Tale of two tech giants
Why have investors drawn such different
conclusions about Newbridge Networks and JDS
Uniphase, two of the largest, most influential
companies in the region?
James Bagnall
The Ottawa Citizen
With a combined local workforce of more than 9,000, JDS Uniphase Corp. and
Kanata-based Newbridge Networks Corp. are two of this region's largest and
most influential technology firms. And so far this year, they have been on
stunningly different trajectories.
Share prices at JDS Uniphase, which makes fibre-optic components, closed
yesterday at $245.10 on the Toronto Stock Exchange, more than four times their
price at the beginning of the year. Newbridge shares, meanwhile, continued to
drift. They finished trading on the TSE at $28.65, down 39 per cent for the year.
Newbridge stock has fallen so far recently that the company will probably have
to put up more stock or cash to complete a takeover of Stanford
Telecommunications next month.
The market value of JDS Uniphase now stands at nearly $25 billion -- about five
times that of Newbridge. At the beginning of the year, Newbridge was actually
worth more than JDS Uniphase.
On the surface, this incredible turn of fortune looks odd. JDS Uniphase is
expected to generate $1.1 billion U.S. in sales in fiscal 2000 (ending June 30).
Newbridge will easily top this figure. Both companies build products aimed at
helping telephone and data service firms expand network capacity. Each does
very well in its core business.
Nevertheless, investors have drawn vastly different conclusions about the
prospects of these two local giants. Are they right to do so?
Certainly JDS Uniphase has shown itself to be a better-run machine. Two days
ago, JDS Uniphase not only unveiled better-than-expected financial numbers for
its quarter ended Sept. 30, it advised analysts to boost significantly their revenue
forecasts for fiscal 2000.
JDS Uniphase is now expected to grow at least 80 per cent year-over-year.
Canadian analysts also took note of another gem: This marked the 15th straight
quarter in which the firm has either met or exceeded its projections.
Newbridge has had to pre-announce worse-than-expected earnings five times
over the same period. Not surprisingly, there is considerable nervousness about
whether it will commit the same sin in the second fiscal quarter, which ends this
weekend.
A pre-announcement would come early in November, which means current
owners of Newbridge stock are hoping for silence. No news could imply the
firm had met its targets, perhaps easing the recent downward pressure on
Newbridge's share price.
However, the share price is merely a symptom. There are a couple of other very
important differences that help explain the growing gap between the two firms'
valuations.
The first has to do with the U.S. market, where telephone firms and Internet
service providers are aggressively expanding their networks.
Winning market share south of the border is key to rapid growth and JDS
Uniphase -- the product of a June merger between JDS Fitel Inc. of Nepean of
Uniphase Corp. of San Jose, California, is showing how it's done. With the
merger, JDS Fitel acquired U.S. channels and a big presence in Silicon Valley. It
has become the dominant independent supplier of fibre-optic components and
subsystems.
Newbridge's experience with cross-border mergers has been far less pleasant. It
bought UB Networks, a California-based data-networking firm, to gain access to
distribution channels. But Newbridge couldn't make the transaction work, in part
because UB Networks was not a top-tier player. The distraction allowed such
competitors as Ascend Communications Inc. of California to grab a big share of
Newbridge's main market, high-speed switching devices that use asynchronous
transfer mode technology.
Newbridge's new chief operating officer, Alan Lutz, was hired last year to help
raise Newbridge's profile in the U.S. He has also steered the firm into a couple of
promising areas: high-speed wireless and Internet Protocol technology.
In some ways, JDS Uniphase is lucky. President Jozef Straus and other founders
built a company around fibre-optic technology because that had been their
experience at Nortel Networks Corp., their former employer. In the mid-1990s,
when it appeared Newbridge's ATM technology was taking the world by storm,
fibre-optics looked like an interesting side business.
ATM products are still selling well for Newbridge; in the most recent quarter
revenue growth was roughly double the 35- to 40-per-cent rate of the ATM
market as a whole. But Newbridge's overall growth -- 16 per cent year-over-year
-- is held back by older, slower-moving products.
Both of JDS Uniphase's two main product lines are on fire. Sales of fibre-optic
components and systems more than doubled in the most recent quarter. For
investors in technology, momentum is everything and JDS Uniphase has it. Two
days ago, it unveiled plans to at least double its global manufacturing capacity. It
already has a million square feet of office and manufacturing space in 11
buildings across the Ottawa region, so it doesn't get much attention.
However, longer-term investors might recall that Newbridge, little more than two
years ago, was contemplating a robust expansion of its Kanata facilities.
Problems with UB Networks intervened.
Nothing similar lurks on the horizon at JDS Uniphase, but investors should be
aware that all of JDS business lies in a single niche. Not only that, but close to 40
per cent of its business last quarter went to just two customers -- Lucent
Technologies Inc. and Nortel. |
