----- JDS Uniphase (BUY)
Strong 2Q/00 as expected; raising fiscal 2000 & 2001 Eps estimates
increasing 12-month price target to $300
Earnings Per Share P/E
JDSU 52-Wk ------------------ ------------ MkCap
1/26 Rge 6/99 6/00 6/01 3Q/00 3Q/99 6/00E 6/01E Yld ($B)
---- ----- ----- ----- ----- ----- ----- ---- ---- ---- -----
$216.75 $248-18 $0.37A $0.74E $1.11E $0.20E $0.10A 292.9 195.3 NM 81.1
Previous $0.67 $0.97 $0.17
Calendar 12/99 12/00 12/99A 12/00E
---- ---- ---- ----
$0.54A $0.92E 401.4 235.6
Previous $0.52 $0.81
JDS Uniphase (JDSU) reported its fiscal 2Q/00 earnings results after the close of the market yesterday. The company reported EPS of $0.18 (three pennies ahead of our estimates and Street consensus) on revenues of $281.7 million (119% growth year-over-year and up 22% sequentially). The big themes on the call were as expected, capacity expansion, packaging of components, and building the company?s operational infrastructure. The company remains very bullish about its market opportunities and we continue to believe that JDS Uniphase is the clear leader in the high growth optical components space. Capacity expansion seems to be coming along even faster than expected and the recently closed acquisitions of EPITAXX and SIFAM are seeing strong growth. The shift to selling more modules is still under way as the company is focusing heavily on increasing its ability to package optical components, with new facilities in the U.K. and Holland. This, in our opinion, is the prime reason for attempting to acquire E-TEK (ETEK/$196.50/Buy). We are increasing our fiscal 2000 and 2001 EPS estimates from $0.67 and $0.97 to $0.74 and $1.11. These estimates do include the anticipated closing of the OCLI transaction on February 4th. We continue to believe that our estimates are conservative as the demand environment for JDS Uniphase and its peers continues to strengthen. We look for new players like Cisco (CSCO/$/BUY), Sycamore (SCMR/$/BUY), ONI, and Chromatis ? all of which are now shipping at least beta test products ? to possibly widen the gap between optical component supply and demand over the next several quarters, with more capacity likely narrowing the gap once again in 2001. We remain bullish on the optical components sector as a whole and we are increasing our 12-month price target on JDSU to $300. We reiterate our BUY rating on shares of JDSU.
We are increasing our EPS estimate for fiscal 2000 from $0.67 to $0.74 and for fiscal 2001 from $0.97 to $1.11. We are also raising our target price from $175 to $300. Our optimistic (yet possibly still conservative) outlook for JDS Uniphase is driven by revenue expansion in the remainder of fiscal 2000 and going forward as the company reaps the rewards of its recent aggressive acquisition spree. While we expect JDS Uniphase?s core optical components and modules businesses to remain healthy in 2000 (conservatively 15% quarter over quarter growth), acquisitions are driving 20-25% sequential revenue growth over the next couple of quarters. Gross margins should stay relatively constant as the costs of ramping new manufacturing facilities in Plymouth, England, Zurich, and Eindhoven, the Netherlands, will be offset by the incremental revenue benefits of greater capacity and increased automation. There may even be some room for slight gross margin improvements, although cost savings may be passed on to equipment manufacturers to lower the overall cost of the box. Our new target price of $300 is calculated by applying a 45 forward revenue multiple to our new calendar 2001 revenue estimate of $2.77 billion. This assumes slight multiple contraction and just over 50% revenue growth in 2001.
JPMS Fiscal EPS Estimates for JDSU
3Q00E
4Q00E
FY00E
Current EPS Estimates
$0.20
$0.22
$0.74
Previous EPS Estimates
$0.17
$0.19
$0.67
Source: JPMS estimates.
JPMS Fiscal EPS Estimates for JDSU
1Q01E
2Q01E
3Q01E
4Q01E
FY01E
Current EPS Estimates
$0.24
$0.26
$0.29
$0.32
$1.11
Previous EPS Estimates
$0.21
$0.23
$0.25
$0.27
$0.97
Source: JPMS estimates.
Financial Vitals
JDS Uniphase's revenues totaled $287.1 million, up 119% year-over-year and 22% sequentially. Gross margins trended up slightly to 50.6% (from 50.5%), a level at which we expect them to remain fairly constant at going forward. R&D came in below guidance of 8-9% of sales at 7.7%, although we expect the company to reach the higher end of the range over the next several quarters. Operating margins were stable at 30.9%. DSOs were 56 days, up 1 day from last quarter and in-line with the company?s target. Cash decreased only slightly to $885 from $959 in 1Q/00. The company spent $42 million in capex and $110 million for acquisitions during the quarter. The two largest customers for the quarter were Lucent (LU/$56.00/Buy) at 22% of sales and Nortel (NT/$99.94/Buy) at 14%. Maybe more importantly, we started to see even more activity from emerging optical systems players which could become significant customers for JDS Uniphase and its peers over the coming year (remember, the new players outsource nearly 100% of the optical components inside of their boxes).
Several important points from on the call:
ú Capacity Expansion and Emphasis on Packaging - JDS Uniphase has made its two to three times capacity expansion over the next year a key business priority. Contributing to these efforts, the company announced that it is opening an 80,000 square foot facility in Plymouth, England, the site of SIFAM's headquarters. This location will increase SIFAM's filter and coupler capacity as well as include 20,000 square feet for 980 pump chip packaging. The pump laser modules that will be produced in England will be the first ones for the company and are expected to reach a 50,000 device output rate per year. Additionally, capacity is being added in Zurich to ramp in the April timeframe and Eindhoven is qualifying its source laser packaging by May to double production rates at that facility. JDS Uniphase is placing a large emphasis on building out its packaging capabilities as customers increasingly want pre-assembled modules and subsystems, not individual components. E-TEK is an excellent packaging company and should immediately help JDS Uniphase once the deal is approved.
ú Acquisition Updates ? JDS Uniphase has been very active in the acquisition market over the past several months, aggressively expanding its product portfolio with acquisitions of EPITAXX, SIFAM, Oprel, Ramar, AFC Technologies, OCLI, and, most recently, E-TEK Dynamics. The company is now reaping the benefits of these transactions. The product lines for these companies will boost revenues over the next couple of quarters (particularly with the closing of the OCLI acquisition on February 4th). We expect the company to continue targeting key next generation technologies as acquisitions will be an integral part of the JDS Uniphase's growth strategy going forward (taking the Cisco approach).
ú Operational Updates ? With all of the recent acquisitions, one of the biggest concerns is obviously integration and building and operational infrastructure to support such as fast growing company. JDS Uniphase detailed its multi-phase approach of integrating all of its acquisitions and operations worldwide. It is first implementing a new Oracle (ORCL/$55.06/Buy) system in the US and Australia and then in May will focus on implementation in Canada and Europe to be completed by January, 2001. We believe that it is essential for JDS Uniphase to tie all of its worldwide operations together and pace its internal efficiencies with its new-found size. Information technology and software systems to track manufacturing expansion and yield improvement, customer relationships, financial performance, employee hiring, and product design specifications will help JDS Uniphase manage its explosive growth and integrate its current (and future) acquisitions. We expect the company to continue providing quarterly status reports on its implementation progress throughout the year.
ú Next Generation Technologies ? The company is currently experiencing strong demand for higher speed and higher optical power communications components. As service providers look to deploy more channels at higher speeds, OC-192 DWDM systems (10 Gbps) are now receiving heavy demand, driving the need for more 10 gigabit modulators and higher power pump lasers for optical amplifiers. JDS Uniphase is ramping its 10 Gbps. modulators, transmitters, and receivers and increasingly pursuing 40 Gbps. Technology (called OC-768). JDS Uniphase was also one of the first optical components manufacturers to supply OC-192 modulators and sales today are expanding rapidly. Other new developments at JDS Uniphase include better packaging, waveguides, smaller and cheaper amplifiers for the metro market, increased automation, higher power optical amplifiers for the cable television market, higher power tunable lasers, and wavelockers.
What are the Risks???
While it is very easy to point out everything good about the JDSU story, there are risks. First and foremost is execution. While we do believe that JDS Uniphase?s management team is among the best in the industry (if not the best), integrating numerous acquisitions while growing the inherent business more than 100% year over year is no easy task. While we do believe that management has cushioned itself with guidance to the Street, executing the master plan remains the most difficult task in our opinion. If the E-TEK transaction does catch the eye of the government (hard to tell, yet), this could be a near-term distraction for JDS Uniphase. We don?t think it will be, but it is a risk. We do not believe that demand is a big risk near-term (the demand environment looks strong), although we may see some new competition. We expect to see at least a couple of private optical components companies enter the market this year (some possibly public), although JDS Uniphase?s market share and scale will eliminate most of that risk. We believe that the only big players to potentially enter the market would be spin-outs from one of the equipment suppliers, like Nortel or Lucent, which could certainly add to the relatively limited competitive environment. On the other hand, JDS Uniphase may acquire one of these groups and continue to add to its rapidly growing scale.
We reiterate our BUY rating on shares of JDSU and 12-month $300 target price.
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