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JDSU: Exceeds 4Q--Accelerating Growth--Raising Numbers--Buy
Salomon Smith Barney
Tuesday, July 27, 1999
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--SUMMARY:--JDS Uniphase--Connectors & Other Components *Pro forma EPS was $0.48 vs. approximately $0.25 (pro forma) last year, up roughly 93% and vs. our $0.42 estimate and the range articulated recently of $0.45-$0.46. Revenues of $191.6M were up roughly 97% YOY (80%-85% internal), 10% above our forecast. *We believe mix shift towards Lucent and Nortel, who we see as the dominant transmission providers, is positive going forward and indicative of new clout of company. *Major design-in with Nortel to supply 100% of selected products and a large part of filters for certain applications. *Raising FY00 estimate to $1.09 from $1.05, up 49% on 66% revenue growth, likely to be exceeded on margins. Reiterate Buy and $108 price target. *All numbers are restated for the stock-split effective this morning. --EARNINGS PER SHARE-------------------------------------------------------- FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year Actual 06/99 EPS $0.14A $0.16A $0.19A $0.24A $0.74A Previous 06/00 EPS $0.47E $0.50E $0.54E $0.59E $2.10E Current 06/00 EPS $0.25E $0.25E $0.27E $0.32E $1.09E Previous 06/01 EPS $0.69E $0.74E $0.79E $0.87E $3.10E Current 06/01 EPS $0.37E $0.37E $0.38E $0.44E $1.56E Previous 06/02 EPS $N/A $N/A $N/A $N/A $N/A Current 06/02 EPS $N/A $N/A $N/A $N/A $N/A Footnotes: --FUNDAMENTALS-------------------------------------------------------------- Current Rank........:1H Prior:No Change Price (7/26/99).....:$79.07 P/E Ratio 06/00.....:72.5x Target Price..:$108.00 Prior:N/A P/E Ratio 06/01.....:50.7x Proj.5yr EPS Grth...:50.0% Return on Eqty 99...:17.2% Book Value/Shr(00)..:3.85 LT Debt-to-Capital(a)0% Dividend............:$N/A Revenue (00)........:954.30mil Yield...............:N/A% Shares Outstanding..:87.0mil Convertible.........:No Mkt. Capitalization.:6879.1mil Hedge Clause(s).....: Comments............:(a) Data as of the most recently reported quarter. Comments............: --OPINION:------------------------------------------------------------------ QUARTER SOLIDLY ABOVE EXPECTATIONS--GROWTH ACCELERATING--RAISING FY2000 ESTIMATE--REITERATING BUY RATING AND $108 PRICE TARGET JDS Uniphase reported earnings for the combined company last night of $0.48 versus what we believe was $0.25 pro forma in the year-ago quarter, up roughly 93%. Revenues of $191 million were up roughly 97% year over year, or about 80%-85% excluding the Philips acquisition, 10% above our forecast. This is against our earlier expectations for $0.42 pro forma and exceeded the recently articulated guidance range of $0.45-$0.46. The company does not plan to restate historicals for FY1998, but our model attempts to approximate these numbers by combining the income statements of the two companies. Both JDS Fitel and Uniphase reported incredibly strong gross and operating margins in the quarter. Uniphase reported a 54% gross margin versus 52.5% last year and 51.3% in the third quarter, driving the 53.1% gross margin for the combined company. JDS Fitel's operating margin of 33.5% compares to 29.9% last year and 33.1% in the third quarter, resulting in a combined 32.2% operating margin. We are not expecting such strong margins going forward, forecasting a 51% gross margin and 30% operating margin for JDS Uniphase, both in line with guidance. ACCELERATING REVENUE GROWTH Revenues were up 132% for JDS Fitel and 68% for Uniphase (about 55% internal), accelerating materially for both companies. RAISING ESTIMATES We are raising our estimates to $1.09 from $1.05 for FY00 and to $1.56 from $1.55 for FY01. Our $1.09 number forecasts 66% revenue growth and 49% EPS growth on margins that decline throughout the year. Given that margins for the quarter were up significantly for both companies, we view the scenario of declining margins as improbable, but the impact of additions to capacity, mix shift, and other factors are harder to predict, in our view, than the strong growth. SHIFT TO STRONGER PLAYERS, BOOMING MARKET, DESIGN INS, FUELING GROWTH While Uniphase alone had no 10% customers for the quarter or year, JDS Uniphase reported two 10%-plus customers for the full-year. Lucent represented 17% of the combined company's sales in the quarter (13% for the year), while Nortel was a 10% customer in fiscal 1999 and under 10% for the quarter. Lucent has clearly moved up throughout the year, and given the design win announced this quarter with what we believe to be Nortel, this customer is likely to grow, as well. We believe that there is a mix shift toward these two leading systems providers and away from the second-tier providers. One reason, obviously, would be the relative success of Nortel and Lucent in WDM. The other, we speculate, is the growing dependence of these large OEMs on JDS Uniphase as the company becomes bigger and increases its scale in production, R&D, and product offerings. DESIGN WIN WITH NORTEL There was little news in the quarter, but one significant development was the mention of a design win, we speculate with Nortel, for 100% of selected products. More specifically, JDS Uniphase will supply a large portion of its 200 and 100 Ghz filters for long haul applications. CATV EXTREMELY STRONG This increased as a percentage of stand-alone Uniphase revenues from 22% for the year to 26% for the quarter, fueled by the U.S. build out and Uniphase's WDM product offerings. DETAILS OF THE QUARTER Below we provide three charts to clarify the abundance of numbers provided in the press release (all numbers are pre-split): JDS Uniphase Comparative Results 4Q99 4Q99 Versus 4Q98 Y-O-Y Actual Exp Exp Actual* % Growth Revenue $191.6 $175.0 9.5% $97.3 96.9% Gross Margin 53.1% 51.0% 4.1% 52.3% 1.6% Operating Income $61.6 $53.1 16.0% $30.1 104.8% Operating Margin 32.2% 30.3% 6.0% 30.9% 4.0% Net Income $41.7 $36.3 15.0% $20.9 99.4% EPS $0.48 $0.42 16.4% $0.25 92.6% *Salomon Smith Barney estimates Uniphase Comparative Results 4Q99 4Q99 Versus 4Q98 Y-O-Y Actual Exp Exp Actual % Growth Revenue $87.1 $85.6 1.8% $51.8 68.2% Gross Margin 54.0% 50.0% 8.1% 52.5% 3.0% Operating Income $26.0 $24.4 6.7% $16.0 62.8% Operating Margin 29.8% 28.5% 4.8% 30.8% -3.2% Net Income $18.5 $17.3 6.9% $10.3 79.6% EPS $0.43 $0.40 7.4% $0.27 60.2% JDS Fitel Comparative Results 4Q99 4Q99 Versus 4Q98 Y-O-Y Actual Exp Exp Actual % Growth Revenue $155.2 $131.5 18.0% $66.9 132.1% Gross Margin 52.1% 52.0% 0.2% 52.0% 0.2% Operating Income $51.9 $42.1 23.2% $20.0 159.9% Operating Margin 33.5% 32.0% 4.4% 29.9% 12.0% Net Income $33.8 $27.8 21.8% $13.9 144.0% EPS $0.41 $0.34 22.8% $0.17 138.3% The 54% gross margin at Uniphase was one of the bigger surprises in the quarter, the result of the successful ramp of production at the new Zurich and Eindhoven facilities. Capacity was 100% filled, and everything was reportedly running efficiently, but management admits that as capacity is added, such an ideal confluence of events is not likely to occur regularly, guiding gross margins for the combined company to be in the 50%-51% range. USE OF PROCEEDS FROM THE PENDING EQUITY OFFERING: ACQUISITIONS On the conference call, management identified three types of acquisition targets: 1. technology 2. market consolidation 3. exit for vertically integrated companies that want to outsource their components Management reiterated its aversion to dilution (excluding goodwill expense) at a recent analyst meeting. VALUATION We are warming to the notion that this company should trade at a multiple beyond its long-term earnings growth rate for several reasons: 1. Estimates will likely increase because of new design-wins that we believe will multiply the growth of this already fast growing market. 2. JDS Uniphase is unique--there is no company in the component area with its scale and breadth, and it is one of the few pure ways to play fiber-optics outside of the service providers. It's also a superb technology company, collaborating on a design level with many systems OEMs, and necessary to their efforts in optics. 3. The company has outstanding operating profit margins of about 32%, which look sustainable in the near and intermediate term based on the growth of the market and the high barriers to entry. JDS Uniphase should have a strong position in anything optical, a technology crucial for today's and tomorrow's telecommunications. The combined company not only has the resources of both Uniphase and JDS Fitel at its disposal, but a high-growth revenue base over which to leverage a continued high level of investment and a high-multiple currency with which to make acquisitions. The current 59 multiple on our new calendar 2000 estimate of $1.34 is slightly below the company's current revenue growth rate and considerably above a long-term growth rate of 40%-50%. That's a little rich, but given the strong visibility on the market and JDS Uniphase's solid position in it, we believe that the shares will go higher still, retaining this type of multiple on stron g growth. Assuming nearly 50% growth in FY2001, we think that in 18 months the stock can go to nearly $125. Our intermediate-term target (12 months) is $108, based on weighting calendar 2000 and calendar 2001 as we approach the point where we would be using 2001 as our target year.
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