JDSU's Rationalization Process

A worsening market and changing breakeven rates are forcing JDSU to make tough choices. What will the outcome be?

July 26, 2002

5 Min Read
JDSU's Rationalization Process

After another brutal quarter, JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) says it has turned a corner in its restructuring and is set to scrutinize the basic nature of its business. But with a lack of specifics available, there is plenty of industry speculation about what the "new JDSU" will look like.

On last night's earnings conference call with analysts, execs said market conditions are calling for more drastic action, above and beyond the plant closures and workforce reductions that have already taken place. (After all, headcount's been cut by two-thirds, leaving a little more than 9,000 people on staff, and plants have closed worldwide.)

But the real work to take place over the next 18 months will be a complete rework of the company's product portfolio, resulting in "significant product line consolidations" and other reshaping of company operations, say JDSU executives. With the help of a newly announced president and COO, Syrus Madavi -- late of Texas Instruments Inc. (NYSE: TXN) and ON Semiconductor (Nasdaq: ONNN) -- JDSU will decide just what the next phase of its mission will be.

The company's not saying much about the process right now. "It was disappointing how little detail they gave on last night's call," says Max Schuetz, optical component analyst at Credit Suisse First Boston Corp. Maybe the brass really doesn't know what direction it will take, he suggests, and he says a negative 4.3 percent gross margin would hint the team hasn't given it much thought.

But analysts and other pundits, Schuetz included, have plenty of suggestions. Here's a rundown of some industry thinking on how JDSU needs to reshape its business to meet the future of optical components head on (and it's free!):

  • Consolidate big laser plants. Sources say JDSU needs to face a painful consolidation of laser-making facilities -- something the company has tried to avoid up to now. When customers learn that a laser was made in a new plant, they tend to rethink their contracts and call for product requalification. Some note that this has kept some JDSU semiconductor plants open, such as some 980nm pump laser facilities inherited with the SDL acquisition. JDSU must now decide how to regroup the plants to avoid customer disruption.

  • Integrate the manufacturing of passive components. Sources say demand and pricing for certain passive optical components, such as arrayed waveguides and optical mux/demux parts, have come down so drastically over the past year that any business banking on high volume sales in these areas is doomed. Not even increased demand for AWGs in areas like CATV equipment will bring the necessary relief. "Arrayed waveguides call for high-end clean rooms and sales are based on the premise that wavelength demand is exploding, and that hasn't happened. Growth in demand for more wavelengths hasn't progressed," says Craig Armiento, director of optical network engineering at Lightchip Inc., which competes with JDSU in optical mux/demux and monitoring components.

  • Stop acquiring. Some observers think JDSU's purchase of Scion Photonics (see JDSU Posts Loss, Buys Startup and Why JDSU Bought Scion) might help bring a needed focus to JDSU's AWG business. Then again, it could also complicate matters. "The company continues to make investments and production transitions to new technologies -- intrinsically a good philosophy, but there is risk of glitches in bringing new ... products to market," write Kevin Slocum and Dennis Gallagher of SoundView Technology Group in a note to investors today.

  • Focus on OEM and customer savings. Many think JDSU and other large optical component makers need to focus on making parts that will help save operational costs on telecom networks. Armiento of Lightchip, for instance, says his company has refocused attention on its optical monitoring component as opposed to its mux/demuxes. Armiento's going on the road to tout the cost savings involved in having parts track the health of optical networks and remotely report activity back to the network operations center, avoiding costly truck rolls. Products like these, he says, are more in line with carriers' goals right now.

    Analysts have also cited the need for module integration, size reduction, and lower power consumption as key to attracting carrier spending (see Components Crunch Time).

  • Cut R&D spending. Some think JDSU has its head in the clouds to a certain extent. "To be spending R&D at a run rate of 22 percent of sales is tough to justify right now," says CSFB's Schuetz. The company might better be served by cranking out line card components for existing system OEMs and save some innovations for later, he says.

    Some say the company needs to consider even its best ideas, such as making complex modules to order for specific customers, as ripe for change. "The company's vertical integration and formative module strategy is powerful, but may take several more quarters to prove out," writes James Jungjohann of CIBC World Markets in a note.

Meanwhile, the company struggles on. In its quarterly report (see JDSU Posts Loss, Plans Cuts), it posted overall sales of $222 million for the quarter, a 15 percent reduction sequentially. Pro forma loss was $140 million ($0.10 per share). Sales of telecom-related products (including transmission and network components) represented 59 percent of revenues and were down 27 percent sequentially.

The company is guiding for revenues between $200 million and $210 million next quarter, with a net loss of $.06 to $.08 per share. The company says it needs to realize $260 to $270 million to return to profitability -- something most analysts don't see happening until at least 2004, given current trends.

Late today, shares of JDSU were trading at $2.11, down $0.42 (16.52%).

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.comWant to know more? The big cheeses of the optical networking industry will be discussing this very topic at Opticon 2002, Light Reading’s annual conference, being held in San Jose, California, August 19-22. Check it out at Opticon 2002.

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