Optical components

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
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lastmile 12/4/2012 | 10:02:26 PM
re: JDSU's Rationalization Process JDSU is the industry leader in fiber optic components.
If this giant continues to lose money (because of this slump) I wonder what will happen to all the small guys.
Could some experts please predict the future of fiber optics a few years down the road.
LightBeating 12/4/2012 | 10:02:22 PM
re: JDSU's Rationalization Process lastmile,

They don't lose money 'because of the slump'. They lose money because they have too many people, too many plants, and an inefficient organization, thanks to their anarchic acquisition strategy. They also have a poor business model, based on making components by hand with a low yield, thinking that the customers (telcos) will buy them at any price.

Those days are gone, and in the end, the "small guys" may win out, if they are the "smart guys", and find ways to make cheaper components, and have a better focus and efficient operations.

I mean, what's this as business acumen, when your revenues are down to $200M, to organize the company for a break-even at $270M ! It's like admitting that you can't make a profit, and won't even TRY. Totally insane...Jo Strauz needs to take a long vacation...

Just my opinion...

lastmile 12/4/2012 | 10:02:19 PM
re: JDSU's Rationalization Process LB,
I tend to agree with you that an inefficient organization can make any company go through a rough path such as JDSU.
Inspite of all this,I still believe that the slump is a significant contributer to JDSU's problems.
I am unable to trace any similar component manufacturer that has made money during this economic downturn.
fusionboy 12/4/2012 | 10:02:18 PM
re: JDSU's Rationalization Process JDSU is the industry leader in fiber optic components.

Industry leader my butt. JDSU is the most comvoluted, screwed up company in the industry today - and has been for the past 4 years. Before all the layoffs it was impossible to get someone to call you back - now its impossible to find someone to talk to ("uh, they've all been laid off, let me try and find someone who might know what they did and get back to you")

Instead of spending hundreds of millions on the Top 5 last year (all were in the top 10 for compensation in the Mercury New's salary survey) They should have spent the money creating a rational, organized corporate structure with a responsive, and responsible, sales staff. "I'm unfamiliar with the product" and "I'm sorry their's no one available to take your call" are unacceptable from any sales staff.
BobbyMax 12/4/2012 | 10:02:18 PM
re: JDSU's Rationalization Process JDSU is a most mismanagemebt company with two headquarters. The downfall of the company started when JDSU acquired DSL. The JDSU charman as I recall made 150 million dollars in stock option benefits. When the company is going through this much troble, it is obscene to excerise option. To me it appears that these guys like robbers with no humanity and consciousness.

It almost hired 20 thousand personnel in the last two years. It is difficult to hire these many qualified people in a short period of time. It is also difficult to integrate these many people in the ompany. Anyone who could spell the word optical was hired by JDSU.

JDSU's manufacturing and integration costs are enormous. The only option for the company is to trim its business and workforce.
LightBeating 12/4/2012 | 10:02:18 PM
re: JDSU's Rationalization Process lastmile,

All component manufacturers more or less followed the JDSU model: ramp up production at whatever the cost. They all hoped not to make money, but to be acquired at a huge price or to make a killer IPO. None of that was common business sense. But you'll see that some of them will emerge within the next 12 months: those who have saved their money and optimized their manufacturing processes.

If you're old enough, you'll remember the early days of the PC's (early 1980's). How many of the manufacturers are still there today. Where's the Atari, the Commodore, the Osborne? Dell didn't even exist, yet they came up with a great business model, and now they're one of the major players. We're at the same stage in the component industry.

For all I know, JDSU could disappear, and I wouldn't cry. It's upper management has stolen enough money from investors, they should be in jail by now. The SDL CEO got a $150M cash bonus when they were acquired by JDSU. How do you justify that ?!

lastmile 12/4/2012 | 10:02:17 PM
re: JDSU's Rationalization Process LB,
I tend to agree with you when you say that JDSU is a mismanaged company.
However I disagree when you compare JDSU with computer manufacturers like Atari,Commodore and Osborne. All those companies assembled computers but never manufactured parts.
Unlike electronics, fiber optics is a far more intricate science and it will take years for any start up compete with the existing players. Even if they do come out with the latest technology they would would be absorbed by the big guys.
IMHO there will be one or two dominant players from the existing few. I strongly believe that JDSU is a company with superior technology but bad management and weak support from investors could ultimately lead to their down fall.
gadfly 12/4/2012 | 10:02:16 PM
re: JDSU's Rationalization Process It seems likely that JDSU is one of the first wave players in optical components very much like Shockley and Sprauge ( sp ?) were in early days of semiconductors. Then along came the second wave, TI, Motorola and Fairchild. But they lost out to the third wave headed by Intel who pushed integration.

My long term bet is others will emerge with much more sophisticated integration approaches for optical integrated circuits - that may or may not include Intel who don't seem to understand this business as well as their core business, but they are trying to make a go of it.

LightBeating 12/4/2012 | 10:02:16 PM
re: JDSU's Rationalization Process lastmile,

Don't getm e wrong, I didn't mean to compare the relative technological merits of building computers and optical modules. I was comparing the state of the industry. I agree with you that they're not the same. There was another interesting thread a few weeks back comparing the optical networking industry and the railroad industry at the turn of the century, hardly comparable from a technological point of view!

Nevertheless, I'm not sure I would qualify fiber optics as an "intricate" science, especially when compared with electronics (and here I mean chip manufacturing, not assembling computers). JDSU was at the right place at the right time, but all they had was decent packaging technology, yet inefficient and expensive. The good 'materials' technology (lasers mostly, because they never had much success with their waveguides) they acquired.

Up until the merger of JDS and Uniphase, both these entities actually were very good businesses that had a focused acquisition strategy, especially Uniphase. They then had a few good products (Uniphase had the modulators, JDS had optical isolators and some thin films). But after that, they went wild and acquired everyone and his dog, ending up with two, three or more companies with similar technologies (just count how many FBG businesses they ended up having). I mean, merging with E-tek was stupid from a business point of view, it only made sense for the executives who made so much money out of it, and so was the merger with SDL.

Finally, I don't agree that it will take "years" for startups to compete with JDSU's products. All it takes is some money to buy back those empty plants (at a dime in a dollar), and rehire the expertise. I believe that at this point, JDSU must have (intentionnally) lost its most competent people.

LightSeeking 12/4/2012 | 10:02:15 PM
re: JDSU's Rationalization Process I also doubt that JDSU will remain as one of the big players in the optical component industry. Their timing was right, which got them to where they are now, but I would argue that they even have very good technology or a good business model. In addition, the market condition makes it even more challenging for them to find a business model to sustain.

Gadfly may very well be right: a much more sophisticated integration technology will come out of the next wave players. I have doubts about Intel as well ... it will be interesting to watch who emerges ;-)

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