If we look at the, your exposure to hyperscale datacenters, maybe your positioning, particularly with larger ones who are sourcing directly from you, and the move towards 100 gig, the pipeline of activity, just a little comment there would be helpful.

And if you're seeing more direct from these guys versus distribution?.

Yeah we do very little in distribution.

So the conversations we're having with the hyperscale datacenter guys is direct and I think as I mentioned during the script, the progress we made on our QSFP 2800 GIG product, where we can give those customers samples today of working products and I believe the feedback we've been getting so far is that we're the first ones to give working samples that meet the criteria they need.

It positions us very, very well to have a lead position as the transition in the hyperscale datacenters move from 40 gig to 100 gig. So I'm very encouraged with our progress and with our engagements with those guys..

Patrick Newton with Stifel, please proceed..

Yes, thank you for taking my questions. I guess Alan, I wanted to dive in on the laser side with the revenue definitely behind our expectations. Could you highlight if there was any share loss at all on the instrumentation out of that business. And then with fiber, you talk about strong demand post this inventory pause.

Can you help us quantify this or how quickly you can reach peak revenue levels seen in the prior September quarter? And then just a little bit more clarity on the gross margin side and helping us understand the 800 basis points sequential decline. You did touch on mix.

But I don’t think that really explains the magnitude of the down tick, especially when I think that you've communicated that the fiber laser business is margin accretive and was over 30% of the laser mix in this quarter..

I think you're only allowed one question. So as far as share loss, I don’t believe we've lost any share. I think if you look at the industries we participate in, the micro machining business is typically slower this quarter, in the March quarter as the holiday has gone by and there is capacity there. They look forward to the next season.

We'll see a pickup in our Q switched solid-state lasers where the margins are better than the average laser gross margin. As far as fiber is concerned, the drop in fiber laser revenue this quarter was really an adjustment in the inventory levels at our main customer. And we still don’t have revenues outside of our main customer, Amada.

So we have a whole portfolio of products that we announced at Photonics West that I think over the next year or so we should be able to add to our customer base. But we do expect that over the next couple of quarters we'll get back to the kind of revenue levels we had at our peak time on fiber lasers, not necessarily this quarter.

And then as far as the gross margin drop, we've been adding capacity which increases our depreciation. So as the revenue drops in lasers, it's very good on the upside and it's not so good on the downside because there is a fixed portion of our operation that doesn’t get absorbed..

And then I guess on the datacom side of the business, I really wanted to dive into if there is out size demand on the multi-mode or single-mode side of your portfolio.

And with visibility, can you talk about the growth potential of datacom over the next several quarters kind of weighing some of the opportunities you're seeing on hyper scale against the fact that more and more competition is really targeting this market. .

I'll let Chris answer that..

Hey Patrick, this is Chris Coldren. So the single-mode versus multi-mode question, so we certainly see strength in both. Obviously for us the higher speed, higher data rate is generally in the single mode products. And so I think for us that’s going to be where we're going to see. The largest growth drivers are increasing demand.

We definitely have strong multi-mode business as well but more at the 10 gig rates..

That answer your question?.

And your next question comes from the line of Alex Henderson with Needham. Please proceed..

So I was hoping you could just do a couple of clarifications. You said the enterprise weakness. I assume that’s the network instruments business.

Is that correct?.

That’s correct..

And can you give us any reason why that was particularly weak?.

I think it was really performance on our side and execution. So we're taking measures to improve that. But I think the market is still strong and our products that are in demand in the market, I think it was more of an execution issue on our side..

Second question, we've got a lot of seasonal noise and turbulence in the industrial laser piece.

To the extent that we were to look at this on a full year basis as opposed to just a quarterly up quarterly down kind of jerk around, what do you think the rate of growth of that business should be over the next couple of years? What is the trajectory that we should be anticipating?.

Yes, I think if you look at the overall lasers business, the growth rate of that market, of the total tam is probably mid-single digits. I think the places where we participate, where we’ve added things like the ultra-fast lasers and fiber laser, and more importantly the directly diode laser where we're replacing CO2 lasers.

I'd say that’s probably a low teens kind of growth rate, if you set aside seasonality and all that stuff. So I would expect 10% to 15% growth rate would be the norm over the longer term for our laser business..

And then one product tick question.

Can you give us an update on where you are on your 100 gig CFP2 coherent module for the long haul/metro market? What the timeline do you expect for sampling on that product?.

We had demonstration at OFC last month where we had our customers and to kick the tires and as I have said in the past, we believe that our product, while we're not first to sample, we'll be first to volume, because of the design aspects of a single chip, much like our tunable XFP, we have a single integrated chip with our tunable laser and modulator.

And we believe that we'll both be able to get the time to cost and time to volume that our customers need. I think we'll be sampling in the next few months with meaningful volume, not until really calendar '16..

That’s a dual chip, right? So the receiver is on a separate chip..

Receiver is separate, yes..

Your next question comes from the line of Rod Hall with JPMorgan. Please proceed..

I wanted to circle back around to the SE business in this slide 10 that you guys were showing on deferred revenue. I have a couple questions on that deferred revenue and then maybe one more on SE.

So I guess the first question is what is the gross margin profile of that deferred revenue? It seems at this point that it may not be all that great considering what's happening with your gross margin guidance for FE, but I'd like to hear from you what you think the profile of that is? Is it significantly below what we're seeing for NE? Just give us some color on that.

The other thing that I have a question on that deferred revenue graph is that the absolute level of it is pretty static, let's call it $100,000 to $120,000.

So I don’t -- I'm not sure I understand why you guys are so confident that that deferred revenue absolute level all of a sudden going to grow, which would then imply that we get growth in the SE/NE combined business.

But why wouldn’t that deferred revenue just top out with the mix shifting toward the growth businesses, but the absolute level remaining about the same?.

So I think as far as the gross margin, we ran over 70% this past quarter for SE. So we would expect what's in the backlog -- I don’t have the exact break down for you obviously, but I would expect it to be accretive to our overall margins for any SE. So it should be higher than what we're running overall today and bring the average up.

I think as far as the deferred in backlog, we've seen a pretty quick acceleration of the drop off of the legacy products to 2G, 3G primarily. We do think that’s going to slow down here.

It won't accelerate at that same rate, and we do see with what opportunities we have in front of us with the next generation of products, the opportunity to grow that at an even faster pace, because we're just really getting some of those technologies in front of customers. We've got them in the labs and sampling.

So we're not even into volume yet on a number of those products. So we would expect that to accelerate and we expect the legacy products not to come off at the same rate that they have been over the last two years..

Tom, I guess when people just stand back and they look at these numbers and the trajectory, the margins in SE, it's really hard to buy into the idea this is a good business for you long term, just to put it really bluntly.

So I'm just trying to understand what it is that you would say to people on the call here to convince them that this really is a good business to continue throwing investment after and chasing..

Yes, I think we have to see the path to get 50 million of revenue a quarter then we get to the profitability and then there is pretty high leverage in the model. You could actually see the jump up in year-on-year in the gross margins, even in a small increase in revenue. So you can see that leverage.

So it's really the leverage and it has to be the belief that we can get to the 50 million plus revenue a quarter, and at those type of gross margin level and slowing down the pace of the investment and R&D which has been very heavy over the last couple of years especially in the software development arena. .

Your next question comes from the line of Troy Jensen with Piper Jaffray. Please proceed..

Maybe start up with Tom, you've alluded to a little bit of caution here on Telco spending. With respect to the second half ramp, when would to start to seeing evidence or datapoints from your customers that we're actually going to experience second half ramp.

When do we kind of throw that out and then start to think about 2016?.

Yes, we would be pretty far into probably June month to see that, because we typically have book and ship in those products, and it's typically two to four weeks kind of time frame of lead time on those products that the operators buy that aren’t to more complex solution type products.

So we'll be into the June month I think before we really see that -- if we're going to see that ramp in the second half of the calendar year..

Understood. And then for Alan, you alluded to growth in CCOP coming from datacom.

Are you expecting Telco to be stable or decline here in June quarter?.

I think we should see some growth in telecom, especially as the large North America carrier starts deploying metro build outs in a meaningful way. I think if you just looked at our ROADM, quarter-on-quarter our ROADM revenue was up 30%. And that's just to do lab and first office deployment.

So I think we're going to see significant growth in the second half really around ROADMs and the Line Cards going into this Metro application, and that will also pull along 100 g components and modules as well..

If I could just throw one more in here, I know it's more than we're supposed to, but what are the chances of you guys actually doing the spin here before the end of your June quarter, given it is the end of your fiscal year and start the fiscal year fresh?.

Yes, I don’t think there's a high likelihood of that happening before the end of the June month -- the month of June..

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

A quick clarification that you may have given.

So I apologize if I missed it, but what percentage of the optical communications business came from datacom versus telecom?.

It was 23% datacom..

Great and..

71% telecom and 6% consumer and other..

That's right. Okay, yes. I got the 6% consumer and other then. That's where I missed. Okay, great. And then in terms of kind of a trending -- I wanted to touch a little bit on what was going on from a geographic perspective.

Part of it is I'm not sure whether there is a significant variation among the business units in terms of the geographic mix, but I'd like to get a better understanding of one, the implications of foreign exchange rate changes, and my guess is that that affects the NSE businesses more than the other portions, and also trying to get a better understanding, in particular the dynamic of Asia Pacific falling off significantly.

How much of that is seasonality and how much of that is ForEx and what other issues might be affecting that?.

So first of all your observation about it probably affects NE/SE more or so than the other two business units is directionally -- that's directionally true.

As far as the overall impact is concerned, if you did a comparison between this year and the Q3 of last year, basically locking in of the rate for this quarter as it was the same last year, the delta on revenue would be about $6 million.

The delta on OpEx would be just under $6 million, and we've said at many occasions, that the net impact to the bottom line is immaterial, but there definitely is downward pressure on both the revenue line and OpEx. That would not be you know the primary explanation of variations, however in geographic revenues.

That's just a mix and seasonality issue..

Hey Simon, this is Alan. Just to add to that, the vast, vast majority of the CCOP business is in U.S. dollars, but the currency change does make Japanese competitors maybe more competitive. And so I would say that that's what we're seeing impact, not necessarily an impact on foreign exchange directly with respect to our sales to our customers..

So that leads me to ask, and I understand what you just described; does that lead you to do some discounting in order to compete against those Japanese competitors who have some advantages now or do you maintain your pricing?.

It depends. I think market pricing is market pricing and so we're really focused on having products that no one else can make, and in the datacom space and as well as in the transmission and transport space. So where we have Japanese competitors, and they're qualified, yes, the market conditions different.

But as you can see from our ASP reductions last quarter, it was no different than it has been in the past. So I think our continued focus is leading edge products and technology that differentiates for our customers and add value to them..

So just to wrap up that point, is this a factor in Asia Pacific being down 21% sequentially in March..

I don’t think so. I think we saw some particular strength in North America with I think the CCOP products, optical communications and a couple of large customer here, and then we did strength in North America with some of our cable operators from a NSE standpoint.

So I think that was probably more timing of those orders and the strength in those two areas that drove North America a bit higher..

But why was Asia Pac down?.

It's primarily I think just timing of orders from what we've seen. I don’t see any, I don’t think it's pricing as you were asking about, and I don’t think there is any lost business there that we're aware of. Yes, keep in mind Simon, that the numbers we talk about are the ship to locations.

So they don’t always dictate that that’s where the customers are. So we have U.S. based customers that have a ship to Mexico. We also have that same customer ship into Thailand.

And so depending on their mix, I think that number may be misleading with respect to where -- where the end products for at least CCOP ends up because they could ship it into Europe or ship it into China or other parts of APAC, even if we ship it in to Mexico. .

That makes sense. .

Most of the commercial laser products show up in Japan I believe and lot of revenue and that down quarter-over-quarter. So that’s probably a good percentage of it as well. .

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

A couple of quick ones from me. I just want to revisit the SE revenue recognition issue.

I understand you're going to provide more color I think for fiscal 2015 of how that rev rec is going to work, but has the line moved again in terms of the rev rec into the P&L of that backlog in deferred revenue which you have been projecting to occur I think in Q1 of 2016.

So I'm just trying to understand are we going to get a big chunk of that defer come in into revenue for SE in September quarter? Or is that now moved into follow on quarters. And I understand you are going to give more color but I wanted to get it right now. .

It's a big question. We don't see a big chunk dropping into the Q1 FY16. It's going to be more linear and I think that’s primarily a location intelligence business and the getting to the VSOE and the timing of orders and mix of the customer base. So we don't see a big chunk of that dropping into Q1.

It's going to be more linear from what we see at this point. .

And then the guidance on SE, $39 million was just flat basically sequentially. Did that also include some of the execution issues you had seen in the network instrument business or is there something else going on there? It's not picking up and that’s a bit surprising in what is typically a seasonally strong quarter for your guys..

Some of it is continuing to build as a deferred revenue and part of it is that we -- although we feel that with the enterprise business our network instruments will see improvement, we’re not going to get back to the levels we had expected. So that’s going to take a quarter or two to achieve.

So that is a part of it and the rest is build-up of deferred on the next generation products. .

And then my last question is on Optical Communications gross margin balance. I think we understand the laser side but OC specifically, what drove the margins to decline there sequentially.

I know maybe the 29% last quarter was a bit abnormal, but still from the 2014 levels it's down and is it pricing, is it something else you are seeing and how do you expect that margin to trend in Q4 and maybe into 2016 fiscal timeframe?.

Yes, as you recall we had an ASP reduction in our Optical Coms business of 4.7% and we didn't keep up with that on the cost side. I think from a mix perspective, that also comes into play. Our 3D sensing revenue was at the low point. That absorbs a lot overhead in our fabs.

And so I think its combination of under absorption and caused by 3D sensing, the ASP decline in the quarter, that we’re working hard to make up for Q4 cost reductions.

And so I think as we expect gross margins to go up in Q4, because of a combination of lower ASP reductions and continued drive and cost reductions, as well as more favorable product mix as we go towards more 100 gig datacom products as well as our TrueFlex ROADMs. And but that we will be able to continue into the second half of the calendar year. .

So we get a bit of a pickup there or is it -- should we project it flat come from where we are today as we go into Q4 and then next year?.

We don't give guidance beyond the current quarter, but I would say that for this quarter we expect gross margins to be go up for both optical coms and lasers. .

And then maybe last one, what was the operating margin -- non-GAAP operating margin for the CCOP business on a standalone basis?.

Well, the segment operating margin was 8.9%. And then I think we said we've been pretty consistent if we were a standalone in this quarter then it would be another 4% to plus or minus to 0.5% of added G&A cost and public company cost that if we were a standalone company that’s where you calculate it..

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

Tom, I wanted to come back to the enterprise side of things and SE. Just because it's a little bit more of a new market for your but you've been in there for a while. Can you talk about what you've learned thus far in terms of selling at that space and when you're hoping to fix on the execution side of things? And then Alan just a follow up for you.

I know you're now -- I think it was a couple ago, a deal with Laser 2000 and it sounded like that was on the fiber laser side of things. Just wanted to understand what that agreement is and you talked a little bit about exclusivity.

So I just wanted to touch base on what exactly that is?.

Okay so I will start out on the enterprise side.

I think we saw this last quarter some fairly strong competition and may be the quarter before that and I think it's really the execution is how we get in there and compete against those fairly aggressive competitors and we have in the last I'd say four to six months brought in a new sales leader who I think is getting really good traction, and again I believe we have very good products and the execution coming out of the business unit on the development side looks pretty good.

So I think it's really getting -- being more aggressive in the markets that we're playing and I think the sales leadership is up to that and I think we're seeing those improvements, but it's not going to happen overnight..

And as far as the announcement on Laser 2000, I can't talk specifically about the exclusivity arrangement, but what I will say is that, that this puts a lot more feet on the street, knocking on doors and opening up opportunities for us to sell fiber lasers outside of our main partner. And that's the primary reason for the agreement with Laser 2000.

And they're a good group of people and they have a sales force that's already out knocking on doors..

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

I guess the first question here is just around the, on the customer that's down 32% year-over-year.

Is that -- can you talk about the products that are primarily affected here? Is it primarily the fuel test instruments? I'm just trying to understand you know also potentially what sort of makes you think or I assume you think that's kind of temporary, like is it possible that business never comes back or there are software solution service placing, fuel test long-term and perhaps there's some risk that doesn’t really recover? Can you just give us some confidence or commentary around that?.

Yes, I think primarily comparing year-on-year, it's primarily around the instruments business, and what we are seeing with the customers move to more software defined environment that what we're doing with virtualization of instruments tying to the cloud is something that they need and are looking at very strongly.

I think it's a timing of the transition and then we are do have in front of that customer more of the service enablement types of solutions, which again I think we're getting good traction in labs. In some areas it's just not being deployed in volume.

So we're getting through this chasm where the traditional products, their overall spend has dropped up off pretty significantly.

We'll see some of that pick back up we believe as the spending loosens up, and then we're going to need also make to shift successfully to more of the software service enablement types of products, which again we're working very closely with the customer and the initial feedback in a number of areas is positive but we need to see that volume actually happen..

Okay. And just as a follow up on, as a clarification here, calendar Q2 here [indiscernible] Q4 is obviously weaker than seasonal. You usually have a pretty big drop off in Q3 in part due to Europe. You talked about multi quarter bookings in CCOP.

What do you think sort of seasonality? Would you continue -- would you give us advice on how to model that? Do you still see that being seasonally weak or might that Q3 seasonality be a little more muted? Thank you..

You are welcome, I think you're seeing a bit of smoothing of the seasonality now if you look at the quarters -- the typically high quarters and the lower quarters are seeing a less of a variation. And I think as far as Europe our -- the business out of Europe was down this part quarter.

So I don’t you again expect the seasonality to hit as hard based on coming off of flatter business in Europe..

And our last question comes from the line of Richard Shannon with Craig Hallum. Please proceed..

Did you catch your comments Tom correctly that you saw some weaknesses in the mobility side for NSE, unlike the last I think a couple of quarters where you're seeing some strength.

And so can you help us understand the dynamics there?.

I think as you saw probably reported by a couple of large operators, at least in North America, the wireless spend has been down pretty significantly this last quarter or two. So that's I think reflected in our overall revenue there. I think -- again, we have some very products out there. I think we're getting good traction in the market.

It's been a year-on-year you know we've seen growth around mobility in some areas growing very rapidly. I think when some of the major carriers are down in their mobility spend it is going to impact us. I believe that part is timing.

I think mobility will continue to play a really important role in the network and help people communicate and I think it's a temporary lull on the mobility side..

Okay, and to be clear then, I would suggest that the mobility is concentrated in the U.S.

Is that a fair decision?.

I mean our volumes in the U.S. are heavy, but it's not, I wouldn’t say concentrated. We do, do good amount of mobility business around the globe. The large carriers, that definitely have an impact that are based in North America..

My follow up question is regarding 3D sensing. I think you said you're expecting some improvement here based on some PC applications. A couple of things around that topic. First of all Intel has been talking about this general segment. I'm assuming you're associated with that in some way. If you can clarify that in any way.

And also how fast and far can this move from what perhaps maybe this bottom? I know you're long way from a peak a number of quarters ago, but can you give us a thought process for thinking how much that can improve over the next few quarters or so..

No. I can't comment on specific customers. I think that the non-disclosure agreements we have with all of our customers prohibits that unless they give us authorization to talk about it. I will say though that PC applications that we're participating on are typically today on high end PCs.

And so when or if that transfers first down into the mid-range or the $599 PC, when it becomes – that’s really where the sweet spot is and we're not there yet.

And so I would say that when that happens, then we should be able to see that business pick up dramatically, because today the majority of the models that we're involved with are more in the higher end PCs where the cost points aren’t as sensitive to added features and added cost.

Does that make sense?.

And there are no additional questions in queue at this time..

Thank you Alex. We will be participating on a number of Investor Conferences and events this quarter as listed in the supplemental earnings slide deck posted on our Company's website. This concludes our earnings call for today. Thank you, everyone..

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