JDSU May Be Mulling Optical Exit

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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