I hope this hasn't already been posted:
JDSU March 23, 2000 J.P. MORGAN SECURITIES INC. -
JDS Uniphase (BUY) HEALTHY SUPPLY RAMP IN THE WORKS AT JDS
UNIPHASE; A 10,000 FT.
UPDATE OF THE INDUSTRY LEADER
JDS Uniphase (JDSU) hosted its annual analyst meeting this past
Friday in Zurich, Switzerland and also gave us
a tour of its Eindhoven facility in the Netherlands. We believe
both events reaffirmed the positive strides the
company is making in terms of improving yields, implementing
automated processes, and ramping its major
European manufacturing facilities of active components (980 nm
pump laser chips for undersea and terrestrial
markets, source lasers, etc.). We believe our visit illustrated
JDS Uniphase's dominant position in the optical
components space as it focuses on staying one step ahead of its
competitors and easily meeting its 2000 goal of
ramping overall capacity by two to three times.
Even though we expect the company to continue to have its hands
full over the coming months integrating and
closing several large acquisitions (namely OCLI and E-TEK Dynamics
-- ETEK/$225.94/Buy), we are
encouraged to see JDS Uniphase acting like the big company that it
has become over the last year. As revenue
streams reach 90% plus year-over- year growth in 2000, we believe
it will be critical that JDS Uniphase
continue hiring aggressively, integrating its worldwide
operations, expanding its capacity (via refined
manufacturing processes, automation where cost-effective, physical
infrastructure build-out, outsourcing of
non-core production, and implementing a 24/7 workshift), and
targeting next generation technologies and
acquisitions. We reiterate our BUY rating on shares of JDSU.
Several important points from our meetings with
the company:
IMPROVING YIELDS
We expect JDS Uniphase to significantly improve its yields over
the next 8-12 months, likely even doubling its
output of pump lasers and expanding its fully packaged source
lasers output by 4 times (6-8x ramp for the actual
chips). Use of traditional semiconductor expertise (the company
has recently hired two manufacturing specialists
from National Semiconductor for its Zurich facility) and the
refining of its manufacturing, packaging, and
testing processes will lead to greater levels of production in
2000. We look to these refinements to generate
positive upside to our revenue estimates as the company is
shipping all that it makes today. Increased Use of
Selective Automation - JDS Uniphase has consistently focused R&D
efforts on selectively improving the
automated processes in the manufacturing of its optical components.
The company is particularly concentrating on automating its
product assemblies, fiber alignment and attachment
processes, and testing stages. To date, we believe the company has
focused much of its effort on the testing
procedures as they can take up as much as 60% of the time spent
getting active components, particularly, into
customers' hands. JDS Uniphase has grown to rely on much of its
own internal testing instruments owning the
technology and upgrading the software and automated processes with
each next generation cycle. We expect the
company to continue using this expertise as a competitive
advantage until the point at which a more mature
merchant test instrument market takes shape. We look for the
traditionally large test equipment players to catch
up with fiber optic testing demands over the next couple of years
and hence for JDS Uniphase to begin also
outsourcing those technologies. Our conversations with management
have indicated that qualified automated
processes will be the wave of the future, not qualified products
as it is today. This will help time to market for
the production of next generation technologies.
ZURICH FACILITY UPDATE
We believe JDS Uniphase is well on its way to ramping its active
component business in Zurich as it targets a
significant improvement from its approximately 140,000 chips
shipped in 1999. The company has hired two top
guns from the semi-conductor industry, with experience primarily
in manufacturing, to lead the innovation taking
place at the facility as it works through implementing some of the
efficiencies of the semiconductor industry. It is
also moving to two full workday shifts by fall 2000 and should
have 24/7 operations up and running by the spring
of 2001. In Zurich, a concentrated group of design, process, and
manufacturing engineers has also been formed
across the different areas of the operations to communicate and
share their knowledge of specific means of
innovation and yield improvement. We believe such cross-business
conversations will facilitate faster
technological evolution and improvement.
EINDHOVEN FACILITY UPDATE
JDS Uniphase's Eindhoven facility in the Netherlands will also be
a key part of the company's active component
technology ramp in 2000. The company is currently in the midst of
building out a new 65,000 sq. ft. production
and assembly facility to open in May and ramp throughout the
summer. The new expansion will bring the
Eindhoven facility all of the latest and greatest technology as
well as enable it to centralize and streamline all of
the steps of its manufacturing processes (today these are divided
between two older, formerly Philips facilities).
More importantly, the new facility will provide the company with
more space for additional wafer fabs/reactors
(from 7 MOCVD reactors to 10 by early 2001), clean rooms, and
assembly lines (from the current three assembly
lines to 7 by mid-summer and the possibility by 15 as seen necessary).
Interestingly, the Eindhoven site is also piloting a manufacturing
execution system (MES) which aims to track
yields at each step of the production process. As we understand
it, the program will assign each "lot" or product a
number and capture all data regarding its performance at each step
of manufacturing. Zurich is also looking at
implementing a similar system with remaining North American
facilities farther down the line.
NEXT GENERATION PRODUCTS
With the OFC conference, the company gave us much to get excited
about in its next generation product portfolio
including tunable lasers (using solely its own technology),
semiconductor optical amplifiers (SOAs), Raman
amplifiers, high power submarine chips, optical switches (JDS
Uniphase is currently using opto-mechanical
technology but is also looking at MEMS, liquid crystal, etc.),
configurable optical add/drop modules, and all
optical cross-connects. We continue to believe that JDS Uniphase
has the broadest and most integrated technology
portfolio and is expanding its R&D efforts to address any and all
emerging technologies. We also expect the
company to lead in the convergence of optics and electronics
developing the "building blocks" to facilitate greater
functionality, lower cost manufacturing, higher speed networking,
and more flexibility in the design, production,
and cycle time for its communications components.
JDS UNIPHASE/OCLI/E-TEK
While there are still no concrete answers regarding the
government's review of the JDS Uniphase/E-TEK
transaction, we believe that the company is moving ahead with
fully integrating OCLI and looking forward to the
next steps it will have to take with E-TEK. It still may have some
operational and integration milestones to hit in
the near-term, but we believe eventually operations, accounting,
technology development, capacity management,
inter-office communications, and management appointments will
settle out over the coming year. We also would
not be surprised if the company uses its richly valued stock and
significant currency to make any technology or
capacity acquisitions deemed necessary. What are the Risks? We are
still not changing our tune in that execution
continues to be the greatest risk at JDS Uniphase. Even more than
ever, the company has a full plate in integrating
acquisitions, operations, technologies, and its strategic goals.
As we indicated earlier, we do believe that the
management team is making headway addressing and connecting all of
the different divisions globally and we
look for the company to provide milestones on its ERP progress,
OCLI integration, next generation integrated
technologies, and revised management structure over the coming months.
We reiterate our BUY rating on shares of JDSU and our $150 target price. |
