Good day, ladies and gentlemen, and welcome to the JDSU Fiscal 2007 Second Quarter Earnings Call. My name is Danielle and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). I'd now like to turn the presentation over to your host for today's call, Jacquie Ross, Investor Relations. Please proceed.

Thank you, Danielle, and welcome to JDSU's fiscal 2007 second quarter Earnings Call. Joining me on the call today are Kevin Kennedy, Chief Executive Officer and Dave Vellequette, Chief Financial Officer. As always, I'd like to remind you that this call is likely to 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 Form 10-Q filed for our quarter ended September 30th, 2006. The forward-looking statements including guidance provided during this call are valid only as of today's date, January 31st, 2007, and JDSU undertakes no obligation to publicly update these statements as we move through the quarter. Our comments today will include non-GAAP measures. A detailed reconciliation of these non-GAAP results to our GAAP results, as well as a discussion of the usefulness and limitations is included in today's news release announcing our results and available on our website at www.jdsu.com. Finally, and as a reminder, this call is being recorded and will be available for replay from the investor portion of our website at www.jdsu.com/investors. I would now like to introduce JDSU's Chief Executive Officer, Kevin Kennedy.Kevin Kennedy: Good afternoon. I am very pleased to report that our second quarter results included a number of five-year highs for JDSU, including revenue, gross margin and net income on both a GAAP and non-GAAP basis. These results reflect the ongoing impact of the two-prong strategy we set in motion almost three years ago; namely, to increase revenue through organic growth and diversification, while also executing a far reaching and ambitious program of cost reduction. Highlights of our…

Thank you, Kevin. Before I start, please note that all numbers are non GAAP unless I state otherwise. GAAP revenue for the second fiscal quarter of 2007 was $366.3 million. Non-GAAP revenue of $366.4 million, which includes revenue associated with acquisition accounting, was up 15% sequentially and up 16% from the same quarter a year ago. Second quarter non GAAP gross profit of $148.9 million or 40.6% of revenue improved from $110.3 million or 34.7% of revenue last quarter. Non-GAAP gross margin benefited primarily from the fact that 46% total revenues were derived from our higher margin Communications Test and Measurement business. Targeted cost savings of $2 million were also achieved in the quarter and contributed to the overall gross margin improvement. Non-GAAP operating expenses of $129.4 million were above last quarter's $117.3 million. The increase in expenses resulted from increased Test & Measurement selling costs, increased R&D investments in our Optical Communications business and an increase in our reserves. As a percentage of revenue, non-GAAP operating expenses of 35.3% declined from 36.9% last quarter, inline with our 35% to 38% range. Second quarter non-GAAP net income up $30 million or $0.13 per diluted shares, improved from $6.8 million or $0.03 per diluted shares last quarter and compares to a net loss of $3.5 million or a net loss of $0.02 per share in the year ago quarter. A detailed reconciliation of our non-GAAP results to our GAAP results is available in today's press release. Our non-GAAP results include amortization of acquired technology and intangibles of $16.9 million. The $8.7 million charge related to stock-based compensation, $5.5 million charge for restructuring, primarily associated with our Ottawa manufacturing transition in our Santa Rosa site consolidation and a $28.2 million gain on sale of investments. Including these items GAAP net income of…

Thank you, sir. (Operator Instructions). Your first question will come from the line of Michael Genovese with Citigroup. Please proceed.

Hey, thanks a lot and congratulations guys on a nice solid quarter. I am wondering -- I want to ask about seasonality in both businesses. First in Test & Measurement, if you can help me understand now that you've had this business in your wings for a while, why do you think -- what is the seasonality factor of the strong [4Q] seasonality, is it budget flush, is it carriers emphasis on timing of subscribers at the end of the year? I can't imagine it's for weather. So, I would like to get your views there. And then secondly, in the Optical business, it sounds like there are supply chain movements impacting near-term growth. But what are your views on seasonality in Optical? Is that basically gone away and is your traffic growing in the same amount or roughly in the same pattern every quarter, or do you expect see seasonality throughout the year in the Optical business? Thanks.

Mike, we've been -- thanks for the question. We've been pretty consistent in relative to the Test & Measurement business that impacts the December quarter is a budget flush phenomenon and we saw that again. So, I don't think there is any much more to say that it was consistent. We were pleased with the performance of our team. It became aggressive on all peers, but the seasonality piece is clearly not -- is clearly a piece of budget flush. So, I'd say the magnitude of what experienced at a piece of good performance and execution, but the general phenomenon is a budget flush phenomenon. Relative to the Optical comps, I'd say we don't see a huge amount of seasonality in general, although this particular quarter tends to be the most uncertain or have some of the least visibility. I'll let Dave comment on that.

Yeah, I think in the Optical comp, if you look at a year ago, we saw the benefit from Q2 to Q3 from tunables. And this year we are seeing more of an impact from the rationalization of the inventory levels from our customers and as they try to go to the lean programs. So, that's really a seasonality issue, as much as it's the -- our customers getting their arms around their inventory levels and reducing their inventory -- those inventory investments.

Okay.

Your next question will come from the line of Subu Subrahmanyan with Sanders Morris. Please proceed.

Thank you. A question on margins. Just if you look at the near-term margin goals that you've achieved, can you look out over the next two quarters and talk about what longer term margin goals are going to be? And also, in the near-term, I understand the mix is clearly a big variable, but in the past you've talked about getting the classic JDSU business margins to -- first over 30% and a longer term goal of over 40%, can you give us a sense of where you are in that process?

Sure, Subu. I'd say if I were to take two book-ended goals, the nearest term goals to get the 40% gross margin to be a sustainable and what I would recall mix -- benign to mix, if you will. So, we could -- it wouldn't matter what the mix of contest versus optical comps was per say in a reasonable range to get that to 40%. And so, we'll be spending the better part of calendar '07 to do that. I still believe that for the nature of the portfolio that we have relative to mix of contest and where I think the other businesses will grow, the potential for this company as a portfolio company to achieve a mid-40s gross margin is still something that I intend to try to drive the company to. I'd say the last pieces as we still have a lot of margin improvement I think in number of our segments, clearly optical comps has room to grow. Contest ended up operating with the particular mix it had this quarter at the high-end of our -- I don't know, about 55% to 59% range, something like that. So, very good margin performance there. Lasers, as we get more of a solid state space, we have a significant number of margin points to grow there. And I think we still have restructuring that will deliver margin improvements for the AOTP. So, that's really why I say that the story here becomes the ongoing improvement of the leverage in each of the businesses that we have. We are not near, certainly in the JDSU classic businesses; we are not at where the potential of those businesses is steady state. Okay?

Your next question will come from the line of John Anthony with Cowen and Company. Please proceed.

Good evening guys. I apologize if you already went over this, but could you give any detail on the breakdown of the ROADM shipments? Have you started shipping any of the WSS with channel monitor?

We have some in the market. The one that we just announced, we have not begun to ship; we just announced it this quarter. And the only -- we haven't given a breakdown between the different technologies. We just said that in aggregate across the liquid crystal MEMs and waveguide technologies, we shipped over 10,000.

Could you give us a little more detail about whether the 10,000 units' bias is one technology versus another?

We haven't broken it out and I certainly wouldn't know that detail as I am sitting before you.

Okay.

It's really dependent upon which customers are shipping into what franchises, to be honest with you.

Your next question will come from the line of Ehud Gelblum with JP Morgan. Please proceed.

Hi, thank you.

Hey, Ehud.

How are you? A couple of quick questions. Couple of things, Dave, you said I though were kind of interesting. One is that ASPs had declined in the higher end of your 3% to 4% range. And then, Kevin, you had mentioned that optical components you thought were going to be growing in '07 at the higher end of your 5% to 15% range. Sort of not opposing comments, but ASPs are little bit more aggressive from the decline than you had thought, but revenue up at the higher end at the point of volumes is very strong. If you can talk about the (inaudible), is the decline in ASPs is actually causing a little bit of the extra volume or is there pricing pressure that's causing that, or why the ASPs are down if demand seems to be so strong? And then the other thing that I was interested in, Europe was incredibly strong. Correct me if I am wrong, Test & Measurement does sale at Europe, but not a lot? So, the strength I am guessing in Europe was not Test & Measurement, and does that mean that Optical Components was incredibly strong in Europe? But where was that European strength coming from? I guess the converse to that is, in fact it's Optical Components that was strong in Europe, does that mean it was weak in the U.S.? If you can just kind of help us understand the dynamics?

Yes. I will try to deal with them in a reverse order. It turns out that comp Communications Test and Measurement typically is pretty strong in Europe. If you remember, the genesis of that company included the world headquarters of [Waldoman and Gerlman] WWC -- or WWG. So, we do have a strong footprint and base in Europe and we had good growth there this quarter. Relative to what you could potentially be posing as are they congruent or incongruent observations about the growth rate of optical components and ASPs, I think we have simply said that over the last several years, we have seen just 2% to 4% per quarter erosion, and so this was no different other than we sought on the high-end of it. Certainly, customer concentration would tend to bias towards the high-end. And so, I think last call we had mentioned that as Lucent and Alcatel, Nokia, Siemens, or Sony Ericsson and so forth are getting together, they will try to apply a greater level of buying power because they have larger volumes and that kind of interaction is certainly occurring. The good news is, is that broadband deployments are continuing to be driven out and therefore revenues are continuing to be in this double-digit range. So, I don't think there is anything incongruent. The dynamics driving ASPs in my mind are industry consolidation and the dynamics driving swift absorption of Optics is really broadband build-outs and clearly bias towards metro and clearly bias towards these agile optical products. Does that help?

And your next question comes from the line of [Jim Powel] with GMP Securities. Please proceed.

Thank you very much. Quick one on the lean programs that you mentioned in your statements, does that mean going forward that you are going to have higher inventory that you are going to be carrying as we've seen that from some of the EMS guys? And then a quick one, I think missed on net gain on sales estimates, is that real estate or something else?

The first question on -- let me handle the investments. We had investments in a company called IPG that went public during the quarter and we sold that investment. That's the single biggest contributor to that investment profit we have there. As far as lean initiatives go, lean initiatives -- our customers would like us to carry more inventory with those initiatives. It's a balance that we are trying to work out, because we need to improve our churns in the inventory area. So, we are working with our customers to meet their needs from lean initiatives and we have to balance that with the inventories levels. Our goal is to get these churns above the core churn's range and right now we are at about 3.9. So, we need to improve those churns. So, it's a balancing act [footprint].

Yeah, I'd say the biggest impact that the lean initiative will bring is, one is the level of integration between the supply chains we'll have to increase. So, we'll look more like an extend factory. I think the second piece is we will have less visibility, because we will be pressed to improve our lead times, and as we focus on improving our lead times, we will probably have lower backlog this time coming into the quarter. So, visibility will go down. I don't think it's already tent right now to allow inventories to move in a negative direction based upon lean initiatives per say.

Your next question comes from the line of Paras Bhargava with BMO Capital Markets. Please proceed.

Good afternoon guys. A question on -- Kevin, you made a comment -- I think I heard you right saying that you'd like to get the company to 45% gross margins and I figured that means 10% operating margins given your OpEx range. I am wondering if you have a timeframe for that? And then secondly, I am picking up that some of the newer players in the market [OPD] and Opnix, some of the Chinese guys are injecting a lot of pricing pressure into the market. And is that primarily the reason that you are seeing pricing increase or is there some other dynamic?

Sure. Right now, I don't plan in giving you a specific timeline for the 45%. I think, as I have mentioned on these calls before, I believe the asset is capable of it. The first thing that we have to do is get the asset delivering against a sustainable 40% and that's this year's work. Relative to the pricing pressure, the most significant piece is in fact that we've got a level of industry consolidation occurring. You know picking area like ROADMs today, there is probably some place between 12 and 14 suppliers of ROADMs and there is probably only 10 people that could be customers of them. So, any industry where you have a one-to-one relationship between customer and supplier, you will probably operate at lower gross margin structurally than where you have thousands of people per supply. So, I'd say that the customer concentration is the number one issue. You are right, more competition, but Optics is a place where we always have a lot of competition in general. And then -- and so, I think that's the story of customers consolidations. Hope that helps.

Your next question will come from the line Jeff Evenson with Sanford Bernstein. Please proceed.

Do you thinking through your growth rates year-over-year in the Optical Test and Measurement business? What are you expecting for the underlying fiber-to-the-home deployments and demand and how that impacts your field sales?

Jeff, I don't think we have a point of view on what kind of pond or other growth rate is required to achieve our numbers. Right now, a lot of our numbers are coming from -- we probably think more in terms of CapEx sales and sort of build outs of cable operators, how many head-ends are being tested and so forth. So, I don't know of any calculus that we use that simply look at homes past to the fiber. We probably are simply looking at spending and how much is going into next generation networks and so forth. So, that's the way we sort of gauge it.

Your next question comes from the line of Ajit Pai with Thomas Weisel Partners. Please proceed.

Yeah. Good evening and congratulations on a very solid quarter.

Thank you, Ajit.

Couple of quick questions, the more significant one is about the communications products business. When you are just looking at the Optical Components business and seeing the current profitability and assuming that there isn't any further consolidation within the components business, so no change in industry structure. What kind of margins do you think just with the kind of demand growth that you are seeing, current pricing trends and with the current set of level of concentration in your customer base, do you think that you could get to you 18 months to 20 months out in an operating margin basis?

About a year ago, we told people that we thought this industry could achieve between 30% and 40% gross margins. I think some of the people there are new players and unburden from moving factories to China. I've already demonstrated that they can operate within the 30% to 38% gross margin range. So, I think the current industry structure has worn up the hypothesis of what the range will be. I think it's incumbing upon us to continue to move our margins into that 30% to 40% range. So, the day is right there I think for the industry.

(Operator Instructions). Your next question will come from the line of Jeff Osborne with CIBC. Please proceed.

Great, good afternoon. You mentioned that the submarine market appears to be hitting up, I was wondering, if you could expand on that? And then secondly, was the budget flush that you saw on the test side notably stronger in the cable business products versus Telco, any thoughts there?

Yeah. So, I'd say -- I think you used the word hitting up. I'd say a year ago in a particular quarter, submarine sales would be measured in hundreds of thousands of dollars or certainly less than $1 million. Today, there are millions still relatively small compared to $300 million a quarter, but have grown significantly year-over-year. Relative to, are there differences in spending or budget flush, if you will, between cable operators and telecom operators, I think it's hard to know the specific motivation. What I'd say is that we have the benefit of having some new platforms that fall in confluence with the fact that the cable operators, while the big telecom operators are merging are continuing to try to build out and bring services up. So, I think it was brisk spending for a number of reasons. Some portion of that in cable operators was a budget flush; some I think was opportunistic to build out, while the telecom operators are dealing with their integrations. And so, it was good business for us and we did have the benefit of a new platform this quarter.

And your next question will come from the line of Brant Thompson with Goldman Sachs. Please proceed.

Hi, I was wondering, if you could -- it seems like there is a number of factors influencing the top line trends over this year, lean manufacturing, consolidation of customers, consolidations of other players in the industry. When do you think that we are through some of these, if you could maybe handicap the impact from the lean manufacturing shifts if that is an '07 issue likely not in '08, as they -- could you come and kind of handicap of what time period you think you are most affected by someone, does that kind of left? Thanks.

Sure, Brant. We mentioned in the script that on the contest side, we saw two operators that had actually been engaged in consolidation back last spring. They began to begin spending again. So, the observation from at least two anecdotal situations was that was about -- it was measured in quarters not years. So let's call three quarters, plus or minus one. And so, based only empirically on the evidence that we have, we would say that these kinds of consolidation things on the operator side should largely expire through the end of the second half of calendar '07. On the network equipment manufacturers, where their supply chain rationalizations, I think people are moving very, very aggressively. I think we're beginning -- we saw the effects of that this quarter. We will see little bit more next quarter. I doubt that it will be left into the fourth calendar quarter of the year and in fact, it will probably begin to get later for sure in the second half. So, I think the real message is, we had over three quarters of our Optical Components product lines by growth, hopefully. We saw the Metro grow with the great help. And so therefore, I still think that the climate is favorable, but one big customer that purchase inventory can be a challenge in any quarter and that's the bits and starts that is typical in this market, of course those are helpful concepts.

(Operator Instructions). Your next question will come from the line of Todd Koffman with Raymond James. Please proceed.

Yeah, just a follow-up, clarification in the Optical Communications market. In your opening remarks you had said that the inventory worked down was a multi-quarter phenomenon and then you went on to say that -- I think you said that that segment could grow at the upper end of the 5% to 15% range. When you were referring to the multi-quarter phenomenon, were you talking about multiple quarters from this starting point going forward or did that already include the December quarter work down that it sounds like you experienced as well?

The reference was a year-over-year comparison of numbers. So, we think that fiscal year over fiscal year, there will be the growth rate that we had established. That includes what happen in fiscal Q2, our sense what we will see in fiscal Q3, and a best outlook, if you will, for fiscal Q4.

Your next question comes from the line of Michael Genovese with Citigroup. Please proceed.

Can you hear me?

Yeah.

Okay. Great. Couple of questions of ago, I think you may have referenced to this, but I am still looking for clarification on the comment you made about two carriers that came out of consolidation that you've already seen a recovery in spending now. Did that referred you seeing the recovery in spending in the quarter just reported or are you starting to see recovery in spending from these carriers in the current quarter that we are in right now?

In the quarter that we just reported.

Okay. Great, thanks.

And ladies and gentlemen, there are no more questions in the queue. At this time, I'd like to thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.