Optical components

Doink! JDSU Hits Capacity Ceiling

JDSU (Nasdaq: JDSU; Toronto: JDU) says demand for certain optical products is exceeding its production capacity, echoing a similar complaint from Bookham Inc. (Nasdaq: BKHM; London: BHM).

JDSU's news came out during last night's quarterly earnings call, where the company missed its fourth quarter earnings expectations by four cents per share. (See JDSU Reports Q4 and JDSU's Down.)

"There are certain product lines such as ROADMs [reconfigurable optical add-drop multiplexers] and tunables where the forecast had been rising faster than the increased capacity that we'd been building," CEO Kevin Kennedy said on last night's earnings call. Hence, $10 million in revenues have been "scheduled into fiscal Q2 despite the fact that customers have asked for it earlier."

JDSU said first-quarter revenues would be between $378 million and $394 million, short of analyst predictions of $400.1 million as tallied by Reuters Research . Add that missing $10 million, though, and JDSU's range would have fallen on target.

Just a few weeks ago, Bookham noted it ran short of capacity for assembly and test of its tunable lasers -- a product segment that nonetheless grew 17 percent between Bookham's third and fourth quarters. (Bookham's fiscal year ends in June; see Bookham Reports Q4.)

That's leading Bookham to boost its capital spending during the second half of this year. That move, though, will push Bookham's cash-flow breakeven point into next year, CEO Alain Couder said on the company's July 24 earnings call.

— Craig Matsumoto, West Coast Editor, Light Reading

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materialgirl 12/5/2012 | 3:34:05 PM
re: Doink! JDSU Hits Capacity Ceiling This sounds huge for 2 reasons. One is that since when have optical component vendors complained about capacity constraints? Who is buying this stuff and why? Is this a false start or the beginning of something bigger?

Secondly, if JDSU cannot meet street numbers while operating at capacity, when will they? I realize their test numbers were off, so perhaps optical is now a meaningless subset of JDSU. Who would have thought, in 2000, this would ever happen?
Pete Baldwin 12/5/2012 | 3:34:04 PM
re: Doink! JDSU Hits Capacity Ceiling To your first point: Exactly. Worst case is that this is just a blip, or even a case of double-ordering (JDSU thinks that's not the case, btw) ... which would mean that any capacity added would become just excess expense once things normalize. I guess that's a concern for Bookham most of all, with their Shenzhen facility.

Not sure I'd call optical "meaningless" to JDSU, but it's true that they're counting on test to drive growth margins (and to become 45% of revenues, IIRC from the earnings call.)

Test was off partly because of a surge in cable MSO business in a previous quarter, a surge that they knew was an anomaly. Minus the cable spike, test was up 15% y/y and 6% q/q, which JDSU says was within their model.
^Eagle^ 12/5/2012 | 3:34:03 PM
re: Doink! JDSU Hits Capacity Ceiling MaterialGirl,

To your first point. There is indeed a great overall move in optical components that has been somewhat under reported. Most of these companies are too integrated with so much of a "one stop shop" structure, that when they report their numbers, there is a huge mix of low margin and even products that make loss mixed with some others that are making a profit and are in accelerating sectors.

if you peel things back and analyze by deeper parsing of sectors and applications, then some very interesting trend lines emerge.

When you understand those trend lines, the bookham and jdsu news is not surprising. Nor is it a one time blip. There is a thread of components that are experiencing a boom and I believe this sector will continue to grow for the next several years.

Key is you gotta parse out the network and drill deeply into the carriers from access to edge to metro to regional to long haul and also the layered architecture of transport, switching and routing and understand where there is margin and where there is volume, but no margin or even negative margin.

Since these large companies are so diversified, they tend to not be able effectively attack quickly things that happen faster than they expected. And surging sectors are not easily identifiable when looking from the outside in where all the numbers are rolled up into larger groupings.

But again, I am pretty sure this is not a one time exception. I am pretty sure that in these key sub-sectors there is a quickly rising market that will continue for some time.

Focus is the name of the game in my mind if you are a component vendor. Do what you do very well and make a profit. Don't bleed your self or your investors dry by trying to be all things to all people and service all the sectors. Some are a race to the bottom in terms of selling prices and margins. Other component sub-sectors are actually quite profitable and much more immune to price cutting by competition and have difficult barriers to entry.

Don't dilute your effort into things that are low margin.

I also believe in killing off your own low profit products before competition does it for you and keeping all a company's resources focused where they can truly add value and hence margins. Profit is the name of the game.

steady 12/5/2012 | 3:34:03 PM
re: Doink! JDSU Hits Capacity Ceiling Hi sailboat, I appreciate your post very much, for everytime you give very serious and instructive comments. We can find in the article that the capacity problem concerning JDSU and BOOKHAM has a overlap of tunable products. It coincides with your point -- some specific product segment acts.

However I think "to focus" is too difficult for old company than startup. Anyway the old assets can't be just abandoned. In this situation, my personal opinion is "merger" is still an effective and quick way. Maybe we should have more good mergers, if Finisar and Optium can be counted as one.
Riverhigh 12/5/2012 | 3:34:02 PM
re: Doink! JDSU Hits Capacity Ceiling While I appreciate the discussion placed on product mix and portfolio strategy I believe JDSU's inability to control SG&A expenses have been overlooked. The following extract from the Motley article released August 21 says it all:

GÇ£How did JDS turn better gross margins into an even bigger operating loss? By allowing its costs to run amok. R&D spending increased 12% GÇö but IGÇÖve got no objection to that. Tech firms need to invest in their tech. But I donGÇÖt like that JDS increased its selling, general, and administrative spending at twice that rate GÇö 24%. This surge in operating costs has JDS now posting an operating margin worse than those of Agilent (NYSE: A), Coherent (Nasdaq: COHR), and Finisar (Nasdaq: FNSR)GÇ¥

Regardless of the gross margins until JDSU gets a handle on their SG&A expenses this company will be under financial pressure. I think its time for the Board of Directors to step in and put in place a plan to reduce SG&A expenses.
^Eagle^ 12/5/2012 | 3:34:01 PM
re: Doink! JDSU Hits Capacity Ceiling Riverhigh,

I completely agree with you. Lots and lots of management and middle to upper layers. Each taking a cut of the pie.

My comments were more on the demand side. Was there and is there a real trend emerging that shows growth in some sectors. I think there is.

But in terms of JDSU, I see several problems. You pinpoint one of the major ones and describe it succinctly. I completely agree.

materialgirl 12/5/2012 | 3:33:57 PM
re: Doink! JDSU Hits Capacity Ceiling Dear Sailboat:
Thanks for your post. It sounds like this is a market of niches, with limited ability for a vendor to move niche to niche. Which means, if you lead the right niche and it starts to grow, you do well.

IMHO, the 40G backbone market just cannot get that big, since we can't need that many core switches. The volumes must grow as we move toward access, where the sweet spot has to lie.

As to the JDSU SG&A problem, does it stem from the fact they service two separate markets with no overlap?
vlui 12/5/2012 | 3:33:51 PM
re: Doink! JDSU Hits Capacity Ceiling Sailboat,

You made some very good points. But did you do any peeling and parsing of their numbers? If so, what did you find? It seems apparent about the ROADM and tunable lasers as common denominators for BKHM and JDSU, but any deeper insights?
HomerJ 12/5/2012 | 3:33:49 PM
re: Doink! JDSU Hits Capacity Ceiling Can anyone shed some light on JDSU's comm test strategy? I get that optical comms was a big turd a few years back and they needed to "diversify" to survive. But they diverified into a completely separate line of business. Heck, it looks today a lot like Agilent did 3 yrs ago. And Agilent dumped the component side of things. Why? It had nothing to do with test equipment and wasn't making money. Sure, there are parts of JDSU's optical comms making money, but overall that's some low margin stuff.
^Eagle^ 12/5/2012 | 3:33:47 PM
re: Doink! JDSU Hits Capacity Ceiling HomerJ,

Com test strategy at JDSU is completely separate from the optical components and modules business.

essentially it is a completely separate entity with no overlap. Even different HR staff, different recruiters, different sales management and sales channels, different reporting, different everything.

only overlap is at very top of the corporate pyramid.

Essentially, they are almost just like Agilent with the only exception being test application focus. There is perhaps 30-40% overlap on test platforms between Agilent and JDSU / Acterna.

Acterna has more test boxes for telco's and mso's. Agilent has test boxes for more different industries (think RF, medical, industrial manufacturing, etc. in addition to communications) and more different high end spectrum analyzers.

Hope this helps.

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