JDS Uniphase's CEO Discusses Q3 2012 Results - Earnings Call Transcript

JDS Uniphase (JDSU)

Q3 2012 Earnings Call

May 02, 2012 5:00 pm ET


Cherryl Valenzuela -

Thomas H. Waechter - Chief Executive Officer, President and Director

David W. Vellequette - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

David W. Heard - Executive Vice President and President of Communications Test & Measurement Business Segment


Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

Nikos Theodosopoulos - UBS Investment Bank, Research Division

Kevin J. Dennean - Citigroup Inc, Research Division

Ehud Gelblum - Morgan Stanley, Research Division

Nathan Johnsen - Pacific Crest Securities, Inc., Research Division

Mark Sue - RBC Capital Markets, LLC, Research Division

Natarajan Subrahmanyan - TheJudaGroup, Research Division

Michael Genovese - MKM Partners LLC, Research Division

Georgios Kyriakopoulos

James Kisner - Jefferies & Company, Inc., Research Division



Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 JDSU Earnings Conference Call. My name is Keisha, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Ms. Cherryl Valenzuela, Senior Manager of Investor Relations. Please proceed.

Cherryl Valenzuela

Thank you, operator, and welcome to JDSU's Fiscal 2012 Third Quarter Financial Results Conference Call. Joining me on the call today are Tom Waechter, Chief Executive Officer; and Dave Vellequette, Chief Financial Officer. David Heard, President of the CommTest business segment, will join us today during the Q&A session of the call.

I'd like to remind you that this call will include forward-looking statements about the future financial performance of the company. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to look at the company's most recent filings with the SEC, particularly the Risk Factors section of our Annual Report on Form 10-K filed on August 30, 2011. The forward-looking statements, including guidance, provided during this call are valid only as of today's date, and JDSU undertakes no obligation to update these statements as we move through the quarter.

Please note that all numbers are non-GAAP unless otherwise stated. A detailed reconciliation of these non-GAAP results to our GAAP results, as well as a discussion of their usefulness and limitations, is included in today's news release announcing our results, which is available on our website at www.jdsu.com.

As a reminder, the quarterly earnings press release, supplementary slides and historical financial tables are posted at www.jdsu.com/investors under the Investor Resources section. Finally, and as a reminder, this call is being recorded and will be available for replay from the Investors section of our website.

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

Thomas H. Waechter

Thank you, Cherryl, and good afternoon. I will provide an overview of our March quarter and market trend before handing the call to Dave for a more detailed discussion of our financial results.

JDSU delivered fiscal third quarter revenue of $409 million, within $1 million of the lower end of our guidance range. The March quarter, typically, has a seasonal revenue decline due to the timing of budget releases by carriers. This year, we experienced a later-than-expected budget and order release cycle. In addition, there has been continued cautious spending by European customers and a higher mix of deferred revenue from software and solutions sales.

In spite of the slow start to the quarter, book to bill was above one for JDSU, as well as the CCOP and CommTest segment. CommTest had approximately 50% of its bookings take place in the last 4 weeks of the quarter, which impacted revenue by approximately $3 million. The AOT segment's book to bill came in slightly below one, following exceptionally strong bookings in December.

Improved gross margin from CommTest and disciplined control of expenses resulted in an operating margin of 7.3%, at the high end of our guidance range. Each of the business segments was within or above the operating margin guidance ranges we previously provided. EPS was $0.11, and we continued our long streak of positive cash flow from operations. Although we saw lower-than-expected revenues in the quarter, I am pleased with the progress we have made towards obtaining CommTest and AOT target business models, along with a strong end of quarter booking.

During our Analyst Day in February, we presented business model targets and action plans for CommTest and CCOP. Specific actions we have taken include the following. In CommTest, a greater mix of software revenue led to a sequential increase in fiscal Q3 gross margin. We also took steps during the quarter to reduce our internal manufacturing support infrastructure, and we are working with our vendors to reduce our cost of materials. These actions are a part of a set of initiatives aimed at capturing gross margin improvement of 3 to 5 percentage points and operating efficiencies of 2 to 3 percentage points for the CommTest segment by the December quarter. Our confidence continues to grow that we will achieve the CommTest target model.

In CCOP, we communicated a similar set of initiatives. In fiscal Q3, we completed the transfer of our fiber laser manufacturing to Asia. A number of differentiated products related to Self-Aware Networks will launch by calendar year end and contribute favorably to product mix. We continue to aggressively implement cost reduction and supply chain improvements across CCOP. AOT's operating margin of 33% for the March quarter was within the target model.

Now to the market drivers and line-up of innovative products for our core markets. As we outlined during Analyst Day, JDSU's core business focus is on the network and providing anticounterfeiting solution. These 2 areas drive the primary growth of our business. Market drivers are strong and continue to strengthen for both networking and anticounterfeiting. We did, however, continue to see a gap between the strength of the network drivers and the level of spend by the network operators. We anticipate that this gap will close in the midterm, as network capacity remains stretched across the globe.

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