JDSU is midmakeover. Last fall, the Milpitas (Calif.)-based vendor of telecom-gear components shortened its name from JDS Uniphase and revamped its corporate logo. That followed years of layoffs aimed at cutting millions of dollars in costs. And in the past year alone, JDSU has shelled out more than $500 million in cash and stock on four acquisitions. JDSU, a maker of components used in fiber-optic communications networks, is trying to branch into new fields and stem years of losses.
The company continues to lose money, and it's still no beauty -- but a new JDSU is beginning to shine through. Drawing on its own research and the expertise of acquired companies, JDSU has introduced 24 new products since December, 2005. That's six times the number of the previous year.
The new lineup and some recently announced partnerships are aimed at helping JDSU gain share in a few key markets, like network-testing equipment, remote switching devices, and specialty pigments used on drug labels to verify authenticity.
TIME TO MERGE? Some of JDSU's new products, used in the development of networks that send data at super-fast speeds, are also selling well, analysts say. There could even be newfound demand for JDSU itself, in the context of merger discussions between telecom equipment makers Alcatel (ALA) and Lucent (LU). That deal would step up pressure on other gear vendors among JDSU's customers to grow through mergers (see BW Online, 3/27/05, "What's Next for Nortel"). Components makers like JDSU may then be more inclined to follow suit.
What about JDSU's bottom line? The company is expected to reach break-even on an operating basis in the fiscal third quarter, which ends in March, and then achieve profitability on that basis, says Standard & Poor's analyst Ari Bensinger (see BW Online, 5/26/05, "Can JDS Uniphase Buy Black Ink?").
In the second quarter, sales rose 73% -- and in the current period, revenue is expected to jump 88%, according to analysts surveyed by Thomson ONE. Results are due to be released by early May.
WARY ON THE STREET. If things are going so well, why aren't more analysts bullish on the stock? Some say it's become too expensive, having more than doubling since May, 2005. Needham & Co. downgraded the stock to hold in February. And though sentiment has turned more positive since the Alcatel-Lucent discussions, most analysts don't recommend the shares.
With the stock trading at $4.11, JDSU's price-to-sales ratio is more than twice its peer group's, says Bensinger. What's more, the company's goodwill and intangible assets are high, which could lead to possible future write-downs, says Peter Hofstra, an analyst with AIC funds, which doesn't own JDSU shares. "I don't think its shares are worth [the current price]," he says.
Many of the markets that JDSU is targeting are still relatively small and will take time to develop. Rivals like Avago Technologies and Finisar (FNSR) are gaining momentum in some of JDSU's key markets. The optical components market, which represents one-third of JDSU's overall sales, remains volatile. Thomson ONE predicts JDSU will show 12% annual sales growth.
TRIPLE-PLAY TESTING. Still, the raft of new products is expected to help JDSU nab share. The company unveiled the industry's first all-in-one portable tester in February. The device is used to monitor networks that provide a so-called triple-play combination of video, phone calling, and high-speed Internet access (see BW Online, 1/27/06, "Communications Gear's Strong Signals"). According to industry analysts, the market is growing 45% a year as telecom systems handle more services and data.
JDSU gets almost half its revenue from the testing and measurement business and owns about 45% of the triple-play testing market, estimates Susan Eustis, CEO of tech consultancy WinterGreen Research. The tester could help JDSU gain another 2 points to 3 points of share in this $195 million market, which is expected to double this year.
REMOTE SWITCHING. Then there are new switches, introduced in February, used to remotely alter the flow of traffic along communications networks. It's a welcome breakthrough for companies that have to dispatch technicians to handle such tasks. Similar capabilities are available from start-ups like Capella Photonics, says Daryl Innis, an optical components analyst with consultancy Ovum-RHK, but not big established players.
The market for the switches is expected to grow to $100 million this year from $60 million last year. "They are in the position to dominate the market," says Innis. "By being a front-runner, it bodes well for the future."
And the switches should trigger sales of related network components, such as tunable lasers and filters, Innis says. Taken together, these products' sales should grow at 40% to 45% a year, he says.
What's more, JDSU could also benefit from a plan to focus on what's known as agile, or remotely reconfigurable, optical networks. Telecommunications networks are becoming increasingly based on optics, since that technology offers higher capacity, says Frank Dzubeck, president of telecom consultancy Communications Network Architects. JDSU expects demand for components used in agile optical networks to grow 50% annually.
LABELS TO TRUST. Customer interest in more-established JDSU products is growing as well, thanks to new partnerships. JDSU's pigments are used on the labels of 40 drugs, including Viagra, to show pharmacists that the meds aren't counterfeit. The pigments work by changing color when you shift the viewing angle of a drug's label, demonstrating that the product is the genuine article. On Mar. 17, JDSU joined forces with label maker Nosco, meaning their pigments could find their way onto hundreds of drug labels, says Enzo Signore, JDSU's vice-president of corporate marketing.
Because such labels are cheaper and potentially more secure than alternative technologies like radio-frequency identification (RFID) tags, which require pharmacies to buy additional equipment and software, this market is flourishing: It should grow 45% from its current $85 million base, estimates Eustis. And margins on the pigments, using proprietary technology for which JDSU owns patents, could reach 65%, Eustis figures.
Like so many other projections for JDSU's growth, these are lofty indeed. And if achieved, they'll make for one very appealing makeover.
Kharif is a reporter for BusinessWeek Online in Portland, Ore.
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