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9 February 2009


JDSU sales decline accelerating

For its fiscal second-quarter 2009 (ended 27 December 2008), optical communications component maker JDSU of Milpitas, CA, USA has reported net revenue of $357m, down 6.2% on $380.7m last quarter and 10.5% on $399.2m a year ago.

The decline was driven mainly by the economic downturn weakening demand in the Communication and Commercial Optical Products (CCOP) segment, as well as deferring about $10m of revenue for products shipped to Nortel (for which payment was not received prior to its bankruptcy filing on 14 January). CCOP revenue was $127.9m (36% of total revenue, versus 43% last quarter), down 21% on last quarter. Specifically, Commercial Lasers revenue was $18.4m (down 13.7% on last quarter due to declining demand from semiconductor equipment manufacturing and biomedical customers). Optical Communications revenue was $109.5m (down 22.2% on last quarter's $140.6m, just partly due to the $10m of deferred Nortel revenue). Revenue for reconfigurable optical add-drop multiplexers (ROADMs) grew by 30% to about 30% of optical revenue (having shipped over 30,000 units in total, and maintaining number-one market share, it is believed).

Communications Test & Measurement segment revenue was $176.2m (49% of total revenue, versus 43% last quarter). This is down 10.8% on $198m a year ago but up 6.6% on last quarter’s $165.3m due to demand in the Americas (including higher demand for cable products in Latin America).

Advanced Optical Technologies (AOT) segment revenue was $53.1m (15% of total revenue, level with last quarter). This is down 0.8% on last quarter but up 6.6% on $50m a year ago.

By geographical region, Americas revenue was $165.7m (47% of total revenue), down about $4m on last quarter due mainly to deferred revenue adjustment. Also, typical end-of-year carrier procurement activity was significantly lower than historical levels. EMEA (Europe, Middle East and Africa) revenue was $108.2m (30% of total revenue), down about $10m, split evenly between Test & Measurement (due mainly to the impact of foreign exchange) and CCOP (also impacted by the deferred revenue adjustment). Asia revenue was $83.1m (23% of total revenue), down about $9m due to lower revenue from Commercial Lasers and AOT products.

Non-GAAP gross margin of 43.5% was down from 46.3% a year ago but up slightly from last quarter’s 43.3%, boosted by execution against lean initiatives as well as the Test & Measurement segment rising as a proportion of total revenue. Also, progress is continuing with improving Optical Communications gross margin, which was 17.4% or (excluding the impact of revenue deferral) 24.6%, up on last quarter (despite the lower revenue). This has been achieved by pruning less profitable products and through lean initiatives and workforce reduction.

“During these challenging economic times we continue to make progress in improving the cost structure and operating model of the company,” says president & CEO Tom Waechter. Operating expenses have been cut from $144.6m last quarter to $137m, reflecting reductions in discretionary spending, office consolidation, workweek shutdowns, job cuts, and the favorable impact from foreign exchange rates.
On a non-GAAP basis (excluding the impairment of goodwill and long-lived assets of $699.6m due to the impact of the macro-economic business environment on JDSU’s market capitalization) net income was $24.8m, down from $50.2m a year ago but up slightly from $23.4m last quarter.

During the quarter, the firm had positive operating cash flow but (after being free cash flow positive for the past seven quarters) it was free cash flow negative by $4.6m due to investing $14m in inventory from products transitioning to contract manufacturers and consuming $3.7m for restructuring activity. At the end of the quarter, JDSU’s cash balance was $689m. Net cash increased after reducing outstanding debt balance by $125m (retiring substantially all remaining zero-coupon senior convertible notes and repurchasing $50m of 1% senior convertible notes), resulting in a gain of $22.3m. (The repurchase of an additional 50m of 1% senior convertible notes in January should result in a further gain of $20m in fiscal Q3.)

JDSU says that it has seen a softening in bookings as customers are impacted by the current economic climate. Also, for fiscal third-quarter 2009 (ending 28 March), the decline in average selling price (ASP) is expected to be above JDSU’s historical range, as the firm has just completed a set of competitive pricing negotiations. JDSU hence expects fiscal Q3 revenue to fall 16-23% to $275-300m (with the CCOP and Test and Measurement segments declining by the same percentage).

Goals for Optical Communications include sustainable margins of 25-30% near term and greater than 30% longer term. Waechter reckons that JDSU now has a sustainable cost structure from which it can realize a 10% operating margin and a 46% gross margin on revenues of $400m.

Gross margin improvement initiatives include continuing to simplify and scale the business model by reducing JDSU’s overall complexity. This is being done by moving from a fixed-cost to a more variable-cost manufacturing model (transitioning more manufacturing to contract manufacturers, while retaining manufacturing processes unique to JDSU). As a result, more than 20% of JDSU’s currently occupied real estate will be vacated.

In particular, last week JDSU agreed to sell the assets and inventory of its assembly plant in Shenzhen, China (which manufactures the optical communications transport and transmission product line) to electronics manufacturing services (EMS) provider Sanmina-SCI Corp. This involves the transfer of about 2000 staff (contributing to total headcount of 6645 being cut by more than 2200 by the end of fiscal 2009). The deal is expected to be finalized by 6 April. JDSU says that it will benefits from the lower fixed-cost model, while Sanmina increases its capacity in the Shenzhen area and immediately adds to its expertise of optical assembly and test. The firm is also in the process of doing last-time product builds at its submarine product assembly plant in San Jose, CA - future submarine products and services will be assembled in Shenzhen.

JDSU started its ‘lean manufacturing’ productivity improvement program over 12 months ago (in advance of the downturn), putting the firm at an advantage compared to its peers, Waechter believes. Chief financial officer Dave Vellequette reckons that JDSU will have lowered its breakeven point to $300-310m in revenue by the end of the March quarter, then by a further $15-20m (thanks to the Shenzhen transition) to $290-295m by the end of the June quarter. In total, operating costs will have been lowered by more than $28m per quarter during fiscal 2009.

“Our strong balance sheet, aggressive cost-saving programs and strategic focus will allow us to weather the current global economic headwind,” says Waechter. “We will continue to focus on innovation and our lean initiative activities, which I believe will uniquely position JDSU for future growth once market conditions improve.”

See related item:

CEO and 400 jobs to go as JDSU closes seven R&D centers & three plants

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