Jacquie Ross - Director of Investor Relations Kevin Kennedy - CEO Dave Vellequette - CFO

Michael Genovese - Citigroup Subu Subrahmanyan - Sanders Morris John Anthony - Cowen and Company Ehud Gelblum - JP Morgan Jim Powel - GMP Securities Paras Bhargava - BMO Capital Markets Jeff Evenson - Sanford Bernstein Ajit Pai - Thomas Weisel Partners Jeff Osborne - CIBC Brant Thompson - Goldman Sachs Todd Koffman - Raymond James

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.

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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 second quarter results include non-GAAP revenue of $366.4 million, up 15% from last quarter and up 16% from the same quarter a year ago, primarily due to seasonal strength in the Communications Test and Measurement business. Non-GAAP gross margin of just under 41% was up from 35% last quarter and from 36% in the same quarter a year ago. Segment mix was the primary driver, although gross margin improved across all four businesses during the quarter. Importantly, we achieved the first positive non-GAAP operating margin result in almost six years, with non-GAAP operating income of almost $20 million or about 5% of total revenue. Additionally, the second quarter represented our fifth consecutive quarter of positive non-GAAP EBITDA, which increased more than threefold sequentially to about $34 million or 9% of revenue. Moving to the bottom line, JDSU delivered the second consecutive quarter of positive non-GAAP net income increasing to $30 million from just under $7 million last quarter and from a loss of $4 million in the year ago quarter. On a per share basis, non-GAAP earnings of around $0.13 per diluted share compares to the $0.03 per share last quarter and to a loss of $0.02 per share in the same quarter a year ago. Finally, the company book-to-bill was once again greater than 1. Last quarter we shared with you for the first time a business model that we were targeting for achieving during the fiscal 2007. Targets included a non-GAAP gross margin in excess of 40%, non-GAAP operating margin in the range of 2% to 5% and non-GAAP EBITDA in the range of 6% to 9%. We met or exceeded each of these targets in the second fiscal quarter. The early achievement of these targets was primarily the result of very strong seasonal performance in our communications test and measurement segments. Our objective for the rest of the calendar 2007 will be to drive improved efficiencies across JDSU in order to achieve the targeted model on a sustainable basis. Dave will give you his regular updates on our progress later in the call. Before I address each of our businesses in turn, I'd like to share a few observations from Q2 regarding the broader environments surrounding both our Optical Communications and Communications Test and Measurement businesses. First, we observed no change to the underlying drivers of investment in new or upgraded broadband networks, the proliferation of rich media content and increasingly aggressive competition from cable and Telco service providers. Second, industry and operator consolidation continues to evidence lot of spending in some franchises. Initially, pauses are associated with uncertainty around the timing and completion of M&A transactions. Later, pauses relate to supply chain rationalization of new combined entities. This said, we did observe in our Communications Test and Measurement segment that some spending recovered as two customers began to emerge from this multi-quarter transition. Regarding sales of our Communications Test and Measurement products, we saw growth across all three geographic regions. Tier 2 operator spending continues to support both and sales to cable operators were particularly aggressive. With that, I will now update you on each segment on each segment in turn. After four consecutive quarters of growth, Optical Communications declined 4% to about $133 million from a strong $138 million last quarter. Year-over-year, second quarter revenue grew 21%, and for calendar 2006, Optical Communications grew 27% from calendar 2005, highlighting the ongoing favorable environment. As noted in our preliminary announcement a few weeks ago, our Optical Communications segment was impacted by supply chain and inventory rationalization by certain customers during the second quarter. Bear in mind that roughly 80% of our Optical Communications revenue derives from our top 20 customers in any given quarter. During the second quarter, five of these customers were involved in consolidation activities and an additional three customers were working with us to address their lean manufacturing initiatives or inventory management. In general, JDSU and other suppliers will be expected to offer shorter lead times to enable customers to carry smaller inventories going forward. As a result, we believe that some Optical Communications customers ordered less during the second quarter as they work through existing inventories. Of interest, our subsystems business was impacted most by the transition to shorter lead times. In fact, it was the only sizeable exception to a quarter of growth in nearly every element of our Optical Communications business with particularly strong performance in high-power lasers and modulators. Based on discussions with customers, we suspect that inventory and supply chain rationalization activities are likely to be multi-quarter phenomenon that will continue to hamper visibility. Nonetheless, we remain confident in our end markets and believe that the optical communications segment will grow at the upper end of our previously targeted 5% to 15% range for fiscal 2007. Within the segment, metro targeted products continue to grow. Tunable lasers enjoyed ongoing strong demand and with our new capacity coming online, we expect to ship twice as many in the third quarter as we shipped in the second quarter. Our Agile Optical Networks portfolio including tunable now represents more than 20% of the Optical Communications revenue and has grown more than 50% from the same quarter a year ago. During the second quarter, we announced that we had shipped more 10,000 ROADMs, once again highlighting JDSU's leadership. JDSU's ROADMs are carrying live traffic in Tier 1 networks today, and we remain the only company that offers all three of the leading ROADM technologies. Client activities for the next generation products continue to be strong with all of the major equipment manufacturers, and during the quarter, we further expanded our ROADM portfolio with the introduction of a new Wavelength Selectable Switch with integrated channel monitor. Moving to other elements of our portfolio, we experienced record shipments for our 980 Pump used power optical amplifiers. Our leadership position in the pump segment also enables JDSU to participate in the small but growing submarine opportunities. Our lithium niobate modulators driven by the growing demand for 10-gig lengths grew by over 20% compared to the previous quarter. In the datacom market, we continue to hold the leading position in the storage area networks segment, thanks to our 4-gig fiber channel offering. The Communications Test and Measurement segment delivered revenue of about $168 million in the second quarter. Coming off a lower than expected Q1, this represented an increase of 44%, in large part due to strong year-end spending by certain customers. Additionally, improved operations and sales execution also contributed to higher revenues following changes made in the first quarter. Although quarter was presented by sequential growth across all elements of the business, our field services group performed particularly well. Adoption of our HST triple play telecom test platform continues to grow with more than 20,000 units shipped to-date and several new multimillion dollar orders closed during the second quarter. A cable version of the HST known as our DSAM also performed well. During the second quarter, we closed our largest deal ever for this product highlighting a very strong quarter in terms of demand from cable operators. To give you an idea of the scale, this quarter two cable operators were included in the list of JDSU's largest eight customers versus nine just two quarters ago. Our field service solution for fiber optic test also performed well, driven by continuing strong acceptance of our T-BERD 8000 fiber to the curb on the [test systems]. For JDSU, service assurance is an area of strategic importance. The acquisition of Casabyte was closed on January 23rd extends JDSU's broadband triple play test capabilities into the triple play and we are excited by the opportunity to expand our portfolio to help customers address the complexities of fixed and mobile networks in an emerging multi-service rich media environment. Following receipt of Frost & Sullivan's 2006 Growth Strategy Award, our IPTV portfolio was further validated in November when JDSU was formally selected by Alcatel as a Test & Measurement partner. As a leading innovator in this area, we continue to expand our IPTV-related product offerings to enable customers to initiate and maintain reliable services at a lower cost. For example, during the second quarter we added IPTV transport stream monitoring for QT-600 Ethernet & Triple-Play Probe. Consequently, JDSU offers the only test solution on the market today that addresses quality of service from head end to the home. Another first, our 40-gig ONT Optical Transport platform is enjoying strong adoption by network equipment manufacturers and operator labs. It is the only portable single-box solution market with 40-gig and advanced cheater test capability. Our Communications Test and Measurement business has historically enjoyed very strong relationships with carriers, so we are very pleased with the opportunity to continue to expand our presence with equipment manufacturer. In fact, since being acquired by JDSU, bookings for our Communications Test and Measurement business with network equipment manufacturers have more than doubled. For the segment as a whole, year-over-year revenue growth was 15%. However, adjusting for the revenue associated with our acquisition of Test-Um in May last year and execution-based revenue push outs from last quarter, year-over-year revenue growth was in the middle of our 6% to 12% projected growth rate. Following a seasonally strong December quarter and consistent with historical trends, revenue for this business is expected to decline in Q3. While seasonality hinders easy understanding of trends in this segment, we remain very pleased with the overall trajectory of the business. We now expect fiscal year revenue growth in the range of 8% to 12% when compared to adjusted fiscal 2006 revenue of almost $520 million. Our Advanced Optical Technologies segment delivered revenue of 40 million during the second quarter, up 3% sequentially but down 2% from the same quarter a year ago. You would recall that this segment was in the midst of significant restructuring a year ago, so the achievement its second consecutive quarter of growth is notable. We expect consolidation activity at segment Santa Rosa's site to be complete by the end of the fiscal third quarter. That in mind, we continue to incur expenses associated with the transition that you can see from segment report that benefits are being realized. On the commercial laser and photonic power business continues to grow in the second quarter with revenue of $25 million, up 4% sequentially and 39% year-over-year enabled by strong adoption of our solid state offer. The transition of manufacturing out of Santa Rosa was completed on schedule during quarter contributing to an improved operating margin of 9% compared to 7% last quarter. JDSU continues to innovate in solid state and fiber lasers applying the company's broad telecom and optical technologies to the commercial laser market. Our newest 100-watt fiber delivery laser makes extensive use of our optical communications high-power diodes and extends our range of direct diode laser offerings. We also announced our FCD488 at [Protonix West] last week, the industry's first solid-state laser based on fiber optic telecom grade component. This new product which was developed leveraging expertise and resources across multiple business segments has already received excellent customer feedback. We expect to continue to outpace the project of solid-state market growth at the rate of 5% and through the transition from gas to solid-state further strengthen the segment's profitability. Moving to corporate updates, we've been evaluating our real estate investment portfolios over the last two years as a part of our broader restructuring exercise. During the second quarter, we continue to consolidate company's global footprint and also sold three investments realizing gain of 20 million on our GAAP income statement. Following the conclusion of our heavy lifting phase of restructuring and the establishment of our near-term business model target a few months ago, we believe it is the right time to help investors gain a better understanding our business. Going forward, it will be the progress of each individual business rather than corporate level cost initiatives that will drive the company's organic improvement. With that in mind, we'd like invite analysts and investors to a series of educational webcast that we offer prospective on growth drivers and expectations for each of our segments as well as an understanding of how each segment is structured and managed internally. Look for a press release in the next two weeks announcing the date and times of the four webcasts which will take place during February and March. Our decision to host these webcasts now is intended [help] the amount of confidence in the overall trajectory of the company and our evolving business models. Getting back to our results, the company achieved a new set of milestones in the second quarter in terms of just about every key financial metric; revenue, gross margin, EBITDA, net income and cash flow from operations. The achievement of positive non-GAAP operating income for the first time since the collapse of the telecom market is extremely important and I'd like to thank JDSU's employees who have demonstrated a great deal of commitment and resilience over the years. We have more work ahead of us to translate this quarter's results into a sustainable business model, but this quarter more than any previous quarter has clearly signaled what can be achieved. With that, I will now hand the call over to our Chief Financial Offer, Dave Vellequette. Dave?

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 $23.2 million or $0.10 per diluted share improved from last quarter's net loss of $17.4 million or a net loss of $0.08 per share and from a net loss of $42.1 million or a net loss of $0.20 per share in the same quarter a year ago. Moving to the quarterly results for the business segments, Optical Communications revenue declined 4% sequentially to $132.7 million. On a year-over-year basis, growth remained strong, with revenue up 21% in the same quarter a year ago. Operating margin declined from just under 2% last quarter to breakeven, as higher gross margins were offset by increased R&D investments. The higher gross margins reflected our execution against our cost saving initiatives which were partially offset by the impact of lower revenues and continued sequential ASP declines which were at the higher end of our 2% to 4% range. Moving to Communications Test and Measurements segment, revenue of $168.2 million, was up 44% from the first quarter and up 15% from the year ago quarter. However, you will recall that first quarter performance in this segment was negatively impacted by our Oracle implementation and sales force realignment. Combined with the acquisition of Test-Um, we believe that these factors accounted for about $9 million of revenue in the second quarter. Excluding these items, year-over-year revenue growth was closer to 9%. In addition to higher revenues, the segment also benefited from a favorable product mix which resulted in an operating margin of 21.3%, the strongest performance since we acquired this segment in December of 2005. Advanced Optical Technologies, which includes our flex and custom optics businesses, delivered revenue of $40.4 million. This was up 3% over last quarter or down 2% from the year ago quarter when this business was still in midst of restructuring activity. The segment's operating margin continued to improve highlighting continued progress in our cost reduction and consolidation initiatives at the Santa Rosa site. Operating income was 31.4% of revenue which compares to 28% in the previous quarter. Our Commercial Lasers business grew 4% this quarter or 39% year-over-year to $25.1 million. Operating income improved for the fourth consecutive quarter to $2.2 million or 9% of revenue, reflecting ongoing operational improvements in addition to the growing mix of higher margin in solid state products. On a geographic basis, Americas contributed 57% of revenue; EMEA, 27% of revenue; and Asia Pacific, 16% of revenue. On a dollar basis, revenue grew in all three regions with particular strength in Europe which was up 23% sequentially and 34% year-over-year. Moving to the balance sheet, total cash, cash equivalents, short-term investments and restricted cash was $1.227.7 million at the end of the second quarter, up $11.7 million. Also, we were cash flow positive from operations for the quarter. Net accounts receivable of $274 million increased $43 million from last quarter, highlighting the volume of quarter end booking shift orders from the communications Test & Measurement segment. DSO was up two days to 68 days. Inventory churns declined slightly to 3.9 and finally headcount as of December 31st, 2006, was 6,851, up from 6,736 last quarter. Next, I'd like to update you on our ongoing cost reduction initiatives. As noted earlier, we achieve the $2 million of targeted cost savings in second quarter, spread between our Optical Communications, ALT and Commercial Laser businesses. Specifically, we completed the manufacturing transition out of Ottawa during the second quarter. For the third quarter, we are targeting an incremental $3 million of savings, bringing our cumulative quarterly savings to $7 million. We expect third quarter savings to come primarily from the transfer of our Santa Barbra manufacturing, which was completed at the end of the second quarter and the consolidation of our Santa Rosa site from 13 buildings to six by the end of the fiscal third quarter. As Kevin noted, this quarter marked the achievement of our near-term business model target, specifically, our non-GAAP gross margin in excess of 40% and a non-GAAP operating margin in the 2% to 5% range. When we discussed our target business model with you last quarter we weighted specifically on a 40:40:20 split between our three markets. That is, 40% of revenue from Optical Communications, 40% from Communications Test and Measurement, and 20% from the combined ALT and Commercial Laser Groups. It is clear that we outperformed these near-term targets in the second quarter through the segment mix heavily in favor of our Communications Test and Measurement business. If our revenue mix had been 40: 40: 20 then our non-GAAP gross margin would have been approximately 39% and our operating profit would have been in our near-term operating margin range. Some other points to bear in mind as you think about our financial performance over the coming quarters. First, Our Communications Test and Measurement business has traditionally benefited from strong calendar year-end customer purchases. This seasonality can result in fluctuating growth rates. We believe that it makes sense to assess this business in terms of year-over-year quarterly growth. We expect year-over-year growth to range between 6% and 12%. Due to Q2 seasonality in Communications Test and Measurement, we have historically seen a sequential revenue decline in this segment. For fiscal 2005 and 2006, Q3 revenue declined 17% and 13% respectively. Next, for JDSU as a whole, we continue to target non-GAAP operating expenses in the range of 35% to 38% of revenues. Also, operating expenses for Q3 will include low single-digit millions of dollars related to the acquisition of Casabyte. And below the line, our income tax expense is expected to range between $3 million to $5 million per quarter. Now, to our financial guidance for the third quarter. As for our revenue guidance included among other things; first, ongoing pauses among our network equipment manufacturer and carrier customers associated with industry consolidation, all be it in a generally favorable environment for optical and broadband equipment. Second, continued execution of inventory and supply chain rationalization among our network equipment manufacturer customers in the optical communications business. Third, the Communications Test and Measurement segment tends to have a high level of book and ship activity. Based on customers' historical order flow, these orders tend to be weighted towards the third month of the March quarter. Although the team has a strong track record of turning in quarter business, manufacturing constraints may impact our ability to fulfill some orders in the quarter. With these factors in mind, we expect third quarter revenue to be in the range of $333 million to $353 million. Operator, we are ready to begin the Q&A.

Thank you, sir. (Operator Instructions). Your first question will come from the line of Michael Genovese with Citigroup. Please proceed. Michael Genovese - Citigroup: 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. Subu Subrahmanyan - Sanders Morris: 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. John Anthony - Cowen and Company: 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. John Anthony - Cowen and Company: 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. John Anthony - Cowen and Company: 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. Ehud Gelblum - JP Morgan: Hi, thank you.

Hey, Ehud. Ehud Gelblum - JP Morgan: 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. Jim Powel - GMP Securities: 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. Paras Bhargava - BMO Capital Markets: 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. Jeff Evenson - Sanford Bernstein: 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. Ajit Pai - Thomas Weisel Partners: Yeah. Good evening and congratulations on a very solid quarter.

Thank you, Ajit. Ajit Pai - Thomas Weisel Partners: 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. Jeff Osborne - CIBC: 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. Brant Thompson - Goldman Sachs: 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. Todd Koffman - Raymond James: 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. Michael Genovese - Citigroup: Can you hear me?

Yeah. Michael Genovese - Citigroup: 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. Michael Genovese - Citigroup: 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.

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