JDSU: Acquisition of EPITAXX--Reiterate BUY
JDS Uniphase Corp(JDSU)
Rating: 1H
10/6/1999
Salomon Smith Barney ~ October 6, 1999
10/05/99 JDS Uniphase (JDSU $128.69,1-H,Tgt $130.00) Lissa Bogaty
--SUMMARY:--JDS Uniphase--Connectors & Other Components
*JDSU announced the planned acquisition of EPITAXX, a leading merchant
supplier of optical detectors and receivers, for $400M in stock.
*EPITAXX has $40M in sales on a run-rate basis, 350 employees, comparable
top-line growth to JDSU, and a similar gross margin structure.
*We believe the deal should be accretive by low-single-digits to EPS in
FY2000.
*Strategically, the acquisition further expands JDS Uniphase's active
portfolio, providing a semiconductor device that enables
optical-to-electrical signal conversion.
*EPITAXX's Avalanche Photo Diode (APD) receivers give JDSU a leading-edge
technology at a time where sensitivity and reliability are becoming
increasingly important in network architectures.*Reit. 1H rating &target.
10/05/99 JDS Uniphase (JDSU $128.69,1-H,Tgt $130.00) Lissa Bogaty
--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 $0.25E $0.25E $0.27E $0.32E $1.09E
Current 06/00 EPS $0.25E $0.25E $0.27E $0.32E $1.09E
Previous 06/01 EPS $0.37E $0.38E $0.37E $0.44E $1.56E
Current 06/01 EPS $0.37E $0.38E $0.37E $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:
10/05/99 JDS Uniphase (JDSU $128.69,1-H,Tgt $130.00) Lissa Bogaty
--FUNDAMENTALS--------------------------------------------------------------
Current Rank........:1H Prior:No Change Price (10/5/99).....:$128.69
P/E Ratio 06/00.....:118.1x Target Price..:$130.00 Prior:No Change
P/E Ratio 06/01.....:82.5x Proj.5yr EPS Grth...:50.0%
Return on Eqty 99...:17.2% Book Value/Shr(99)..:3.85
LT Debt-to-Capital(a)0% Dividend............:$N/A
Revenue (00)........:1431.50mil Yield...............:N/A%
Shares Outstanding..:168.5mil Convertible.........:No
Mkt. Capitalization.:21684.3mil Hedge Clause(s).....:
Comments............:(a) Data as of the most recently reported quarter.
Comments............:
10/05/99 JDS Uniphase (JDSU $128.69,1-H,Tgt $130.00)
--OPINION:------------------------------------------------------------------
ACQUISITION EXPANDS JDSU'S ACTIVE PORTFOLIO--REITERATE BUY RATING AND
$130 PRICE TARGET
JDS Uniphase announced the planned acquisition of EPITAXX, a leading
supplier of optical detectors and receivers, for $400 million in an
all-stock, purchase transaction. EPITAXX has $40 million in sales on a
run-rate basis (LTM revenues were less than $30 million), 350 employees,
comparable top-line growth to JDS Uniphase, and a similar gross margin
structure. The deal is expected to be slightly accretive to the bottom
line in the low-single-digit range. We will likely raise our estimates
slightly when the deal closes.
EPITAXX is the largest merchant provider in the receiver market,
according to JDS Uniphase, while Nortel is the largest in-house
supplier. Other large players include Fujitsu, Lucent and a host of
smaller companies.
Strategically, the acquisition further expands JDS Uniphase's active
portfolio, providing a semiconductor device that enables
optical-to-electrical signal conversion in a network through the use of
advanced detectors and receivers. JDSU already has a strong position in
electrical-to-optical transmission by way of its source lasers, but was
lacking this complementary technology. JDSU plans to market the
receivers both in component form and eventually as integrated transceiver
modules, further solidifying the company's reputation as having the
broadest product line in the industry.
NEXT GENERATION PRODUCT ROLLOUT EXPECTED SOON
Even with its broad product portfolio before the acquisition, the trends
in the marketplace mandated a closer look at the receiver portion of the
network. The optical-to-electrical signal conversion process is becoming
a much more sensitive area of technology as networks move to increasingly
dense DWDM systems and faster transmission speeds. As this evolution
occurs, reliability becomes increasingly important and a need arises to
monitor the amount of light in the network. It also occurs to us that
scaled back, unamplified metro systems will need particularly sensitive
receivers.
To address these requirements, EPITAXX introduced earlier this year its
2.5 and 10 Gbps Avalanche Photo Diode (APD) receivers and detectors. The
rollout is expected sometime this quarter or next. The advantages of APD
receivers over the traditional pin technology include significantly
increased sensitivity, as well as 10 Gbps capabilities at a time when
networks are increasingly moving to faster speeds.
ACQUISITION TARGETS THREE MAJOR MARKETS FOR GROWTH
There are three major markets that management highlighted as growth
opportunities through the combination of EPITAXX's new products and
well-established science and technology, and the current trends in the
industry: 1) receivers for high-speed applications in the terrestrial
long haul, submarine, and metro markets, 2) optical network monitoring,
and 3) receivers for CATV.
In telecom, the subdivisions listed above all have their own challenges
and opportunities. Avalanche Photo Diode receivers lessen the need for
amplification in long haul terrestrial networks and better control
optical loss; in submarine, APDs work to enhance reliability and simplify
design, an important consideration when laying a network under the ocean
floor; and in metro, where wavelengths are frequently added/dropped from
varying distances, leading to increased attenuation and dispersion--which
creates uneven power distribution--APD receivers accommodate varying
incoming power levels.
Optical network monitoring is another application for EPITAXX's
receivers. As networks become more dense, the need to monitor the
ever-expanding number of wavelengths increases. Monitoring is
accomplished by "bleeding" a certain amount of light from each wavelength
to measure power and output. The smaller amount of light that needs to
be bled, the better, and EPITAXX's receivers are more efficient than
traditional receivers in this respect. Optical network monitoring is
needed in source lasers, EDFAs, OADMs and OXCs, and test and measurement
equipment.
Receivers for the CATV market represent the third market focus
highlighted on the conference call. Management sees a large opportunity
as the CATV infrastructure is upgraded to two-way capabilities.
While APD receivers are more expensive, the benefits of a more reliable
and efficient network should drive the transition from pin receivers to
Avalanche Photo Diode receivers going forward.
---------------------------------------------------
|
