JDS grapples with a shrinking kingdom
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ANALYSIS: Fibre-optics leader tries different survival technique by cutting jobs while still making new investments
By SIMON TUCK TECHNOLOGY REPORTER
Monday, May 6, 2002 – Print Edition, Page B3
OTTAWA -- There's little doubt that JDS Uniphase Corp., one of the darlings of the telecommunications boom that burst about 18 months ago, remains the king of the fibre-optic components world.
The industry's continuing struggles have raised serious questions, however, about the state and scope of that kingdom.
While its industry continues to shrink, JDS, like many others in the sector, is searching for the crystal ball that will allow it to calculate its optimal size for the new realities of its market. Unlike most of the telecommunications industry's large players, however, JDS is trying to shrink while at the same time make new investments so that it's better positioned for growth when things turn around.
Last week, this tricky push-and-pull exercise was put in play as the company simultaneously announced its latest round of job cuts and a new acquisition. The 2,000 new job cuts mean that JDS has now handed pink slips to more than 19,000 employees -- or about two-thirds of its work force -- since the start of last year. JDS, which is based in Ottawa and San Jose, Calif., also said it will vacate an unspecified number of buildings as part of a process that it calls its "global realignment program."
JDS also concurrently announced that it had agreed to buy Scion Photonics Inc. for $43-million (U.S.) in cash, JDS's second acquisition in the past five months. San Jose-based Scion, which has 75 employees, specializes in advanced waveguide technology, which could be a key technology for the next generation of fibre-optic components and modules.
JDS said it must invest in new technology to ensure that it will be well positioned to meet customer demands when the market eventually picks up. "It's not a quest for survival," said Jozef Straus, the company's co-chairman and chief executive officer, during a conference call with analysts and reporters. "It's a matter of leadership, and we are the market leader."
Kevin Slocum, a technology analyst at SoundView Technology Group, said the fibre-optic components business is ripe for consolidation and that JDS is likely to continue as a buyer. "I think there's an acquisition history at JDS that suggests they'll be active," he says.
Mr. Straus said the company has had to cut jobs and other costs to keep its spending in line with sales. During the third quarter that ended March 30, JDS posted a loss of $4.3-billion or $3.19 a share on sales of $261.8-million, compared with a loss of $41.8-billion or $36.63 on $920.1-million a year earlier. Third-quarter sales also fell 8.5 per cent compared with the second quarter.
JDS said last week that it expects to post a loss during the fourth quarter that ends June 30, excluding one-time charges, of 3 or 4 cents a share on sales of between $210-million and $230-million.
What a difference a year or two makes. Like Nortel Networks Corp. of Brampton, Ont., a key JDS customer and the dominant player in the fibre-optic networking business during the recent boom, JDS's most pressing problem throughout most of 1999 and 2000 was keeping up with demand.
The company's share price reflected that enviable position, multiplying by more than eight times in 1999 before reaching an all-time high of $403 in November, 1999.
JDS used that soaring share price to become the industry's leading consolidator. With the Scion deal, JDS has now acquired 15 companies -- including key rivals SDL Inc. and E-Tek Dynamics Inc., both of San Jose -- since JDS itself was created in January, 1999, in a $4.7-billion merger between JDS Fitel Inc. of Ottawa and Uniphase Corp. of San Jose.
Both of last week's developments -- the job cuts and the Scion acquisition -- further concentrate JDS's power in its San Jose wing. Scion continues to tilt the balance toward the California operation, while the job cuts reduce JDS's pool of Canadian employees to less than 2,500 or about one-quarter of the company's total headcount. When the company was created, about two-thirds of the new company's 3,600 employees were in Ottawa.
Mr. Straus, who had been CEO of JDS Fitel before the merger, is now JDS Uniphase's only top executive based in Canada. When asked last year about the company's waning Canadian influence, Mr. Straus said it's not an important issue because JDS is a global company.
Mr. Straus's influence, however, continues to grow within JDS. He increased his responsibility last month to make up for the temporary absence of chief operating officer Greg Dougherty, who is attending to a family illness.
The industry downturn has led to other changes as well. JDS executives said this week that the company is now generating more than one-quarter of its sales from industries other than its core telecommunications market, with that percentage almost certain to increase in the coming months.
Tony Muller, JDS's chief financial officer, said the trend will almost certainly continue for at least the rest of this quarter because of the industry's problems.
Most analysts say the slumping telecom equipment market could still be months away from showing any significant signs of improvement. "Telecom is just horrible," Mr. Slocum said. "I don't think they're anywhere near growth mode."
Alex Mou, a technology analyst at Hotovec Pomeranz & Co. in San Francisco, said JDS will likely be in good shape in the long term, but that the company remains dependent on a telecom rebound.
But JDS executives say it's only a question of when -- not if -- the market returns. "We've been stuck at a red light," Mr. Muller said recently. "Red lights eventually turn green."
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