JDSU/Motley Fool...
I don't know if you've seen this article. Just FYI...for those who follow JDSU.
Libbyt
Dynamic Growth Continues for JDSU
By Phil Weiss
For me, this is a great time to be a Rule Maker Portfolio
manager. That's because last night we announced that we're
adding two dynamic companies to our stable -- Finish based Nokia
Corporation (NYSE: NOK), our first foreign based multinational,
and fiber optic component maker JDS Uniphase (Nasdaq: JDSU). In
fact, we went ahead and ushered both companies into the stable
this morning. We purchased 17 shares of Nokia at $190 and 16
shares of JDSU at $201.50. It's always enjoyable for me to have
new and exciting companies to talk about on a regular basis in
our nightly reports.
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In that vein, tonight I'm going to briefly recap the second
quarter results of one of our two new Makers. In late January,
JDSU announced its second quarter results.
biz.yahoo.com
What I'd like to do first is take JDSU through the quantitative
elements of our ten basic Rule Maker criteria and see how things
shake out. Then I'll wrap up with a few of the other highlights
from the quarter.
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1. Sales growth of 10% or more on a comparable quarter basis
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-- JDSU's top-line revenues are growing at a rate that puts it
among the top tier of public companies. Its year-over-year sales
growth came in at 119%. Its sequential quarterly growth of 25%
easily passed our 10% target as well. Even if the impact of
current acquisitions is excluded, JDSU grew revenues by more
than 100% over the year-ago figure.
JDSU also raised its expectations for sales growth in the coming
year to well over 100% and said that it expects sequential
revenue growth of 25%, which is double the 10-12% that it
expected previously. JDSU is currently growing at
industry-leading rates off a much higher sales base than its
competition. At this point in time, the expansion of its
business is limited much more by capacity constraints than by
demand.
It should also be noted that during the quarter 22% of JDSU's
sales were to Lu cent Technologies (NYSE: LU) and 14% were to
Nortel (NYSE: NT). No other single customer accounted for more
than 10% of JDSU's sales.
2. Gross Margins of 50% or more
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-- JDSU's gross margin for the quarter improved slightly to
50.7% from 50.1% a year ago. There are two elements of the
manufacturing process that are presently holding back JDSU's
gross margins. One is manufacturing efficiency. JDSU needs to
improve upon its operational performance, as it does not get
nearly the same yield as a company like Intel. If it can improve
upon its efficiency, it can create an insurmountable lead over
its competitors.
The other area with room for improvement is that at present JDSU
sells many of its products on a stand-alone basis rather than in
modular form. One of the efficiency keys related to
manufacturing products like those made by JDSU is packaging.
This refers to the ability to take a laser chip from a wafer,
couple fiber to it, adding any other devices that are needed and
making a complete product. As a point of reference, I recall
reading that one of our other portfolio holdings, Intel (Nasdaq:
INTC), was able to significantly improve the margins on its
low-end Celeron chips via its new flip chip packaging.
According to JDSU's SEC filings, gross margins may also be
constrained by the competitive nature of its markets and
downward price pressure on the products that it sells.
3. Net Margins of at least 7%
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-- On a pro form basis (i.e. excluding acquisition-related
charges such as amortization of purchased intangibles and
acquired in-process R&D), JDSU improved its net margin by 2%
(from 21% to 23%). JDSU's net margin is helped to a certain
extent by its dynamic rate of growth. For example, its target
for the ratio of research and development expense (R&D) to sales
is in the 8-9% range. It is currently at only 7.7% as the
company is having trouble keeping R&D growth in line with its
explosive sales growth.
4. Cash-to-Debt of 1.5 or greater
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-- JDSU has a debt-free balance sheet. This is in line with CEO
Kevin Kalkhoven's goal of being able to finance growth through
cash provided by operations. That's music to a Rule Maker
investor's ears.
5. Flow Ratio of 1.25 or less
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-- This is the one area that JDSU falls a bit short of our
expectations. Its flow ratio for the current quarter was 1.54,
which was a 5% decrease from last year's 1.63 figure, and --
more importantly in the case of JDSU -- down 11% from last
quarter's 1.74. Normally we like to look at year-over-year
figures instead of sequential ones. However, one of the
difficulties with evaluating this number for JDSU is the massive
number of acquisitions that it has completed over the last year,
highlighted by last June's combination of Uniphase with JDS
Fitel. Due to the substantial changes to JDSU over the last year
and the lack of availability of pro forma balance sheet
information for the merged entity, right now I believe that it
is better to look at quarter-to-quarter movements on the balance
sheet instead of year-over-year. The mid-quarter acquisitions
that JDSU has made also are likely to have had an impact on
JDSU's balance sheet.
There are a couple of elements on JDSU's balance sheet that we
plan to keep an eye on in the future. The first is its
management of accounts receivable. Days sales outstanding (DSO)
-- accounts receivable / (sales/90) -- increased by 4 days to 59
from last quarter's 55. JDSU has also been building its
inventory for certain product categories, which resulted in an
increase in its days inventory outstanding (DIO) -- inventory /
(cost of sales/90) -- from 70 to 87 days. On the positive side,
our company's days payable outstanding (DPO) -- accounts payable
/ (cost of sales/90) -- increased from 37 to 48 days. All in
all, JDSU's cash conversion cycle (DSO + DIO - DPO) increased
from 88 to 99 days.
fool.com
We fully expect that JDSU's flowie will come down in the future
as it improves the quality of its balance sheet and its
operations while also extending its dominant position in the
marketplace.
There are a couple of other issues that I would like to discuss
briefly before wrapping up this report. The first is that JDSU's
main areas of focus at present are as follows:
- Ramp up its manufacturing capacity.
- Continue to invest strongly in R&D in order to develop its
next generation components.
- Continue its focus on integrating components into modules.
The two biggest concerns for JDSU at present relate to the
question of having enough manufacturing capacity to meet demand
and the company's ability to improve its operational performance
and create an insurmountable lead over its competition. Its
recently agreed upon acquisition of E-TEK Dynamics (Nasda q:
ETEK), should help it better address these issues. If JDSU is
able to successfully address its concerns, then it could well
continue to exceed investor expectations. |
