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JDSU May Be Mulling Optical Exit

Craig Matsumoto
5/14/2007

Following a restructuring process that has created something akin to a holding company, JDSU (Nasdaq: JDSU; Toronto: JDU) could be preparing to sell off its Optical Communications division, industry sources say.

A sale doesn't appear imminent, but market chatter is that JDSU considers a selloff to be one option, given the continued disappointing returns in optical.

"What I've heard on my side was that JDSU is seriously considering divesting its optical communications business," says one source in the optical industry. "If it compares the margins to the test-and-measurement side, optical communications looks invisible."

It's not as if JDSU has lost all interest in optical: After all, the company is in the process of acquiring Picolight Corp. (See JDSU Picks Up Picolight for $115M.)

But sources say the removal of optical would let JDSU concentrate more on its Communications Test and Measurement unit, which was launched with the 2005 acquisition of Acterna. JDSU is continuing to beef up that side of the business, too. Just last week, JDSU grabbed Innocor Ltd. for an undisclosed sum. (See JDSU Buys Into Testy Market and JDSU to Acquire Innocor.)

For JDSU's third quarter, ended March 31, optical products recorded operating losses of $1.3 million on revenues of $128.7 million. T&M notched operating profits of $22.1 million on sales of $162.9 million.

Just one third of the optical portfolio is "operating at or above our target gross margin of 30 percent," JDSU chief executive Kevin Kennedy said on the third-quarter earnings call.

"We have already initiated actions, primarily within optical communications, to be sure that we are able to progress our profitability initiatives regardless of revenue," Kennedy stated during the call, referring to announced staff cuts of 400. He later adding that JDSU has "rescoped operations so that the optical communications manufacturing function now has a dedicated team." (See JDSU Regresses in Q3.)

The "rescoped" part means David Gudmundson, who was named president of optical communications in April, will also run the optical group's operations, which had been the purview of senior vice president Debora Shoquist. (See JDSU Appoints Exec.)

JDSU announced April 25 that Shoquist is stepping down to a staff role. A spokeswoman notes she's still working with Kennedy.

Gudmundson replaces senior vice president Mike Ricci, who's left JDSU to become CEO at chipmaker Ikanos Communications Inc. (Nasdaq: IKAN) (See Ikanos Names CEO.)

That change helped intensify the rumors about an optical selloff, but Ricci tells Light Reading that he was nearly done with the Ikanos interviewing process when Kennedy told execs about the restructuring.

"I told Kevin, 'I'm probably a week away from telling you I'm going to leave,' " he says. "We decided it made no sense for me to be a candidate for that [president-of-optical] role."

The new structure turns JDSU's optical and test divisions into nearly independent entities, with JDSU behaving almost like a holding company. (Other groups inside JDSU include custom optics and commercial lasers.)

That's only going to help fuel supposition of an optical selloff, because the optical group can now cleanly break from JDSU. Moreover, Gudmundson was in charge of JDSU's acquisition strategy recently.

JDSU declined to comment on whether the sale of the Optical Communications business is being considered.

Assuming JDSU is interested in selling, who'll be the buyer? None of its competitors seems big enough to take on such a purchase. Moreover, big mergers among the optical components players have been hard to come by. For example, possible deals involving Bookham Inc. (Nasdaq: BKHM; London: BHM) kept emerging but were thwarted every time. (See Will Avanex Hook Bookham? and Georgio Anania, Ex-CEO, Bookham.)

A stronger possibility is private equity, which has been snatching up tech properties recently. One optical industry source says private equity groups are scouting the optical sector, willing to put down the money if the right deal comes along.

"The private equity people like this kind of industry, because it's mature and predictable," the source says. "They can pretty much model what's going to happen if you roll up a lot of the companies in this space."

— Craig Matsumoto, West Coast Editor, Light Reading

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jggveth
jggveth
12/5/2012 | 3:08:40 PM
re: JDSU May Be Mulling Optical Exit
There's nobody big enough to buy JDSU optical -- unless the Japanese want to -- probably not.

Private equity likes cash flows -- there is none here.

JDSU is just going to have to stick it out and improve margins once the inventory correction is over.

They're far more likely to acquire than to be acquired in the optical space.

Dumb article.
Pete Baldwin
Pete Baldwin
12/5/2012 | 3:08:39 PM
re: JDSU May Be Mulling Optical Exit
Private equity does like cash flows, I'll grant you that. But I'm being told they're seeing potential in optics. You're free to think that's dumb, and in the end, maybe they'll agree with you.
Pete Baldwin
Pete Baldwin
12/5/2012 | 3:08:39 PM
re: JDSU May Be Mulling Optical Exit
It's a bit like the theory about carriers becoming dumb pipes.... you had an analyst study recently saying the "dumb-pipe" model would yield higher margins for the carriers. Problem is, they'd be much smaller businesses - good luck telling shareholders you're about to cast away 75% (or whatever it is) of your revenues...

Would it be better for JDSU to drop optics, find more T&M buys (maybe another one the size of Acterna) and become more of a T&M house? Probably depends on what kind of price gets offered.
paolo.franzoi
paolo.franzoi
12/5/2012 | 3:08:38 PM
re: JDSU May Be Mulling Optical Exit

I doubt JDSU would get out of Optical. There are plenty of segments that make money, unfortunately Fiber Optics for Telecom is not one of them. It might make sense for JDSU to dump such a division from a financial perspective. If somebody wants to pick it up, so be it.

seven
c_headed
c_headed
12/5/2012 | 3:08:38 PM
re: JDSU May Be Mulling Optical Exit
This is actually a fascinating article. JDSU has long been the only logical candidate to act as the consolidator in the optical sector.

The optical component companies, Bookham, in particular, continue to get crushed by low margins. I'm presuming that there are still too many suppliers with too much capacity who can only compete based on price for the sector to prosper.

Which leads to the questions: If JDSU doesn't act as a consolidator who will? Do we really think private equity can come in and rationalize the entire industry? So far the "smart money" has been doling out millions, here and there, to Bookham and others just to keep them going, but with no profits to show for it.

Out of all the possible companies to throw in the towel, it would seem that JDSU would be the last.
DarkWriting
DarkWriting
12/5/2012 | 3:08:38 PM
re: JDSU May Be Mulling Optical Exit
They won't have anything to sell off if they keep buggering up the acquisitions.

DW
materialgirl
materialgirl
12/5/2012 | 3:08:37 PM
re: JDSU May Be Mulling Optical Exit
For an industry to be healthy over time, using innovative new products to improve costs or services, the entire food chain has to be profitable. This is not the case in optical networking. This is not good news for network architectures five years from now.

The Internet was never a commercial exercise, but a military one. Its economics do not work well for all players. This is one sorry example. There are more, namely the dumb pipe guys.
opticalfuneral
opticalfuneral
12/5/2012 | 3:08:37 PM
re: JDSU May Be Mulling Optical Exit
I think this is more a way of forcing the optical components side of the business to finally start making money. And if they can't make money then start chopping/selling. No more hiding behind the T&M income. I give them 6 months. Massive layoff or fire sale. It's been 6 years since the bubble burst and we STILL have too many players chasing too little market. Cisco and the other OEMs are loving it of course. They continue to ask for massive price reductions and there will alweays be someone willing to trash the price below cost of goods. "Hey, we'll make it up in volume."
twill009
twill009
12/5/2012 | 3:08:36 PM
re: JDSU May Be Mulling Optical Exit
This is what a optical component exec told me last week:
"in the Telecom optics market JDSU is largest player at about 15%. Any time you have a market where the largest is that small it is unhealthy. M&A is needed."

Not rocket science, but this is clearly on everyone's minds.
Pete Baldwin
Pete Baldwin
12/5/2012 | 3:08:35 PM
re: JDSU May Be Mulling Optical Exit
Yep, M&A is definitely on everyone's minds. It's a question of who's willing to take on the task. The last ones to try (Avanex, Bookham) don't provide encouraging examples.

NeoPhotonics has been buying up companies, but those are small bits and pieces. Something bigger needs to happen -- and hey, wasn't that what people were saying in 2005?
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