Fiber Optics Companies Weather Toughest Quarter Yet
17 Jul 14:33
By Johnathan Burns
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--In the land of light, things got dark quickly.
Burdened by a slowdown in telecommunications equipment spending by North
American carriers that took the world by surprise, the leading fiber optics
systems and components makers finished the second calendar quarter ravaged by
earnings revisions and plagued with restructurings.
Even though components companies such as JDS Uniphase Corp. (JDSU), Corning
Inc. (GLW) and ADC Telecommunications (ADCT) had warned of a slowdown in
demand, the drop-off was steeper than expected.
Very few companies - most notably optical systems maker Ciena Corp. (CIEN) -
are having what Wall Street might deem is a successful quarter, while Lucent
Technologies Inc. (LU) continues the struggle to regain its footing as the
world's leader in telecommunications equipment.
"It's just a continuation of current trends," said George Hunt,
telecommunications equipment analyst with Wachovia Securities. "Carriers aren't
spending at normal levels and there's inventory issues. I don't think it gets
worse from here, but it won't get better for a while."
Components makers, who for the better part of a year added employees and
manufacturing capability at breakneck speed, have been hit hardest by the
slowdown as high inventory levels at systems companies remain a challenge to
current sales.
"There may be up to $4 billion of excess optical component inventory at
optical systems players," Deutsche Banc analyst Brian Modoff recently noted.
"It will likely take until the first quarter of 2002 to reduce this excess
inventory down to normal levels."
The situation has led Corning, JDS Uniphase, Agere Systems Inc. (AGRA) and
ADC Telecommunications to lower estimates for the current quarter.
Corning, Corning, N.Y., is expected to report second quarter earnings of 18
cents a share, excluding charges, on sales of $1.78 billion, down from 29 cents
a share on revenue of $1.8 billion a year ago. A decline in photonic component
sales is largely to blame for the decrease in revenue, though Corning's sales
mix of high-quality, expensive fiber versus a cheaper, more common fiber is
also partially responsible.
"It appears that Corning is successfully reallocating fiber supply to
international customer to compensate for weak demand in North America," Goldman
Sachs analyst Natarajan Subrahmanyan said in a recent note. "However,
international demand is primarily lower margin single mode fiber rather than
high data-rate premium fiber."
Corning at least has the insurance of its optical fiber business to insulate
it against a downturn in equipment demand. JDS Uniphase, which went on a
spending spree in the last two years to build itself into the world's largest
optical components supplier, has had no such security blanket.
As a result, JDS Uniphase has repeatedly lowered guidance throughout the
year, with company management saying their ability to forecast demand is worse
than it has ever been.
Analysts expect the San Jose, Calif., company to earn three cents a share in
its fiscal fourth quarter, excluding an increase in excess inventory reserves,
on revenue of $616 million, according to a Thomson Financial/First Call survey.
A year ago, JDS Uniphase earned 14 cents a share on sales of $524 million.
While the year-to-year comparison looks strong, sales will be down 33%
sequentially.
"As system vendors work through a major portion of inventory on hand, we
expect order trends to be more healthy in the September quarter and believe
that December could represent a sequentially up quarter," Subrahmanyan said.
Agere Systems, the recent optical components and semiconductor spinoff of
Lucent, is expected to post a loss of 8 cents in the company's fiscal third
quarter, excluding inventory write-downs and deferred recognition of tax
benefits on losses, on sales of $920 million.
Because of the Allentown, Pa., company's product mix and supply agreement
with Lucent, it has maintained a relatively solid repose during the downturn in
spending.
Component and broadband connectivity gear maker ADC Telecommunications,
Minneapolis, is expected to lose 4 cents a share on sales of $573 million in
its third fiscal quarter compared to earnings of 15 cents a share on revenue of
$891 million in the year-ago period. The substantial drop in revenue is the
result of a slowdown in spending by ADC's customers and reflects the impact of
divested businesses.
On the systems side, Lucent is expected to show slight improvement
sequentially, but will face tough year-over-year comparisons. The Murray Hill,
N.J., company is expected to lose 22 cents a share on revenue of about $6.2
billion compared to earnings of 30 cents on revenue of $8.7 billion a year ago.
In the second quarter, Lucent lost 37 cents a share on sales of $5.9 billion.
"We believe the best performing businesses on a sequential basis were
wireless and optical fiber," said UBS Warburg analyst Nikos Theodosopoulos. "We
also believe Lucent will show improving balance sheet trends as inventory turns
and day sales outstanding are likely to improve slightly sequentially."
Lucent is in the midst of a cost-cutting restructuring that the company
believes will return it to profitability. So far, Lucent has announced plans to
cut 24,500 workers from its payroll through layoffs and early retirements. In
addition, a sale of the company's fiber optic cable business would reduce the
workforce by another 6,000 and many on Wall Street expect the company to
announce another round of layoffs that could affect as many as 10,000 more
employees.
Optical switch maker Ciena is expected to earn 17 cents a share in its fiscal
third quarter on revenue of $462 million. A year ago, the Linthicum, Md.,
company earned 10 cents on revenue of $233 million. Ciena is one of the few
companies that has maintained full-year earnings guidance throughout the year.
-By Johnathan Burns, Dow Jones Newswires; 201-938-2020;
johnathan.burns@dowjones.com
(END) DOW JONES NEWS 07-17-01
02:33 PM |
