Optical components

JDS Woes Kick Up More Intel Talk

As JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) continues to rack up disappointing quarters, it's becoming clear that even the best restructuring effort might not be enough. And that's spurred the revival of a pet theory in the industry: Should Intel Corp. (Nasdaq: INTC) acquire JDS?

Last night, for the quarter ended Sept. 30, JDS reported losses of $521 million on sales of $193 million, compared with losses of $1.2 billion on sales of $329 million for the year-ago quarter (see JDSU Sales Fall in 1Q).

Analysts were particularly disappointed that non-telecom products, now representing about half of JDS's revenues, fell slightly from the previous quarter. "We thought that was a nicely growing business, and it showed some volatility," says James Jungjohann, an analyst with CIBC World Markets.

Moreover, JDS official said they would have to cut additional jobs, not specifying numbers. JDS's employment rolls are down to 8,000, from 20,000 at midyear 2001.

As JDS continues to sink like a Taco float at the World Series, maybe it's time to revisit the Intel theory -- one that analysts have kicked around for some time. It's a minefield of what-ifs, but if Intel wanted to become a broad optics supplier, JDS would be a one-stop shop.

Intel's definitely interested in optical networking, particularly the transceiver market (see Intel's 10-Gig Shopping Spree), but hasn't indicated interest in a JDS-sized acquisition.

Some analysts ask why Intel has been bothering with all the startups it's been buying, when it could instantly buy the market leader.

"It would be the smart move, instead of buying up all these B-grade companies," Jungjohann says (see Intel Scoops Up New Focus Laser Unit and LightLogic Bulks Up Under Intel).

"They have spent considerable dollars, in absolute terms, thinking about optical," says Joseph Wolf, analyst with UBS Warburg. "The question is timing. Intel can take a long view on this."

Jungjohann agrees. "They know time is on their side. They would wait for JDS to get its businesses lean and mean."

In a sense, JDS is lucky that Intel hasn't dived into the fray already. In a note regarding TriQuint Semiconductor Inc.'s (Nasdaq: TQNT) purchase of Agere Systems' (NYSE: AGR) optical division (see TriQuint to Acquire Agere's Optics), Jungjohann points out that "very recent speculation was that Intel would look to purchase the Opto unit -- putting it in direct competition with JDSU and potentially building a much larger opto franchise.

"Selling to a tier 2 player like TriQuint should keep investors interested in JDSU's long-term [dominant] industry position."

JDS's size is the lynchpin of investors' hopes. "While competitors will always remain, we believe that JDS’s long-standing footprint, combined with a balance sheet that implies staying power, could extend its leadership position within the industry as both larger and small players continue to exit," analyst Jeremy Bunting of Thomas Weisel Partners says in a note.

Still, investors might be overdoing it, having driven JDS's stock price up 50 percent in the past month, to $2.20 a share.

As for restructuring efforts, analysts could offer little solace. The company's current slim-down plan is aggressive but probably not enough.

"Keep cutting and cutting," Jungjohann says. "It's a tough, tough company to reorganize because of all the acquisitions they made. You've got to unwind them. They're going to be down to eight to 10 facilities, and you still have to figure out if that's the right number."

Sadly, most of JDS's recovery prospects hinge on the timing of the telecom recovery, and there's precious little the firm can do to accelerate that. "Their place in the food chain is their place in the food chain, and that's part of the risk in investing in this part of the industry," Wolf says. "There' s not much that can be done from the components end to stimulate demand."

Maybe JDS and its investors can take heart from the knowledge that design activity continues out in the world -- it just isn't turning into big orders yet.

"When you look at these businesses as stocks, you say there's not much going on," Wolf says. "But decisions are being made by designers daily, and innovation is taking place."

— Craig Matsumoto, Senior Editor, Light Reading
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lastmile 12/4/2012 | 9:28:25 PM
re: JDS Woes Kick Up More Intel Talk JDS's size is the lynchpin of investors' hopes. "While competitors will always remain, we believe that JDSGÇÖs long-standing footprint, combined with a balance sheet that implies staying power, could extend its leadership position within the industry as both larger and small players continue to exit,"

No way.
whyiswhy 12/4/2012 | 9:28:24 PM
re: JDS Woes Kick Up More Intel Talk The "madman" will get those numbers close to plan or heads will roll. (Maybe even Jozefs and Dons?) That's why Syrus is there.

Intel buying them will not change their major problem: blood. Last night, for the quarter ended Sept. 30, JDSU reported losses of $521 Million on sales of $193 million, compared with losses of $1.2 Billion on sales of $329 Million for the year-ago quarter.

Syrus was brought in by the investment bankers, so maybe the Intel rumor has some merit. Put some lipstick on this pig and sell it!

whyiswhy 12/4/2012 | 9:28:23 PM
re: JDS Woes Kick Up More Intel Talk Name one other company that:
1) Has the customer portfolio
2) Has The IP required
3) Has the product breadth
4) Has the Cash horde required enough to last even another 5 year downturn long after there are no competitors left

Are you sure you don't mean "had" for number one?
As to IP, there are many companies that have it: NT, BKHM, GLW, etc. etc. As to three, product breadth is what is killing them...tell me how that is an advantage. finally, how in the heck do you get five years with about a $1B cash left and Syrus said (in the call yesterday) they are going to spend about $400M this year to downsize?

Just wondering... :-)


boston beans 12/4/2012 | 9:28:23 PM
re: JDS Woes Kick Up More Intel Talk Name one product where JDSU is best-in-class today? How much innovation can occur when you are dropping from 41 to ~10 facilities and from 29k to ~8k people? Political innovation, maybe. Intel would not be satisfied with anything but #1 in a defined market space.

Jack Grubman's of the Analyst world: how many people have you put out of work with your beat-the-drum predictions?

Craig, did you hit your article quota? This is old news!
Stu Pendas 12/4/2012 | 9:28:23 PM
re: JDS Woes Kick Up More Intel Talk Last Mile,

Name one other company that:
1) Has the customer portfolio
2) Has The IP required
3) Has the product breadth
4) Has the Cash horde required enough to last even another 5 year downturn long after there are no competitors left

In fact, I challenge you to come up with another company that has any 3 of the above 4 significant competitive advantages.
Stu Pendas 12/4/2012 | 9:28:20 PM
re: JDS Woes Kick Up More Intel Talk The point I was making is that for long term longetivity, you need all of the items mentioned. Having IP without ability to turn it into a manufacturable product is not good enough. Having manufacturing capability when someone else owns the IP (like JDSU) is not good enough. Having the IP and manufacturable product is not good enough if you are not a financially viable company for at least 2 more years. Having the IP, the Manufacturable Product, and a financially viable company is not good enough if you don't have the customer relationships, and at best puts you in an uphill battle for the business with the supplier of all the other components.

If you were designing a system, will you be looking for the financial stability of your supplier especially if the last supplier that you spent weeks qualifying in your system just shut their door. I say: Absolutely. This will naturally drive business towards JDSU making it even more difficult for the struggling competitors. Like it or not: This is the reality. Winner sometimes does take all, just like in poker (even if he is an A'hole)

The actual cash burn rate is lower than that. Even assuming the satated $400 million annual loss to reduce burn rate does not pan out and assuming that there is no recovery and assuming headcount reduction does not reduce/eliminate losses, that still leaves 3 years of positive cash reserves. ($1.4 billion/ $400 million). Is there another company in this position......?
BobbyMax 12/4/2012 | 9:28:19 PM
re: JDS Woes Kick Up More Intel Talk JDSU has expanded too fast and acquired a lot of companies at the height of the false telecom boom. It is still not downsizing downsizing fast enough. JDSU has no business and product plans and things are happening at random. If Intel acquires JDSU, this would be the end of Intel.Intel has been trying get into optical space since the last space, but it has not broken any ground. Intel has to save its existing business because of tremendous downturn of semiconductor industry.

Maintaining two separate headquarters by JDSU is without any merit. JDSU is wasting millions of dollars every month. The invisible cost of inability of making decisions is very detrimental to the company.

The Wallstreet analysts can be trusted with anything. Usually they make false statements to boost up the stock prices.

The telecom industry is not going to recover for another 3-4 years. By the time the telecom industry recovers, the total market size would dwindle at least by 30-to-40%. This means that many telecom companies would disappear.
photonpro 12/4/2012 | 9:28:19 PM
re: JDS Woes Kick Up More Intel Talk You are absolutely correct about your assessment of JDSU not to also forget we are in a telecom depression.When spending begins and it will JDSU stands to be in a very strong position to continue to take market share and begin again to grow their business.Regarding their cash position-next year at this time they should have about 1 billion dollars and be cash flow positive with all of the costs of restructuring behind them.Whether people like it or not JDSU is going to survive and thrive when the telecom depression is over.Everything is relative- the industry and all its players are right sizing their businesses to the market realities of today with many players going out of the business which in turn will be a big positive for JDSU in the future.Every boom and bust cycle has its unexpected caualties and winners and everybody thinks the depression is going to continue forever but the reality is that it will end and a new cycle will begin with JDSU becoming even more important in this up-cycle to its customers than the last up-cycle.Never forget the chip downturn in the 70`s,the computer downturn in the 80`s, the financial downturn in the early 90`s,and now the telecom downturn in the early 2000-they all have one thing in common -all the weak players get weeded out and an even stronger industry emerges with far fewer players .Chances are JDSU will be the dominant player to emerge from this first cyclical component downturn with a strong #1 position regardless of what intel does.Also,dont forget every major optical networking player depends more on JDSU today than ever before (believe me I know).It happens to be a great company in a shitty environment right now but like the seasons that will change.
whyiswhy 12/4/2012 | 9:28:04 PM
re: JDS Woes Kick Up More Intel Talk Do you think JDSU just came up with the $1B cash figure by luck? I'll give them credit for knowing their numbers better than anyone else. They obviously calculated the cost to downsize, and put enough cash there to do it.

Consider this: that $1B cash pile is at least a factor of ten above what it would take a fresh start-up to come into the market and "Goldmine" many of their most profitable products.

The lesson here is it really does cost more to get smaller than it does to get bigger. A lot more. Ten times more. The $400M figure Syrus touted is off by at least 50%. That was the "book" cost of closing the plants, surplusing equipment, terminating real estate contracts. The re-qualification costs for their Telcordia qualified products could easily top $200M alone, and take over a year, each.

That's why they are on very very rocky ground, and honestly much worse off than a smaller company coming up in the world. At least the smaller company does not have a $1B weight around its neck.

JDSU consolidating and downsizing is equivalent to starting over with a big Lead weight tied to their neck. A $1B Lead weight.

That means they (JDSU) are actually much more likely to go bankrupt than a start-up (for example). Private investors will aggressively back the companies in their portfolio they believe can survive and make money. And the amount it takes to keep a smaller company alive and growing is peanuts compared to $1B!

JDSU is largely run by investment bankers who think they know how to strategically run things. I think we all know how they make their money: by duping smaller investors, not by running things brilliantly.

That's why a small company with good management, products, investors and a few real customers is more likely to win. And there are more than a few in that condition out there. But you won't hear that from Wall street analysts or investment bankers. Gee, wonder why?

As always, just my humble opinion.

Hybrid 12/4/2012 | 9:28:00 PM
re: JDS Woes Kick Up More Intel Talk Quality is not JDSU's first priority - it never has been, and they have been quite honest and open about that. Winning sales (JDSU having mastered the skill early on) and shipping an innovative product with adequate specs has always been and always will be. From that perspective JDSU products were an awesome supplier.

Many a competitor, (some small, some large) has benefited from having to step in following a JDSU field failure and pick up the pieces, winning sales based on product value, AND follow on service, quality and reliability.

This approach to business does not encourage follow-on customers. Unfortunately for JSU many systems integrators are designing out JDSU products in order to reduce the lifetime costs associated with field failures, and sticking with similar sized companies who can stand behind their products and at least have a chance of surviving to stand with their customers and provide service over the lifetime of the product. I have direct experience in having to deal with their qulaity issues, in fact it was my full time job for a year.

The cost of quality is so high I expect quality to suffer further at JDSU given prevailing business conditions. Many of their product lines have been discontinued, causing customers to flee to competitors for replacement parts. I also have contacts at JDSU that state they are internally in disarray due to the siloed nature of the acquired businesses and a lack of clear strategic leadership.

Smaller businesses are in a good position to step up and offer alternative sources of supply, and can carry the cost of quality provided they maintain a narrrow focus on one or two quality products.
Caveat emptor!
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