Goldman Sachs note on quarter
JDS Uniphase April 26, 2002
WILL OPTICAL COMPONENTS EVER REBOUND? For the past several quarters, JDSU
has predicted that the next quarter will represent a bottom. The company
did not call a bottom following this March quarter. We have stated that
the bottom could be as early as the June quarter, which continue to believe
is achievable. One metric that supports the June quarter bottom is that
non-telecom sales (includes the datacom and instrumentation businesses),
which seem to have bottomed, will be approximately 45% in the June
quarter).
The company also stated that any initial recovery would be modest, and we
also believe that a substantial, sustainable rebound in the optical
components industry is likely several quarters away. However, we believe
that the optical market will eventually return to health. Bandwidth
demands continue to grow (estimates range anywhere from 60-100% per year),
and optical technologies are clearly the most efficient and lowest cost
method for building communications networks.
JDS UNIPHASE REMAINS THE CLEAR LEADER IN OPTICAL COMPONENTS. While the
current industry downturn has had a significant negative impact on JDSU’s
financials, it has strengthened the company’s competitive position. 12
months ago JDSU’s leadership position was at risk with established vendors
such as Agere, Corning and Nortel’s optical component unit, as well as
several start-up vendors looking to take share from JDSU. This downturn
however has diminished the prospects of start-up vendors and forced
established vendors to refocus on their core markets - JDSU has emerged as
the clear leader in the optical component market through this downturn. We
believe that the company will be able to hold on to and leverage its
leading competitive position to benefit disproportionately from a recovery
in fundamentals.
FURTHER RESTRUCTURING: Management indicated that it would need to further
restructure the company given the continued downturn and unpredictability
in business. The company plans to reduce headcount by a further 2000
employees from current levels of just under 10,000 and close several sites
including its manufacturing operations in Columbus, OH. The plants in
Columbus were acquired through the Piri acquisition via SDL. Piri
specialized in flame hydrolysis technology for manufacturing arrayed wave
guides (AWGs). JDSU also announced the planned acquisition of Scion, which
specializes in chemical vapor deposition (CVD) technology for the
manufacture of AWGs, another technology option versus flame hydrolysis. So
the closure of the Piri plant was a strategic decision to use CVD over
flame hydrolysis for the manufacture of AWGs. These steps are expected to
result in an additional $165 mln of annualized savings. Total costs of the
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restructuring program are now expected to be $1.1 billion, of which
approximately $876 mln was incurred by the end of 3Q. Costs of the global
realignment program were about $25 mln during the qtr. The company expects
to future restructuring cash costs will be $235 mln.
TELECOM BECOMING A SMALLER PIECE OF THE PIE: The Transmission and Network
Components division (which includes amplification, wavelength routing,
transmission and active components products) accounted for 69% of revenues,
down from 74%. Total sales of about $194 mln were down 16% sequentially.
The Thin Film Products and Instrumentation division (which includes optical
coating, instrumentation and non-telco businesses) was 31% of revenue with
sales of $81 mln. This represented a 14% sequential increase due to
particularly strong demand for display products such as projection
television components. Modules represented almost 40% of sales during the
quarter. Modules include amplifiers, transceivers, instruments, circuit
switching products and other integrated products. Disparate and nontelecom
products represented 25% of revenue.
JDSU stated that non-telecom sales accounted for more than 25% of sales.
To calculate carrier end-market business, we would add the IBM transceiver
business, which is sold primarily to enterprises, and the instrumentation
business to the non-telecom portion, bringing the carrier total to almost
$100 mln. Assuming that these carrier sales are roughly flat in the June
quarter, carrier sales will account for about 45% of June quarter sales.
This implies a 25% decline in carrier sales, underscoring the significant
weakness in the telecom market.
JDS UNIPHASE ANNOUNCES ACQUISITION OF SCION PHOTONICS. JDSU also announced
its intention to acquire Scion, a 75-person San Jose based components
company that has adapted semiconductor processes that feature 200mm wafers,
chemical vapor deposition (CVD) for AWG manufacture, and variable optical
attenuator arrays and advanced integrated devices. As mentioned above,
Scion’s expertise in CVD technology was likely a key factor behind the
closure of the Columbus, Ohio plant, which focused on a competing
technology for the manufacture of AWGs. JDSU is already a shareholder in
Scion, and will pay an additional $43 mln in cash for Scion. The
acquisition is expected to close soon.
STRONG BALANCE SHEET: Total cash and investments fell about $90 mln during
3Q to $1.56 bln (approximately $1.45 bln in highly liquid securities was
flat seq.). Cash flow from operations was $10 mln mln vs. $(5) mln in 2Q.
DSOs were 57 days for the quarter, down about 4 days sequentially. 3Q
capex went down to $27 mln from $31 mln in 2Q. Total capex spent so far
this year now stands at $114 mln, well below the company’s target of under
$200 mln and less than half of depreciation. |
