JDSU: The Bottom Not In Sight Yet
By Sam Ouyang, PhD
As telecom carriers had a difficult quarter and as Lucent, which represented fifteen per cent of JDSU?s sales, had serious business problems, it is not a surprise to hear that JDSU?s earning report is not so good either.
Sales are sinking: Like other equipment makers, JDSU, which is heavily reliant on sales to vendors such as Alcatel and Lucent Technologies, has experienced a plunge in revenue amid the slump in the telecommunications industry.
For the fourth quarter ended June 30, 2002, JDSU reported a loss of $997 million, or $0.73 per share. For the fiscal year ended June 30, 2002, JDSU had a loss of $8.7 billion, or $6.47 per share. JDUS had sales of $222 million in the quarter, down 15% from the third quarter and near the mid-point of its sales guidance. Our financial condition remains strong.
Losses in the company's communications business are the major problem. Revenue from the Transmission and Network Components, which represented $132 million in revenue, or 59% of total sales, was down 27% sequentially.
JDSU?s non-telecommunications businesses, as a group, were profitable for the quarter. Sales have been either stable or growing for its Thin Film Products Group. Growth areas include projection display, security, and medical/environmental instrumentation markets. Sales have been relatively stable for commercial lasers for biotechnology, graphic arts and imaging, semiconductor processing, and other applications.
Margins Are Also Down: JDSU?s gross margin, including realignment and other charges was minus 6%. This is lower than expected because of a lower margin product mix, in particular, lower sales of high margin telecommunication components, lower part purchase volumes, a higher mix of data communication transceivers, where JDSU is investing for higher market share, and sales of certain non-telecommunications products.
Continual Restructuring and Cost Cutting: Amid a profound slump in demand from the telecom sector, JDSU has continued to reduce costs through its Global Realignment Program, which are charges for accelerated depreciation, and moving and employee costs related to the phasing out of certain facilities and equipment. For instance, the integration of Scion and the subsequent consolidation of the Columbus and San Jose locations will be completed by August 30. More manufacturing has been and will be transferred to China?s Shenzhen. It is expected that all passive components and a high percentage of modules for fiberoptic communications will be manufactured at its China facility by the end of fiscal 2003.
According to the company, the Global Realignment Program has reduced annual expenses by approximately $955 million. JDSU will undertake further expense reductions to generate an additional $160 million in annual cost savings for a total annual cost reduction rate of over $1.1 billion.
In the meantime, SG&A expenses, which were $57 million for the quarter or 26% of sales for the quarter, were down 12% sequentially.
Over the next eighteen months, JDSU will reduce its annual expense rate by an additional $160 million in order to reduce its cash flow break-even to $200 million per quarter. This would imply a pro forma operating breakeven of approximately $260 to $270 million in quarterly sales.
Yet, Financial Conditions Are Sound: JDSU held $1.45 billion in cash and marketable securities at the end of the quarter, of which over $1.4 billion was cash, money market and other highly liquid fixed income securities. JDSU generated $14 million in cash from operations in the fourth quarter, including $45 million in tax refunds. Its net inventory levels declined 21% during the quarter. DSAR were 55 days for the quarter as compared to 57 days at the end of March. This important measure has continued to improve in recent quarters.
Near-term Outlook is Gloomy: The foreseeable outlook for new orders in telecommunications beyond the first quarter remains flat. Demand continues to be weak in the long haul and ultra long haul telecommunications markets, while consolidation is continuing among carriers, systems providers and component manufacturers. JDSU anticipates net sales for the first quarter of fiscal 2003 will be $200 to $210 million as the downturn in the telecom sector continues. Much of the forecasted revenue decline is in components, typically among its highest margin product lines. JDSU expects gross margin to be in the range of 4% to 8% of net sales with a pro forma net loss of $.06 to $.08 per share, excluding charges under the Global Realignment Program.
To be fair, JDSU?s problem, to a large extent, lies in the end market, instead of itself. Undoubtedly in the near term, further erosion in revenues and gross margins will restrict its profitability and put some pressure on its stock. However, given its large cash position and no debt, we believe JDSU will consolidate its leadership through acquisitions and will lead the recovery in the network component market. ---------------------------------------------------------------------------------------------------
The above article was pulled from the Fredhager.com Weekly Upate. Each Friday, the Hager Technology Team updates their subscribers with analysis and commentary on the companies in the Hager Portfolios. Click here. |
