JDS Uniphase: up and
running
Estimates raised: Offering suggests
company is on the acquisition trail
Jill Vardy
The newborn JDS
Uniphase Corp. has
had an exciting first
two weeks of life --
the start of trading on
two exchanges, a
trading halt, a stock
split, a new share
offering, an earning
pre-announcement
and several analyst
upgrades.
Of course, all the
action is hardly
surprising since the
baby is already a
giant in the fibre
optics industry.
The product of an equal merger between JDS Fitel Inc. and
Uniphase Corp., the new company received enthusiastic approval
from shareholders and final nods from regulatory authorities last
week.
On Tuesday evening it filed to sell up to 7.75 million shares and
announced $181-million (US) in charges in its fiscal fourth quarter,
giving JDS a loss per share of $3.65 (US) in its quarter.
JDS Uniphase said its estimated pro-forma earnings for the quarter,
which ended on June 30, will be about 45¢ to 46¢ a share,
excluding the charges and not reflecting the stock split. That's
slightly higher than analysts' expectations for about 41¢ a share.
Revenue for the quarter will be $188- to 190-million (US), the
company said.
The share offering, meanwhile, suggests to analysts that the newly
merged company is not going to wait until it's older to start making
some planned acquisitions.
"The reaction should be positive because obviously they have
something in mind to do a share offering this soon. The expectation
is the capital will be deployed for new business opportunities," said
Emil Savov, technology analyst at Goepel McDermid of Vancouver.
Yesterday JDS stock (JDU/TSE) closed in Toronto up $11 at
$252 and in New York (JDSU/NASDAQ) up $7 15/16 at $171
1/4 (US), after trading lower on both markets in the course of the
day.
Jozef Straus, JDS' president, chief operating officer and
co-chairman, has said the company is looking at acquisitions to fill
any gaps in its product lines and fuel its growth. The share offering
suggests the company thinks it will be ready to make those
purchases soon.
At a ceremony in Ottawa on Tuesday to mark the opening of a new
research facility, it was clear the two companies are already one in
the eyes of management.
"Everything on the integration is going well. Obviously we're still at
the very early stage but things are proceeding as we have expected
them to," said Tony Muller, the chief financial officer of JDS
Uniphase and former CFO of Uniphase Corp.
"We're in a very dynamic environment ... I think the integration will
be subsumed by our responding to a lot of the challenges and the
opportunities we have and we won't even be looking back on the
integration from these vantage points. The integration and the
differences in our heritage, that will very soon be behind us."
Several analysts, including those at Hambrecht & Quist and
Salomon Smith Barney, have increased their estimates for JDS
Uniphase since it began trading on July 6.
Hambrecht & Quist predicts the company will post revenue of
$963-million (US) in fiscal 1999 and $1.2-billion (US) in 2000,
giving JDS Uniphase earnings per share of $2.13 (US) this year and
$2.43 (US) the following year.
Paras Bhargava, Yorkton Securities' analyst, reiterated a "strong
buy" recommendation on JDS yesterday, with a 12-month target
price of $240 per share (US).
Forecasts such as this pushed the company's stock price up sharply
in its early days of trading. But the split, announced last Thursday,
was prompted by a huge increase in the value of both companies'
shares since the merger was announced last January. The record
date for the stock split is July 23. The stock was halted on both
exchanges when rumours of the split leaked out early.
JDS Uniphase designs, manufactures and sells almost everything a
company needs to set up and run a fibre optic network. It's a blend
of the product lines of JDS Fitel, which makes passive components,
and Uniphase, whose main product lines include active components
of a fibre optic network. Combined, they create what Kevin
Kalkhoven, the new company's co-chairman and CEO, calls "a
world leader in the rapidly growing market for both active and
passive fibre optic components and modules."
The merger was the brainchild of Mr. Kalkhoven and Mr. Straus,
working on the theory -- with which analysts agree -- that
companies want to be able to buy all their fibre optic supplies from
one vendor. But until now there hasn't been a vendor that could sell
a customer the whole line of active and passive components.
"As a combined entity, JDS Uniphase is in an excellent position to
meet the increasing demands of the fibre optic telecommunications
industry by providing products with a higher level of functionality at
a faster time-to-market," said Mr. Straus.
Analysts heard more to make them optimistic at a briefing on
Tuesday afternoon following the opening ceremonies. Industry
experts and JDS officials told them there appears to be a growing
trend toward major telecommunications companies outsourcing their
fibre optic components manufacturing to companies such as JDS
Uniphase. That bodes well for JDS' existing business with Nortel
Networks Corp., Lucent Technologies Inc. and other large
customers.
What's more, if these giants sell their fibre optics manufacturing
lines, JDS is poised to buy them, easily increasing its capacity and
locking up the business of major customers.
The market is growing by more than 50% a year and if JDS can
add new capacity by acquisition, it can grow even faster, said Mr.
Savov. "Demand is not going to slow down in the foreseeable
future. It's increasing." And it will increase more if demand for fibre
optic equipment for local and metropolitan networks continues to
grow as fast as it has in recent months.
The company may see a slight erosion in its net margins, however,
as research and development expenses increase as a proportion of
sales, Mr. Savov noted. "As the industry leader JDS will have to do
more of the heavy lifting. Being number one has its responsibilities as
well as its rewards."
Financial Post
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