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22 August 2008


JDSU growth driven by optical communications

For its fiscal fourth-quarter 2008 (ended 28 June), JDSU of Milpitas, CA, USA has reported revenue of $390.6m (44% Communications Test & Measurement; 37% Optical Communications; 13% Advanced Optical Technologies; 6% Commercial Lasers). This is up 11.3% on $350.7m a year ago and 1.7% on last quarter’s $384.2m.

Growth was driven by Optical Communications revenue rising for a fourth consecutive quarter to $145.1m (up 6.6% on Q3’s $136.1m and up 33% year-on-year), including sales from VCSEL-based transceiver maker Picolight (acquired in May 2007), since when JDSU has added three new VCSEL customers. “We continued to see favorable end-market indicators for broadband services and network build-outs,” says CEO Kevin Kennedy.

However, growth in demand outpaced both supplier and production capacity ramp-up for several products (including tunables and ROADMs, which are starting to see wider acceptance outside North America) constraining growth.

Gross margin was 40.9%, up from 37.4% a year ago (including Optical Communications almost doubling) but down from last quarter’s 42.6% due to the Test & Measurement product mix.

Net loss has risen from $17.9m a year ago to $29.8m, due mainly to non-recurring charges of $45.4m related to the acquisitions of da Vinci Systems and American Banknote Holographics. However, excluding such charges, non-GAAP net income has risen slightly from $15m a year ago to $15.5m. JDSU was free cash flow positive for the sixth quarter in a row.

Compared to fiscal 2007, full-year fiscal 2008 saw improvements in revenue (up 9.5% from $1.4bn to $1.53bn), gross margin (up from 37.7% to 42.8%), and non-GAAP net income (almost doubling, from $64.1m to $114.9m).

In particular, Optical Communications revenue was $527m, up 6.2% on fiscal 2007’s $496m. “We see broadband expanding, with spending focused on network build-out projects and investment in Ethernet, high-speed fiber and video deployment,” says Kennedy. Despite cable network operator investment being flat, North America revenue grew 6%. “We saw growth of nearly 80% in Latin America, where greenfield build-outs are increasing,” he adds. “Europe has shown strength, growing at 16%; Asia increased by 12%, where we are seeing particular strength in India.”

Optical Communications operating margin improved from an operating loss of 2.9% for fiscal 2007 to 3.9% (including 5.4% in Q4), reflecting the impact of higher revenue and lean manufacturing cost-reduction initiatives implemented over the past fiscal year, says Kennedy.

“Moving into 2009, we will continue to focus on advancing our business model across all of our business segments,” Kennedy comments. “Our strategy continues to be to execute as a diversified technology company with a focus on optical and broadband innovation,” adding that the composite company is better able to navigate fluctuations in any one constituent business. “We believe broadband capacity will continue to expand as higher data rates are being delivered to the access/edge, accompanied by video applications and high-definition network requirements,” says Kennedy.

However, there is economic uncertainty in the markets that JDSU serves, which may result in fluctuations in demand for the firm’s products over the next several quarters. “In North America telecom, we witnessed a pattern such that a few largest providers increased their spending while the smaller service providers evidenced cautionary practices,” says Kennedy.

For fiscal first-quarter 2009 (ending 27 September 2008), JDSU expects revenue to be relatively flat at $378-394m, with non-GAAP operating margin of 3-6%. “We typically experience a seasonal slowdown in fiscal Q1, given European vacations,” says Kennedy. But, in addition, Optical Communications product capacity continues to be constrained, so JDSU has had to re-schedule $10m of fiscal Q1 demand for shipment in Q2. However, the long-term annual growth potential for Optical Communications is 5-15%, fueled by telecoms transitioning to DWDM, JDSU reckons.

In fiscal 2008, JDSU moved towards achieving its model gross margins of 43-47% and operating margins at or above 10%. The goal is to achieve this on a sustainable basis by the end of calendar 2008 at a revenue level of $400m per quarter and gross margin of 46%. To improve operating margins by 3-5 percentage points for fiscal Q2/2009 and the reminder of the fiscal year, JDSU says it is hence taking additional steps to lower its cost structure (with staffing already having been cut from 6745 to 6695 in fiscal Q4), including more use of contract manufacturing in Communications Test & Measurement and the transfer of Commercial Laser manufacturing to an Asian contract manufacturer.

See related item:

JDSU’s margins hit by supply and capacity constraints

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