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1 May 2009


JDSU consolidating VCSEL fab into San Jose to cut costs

For its fiscal third-quarter 2009 (ended 28 March 2008), JDSU of Milpitas, CA, USA has reported revenue of $280.6m, down 21% on $357m last quarter and 27% on $383.9m a year ago. The drop is due mainly to the Communication & Commercial Optical Products and Communications Test & Measurement segments, as North American network equipment makers continued to reduce their inventory due to declining demand from their service provider customers. Consequently, the Americas represented just 42% of revenue (down from 47% last quarter), Europe 34% (up from 30%) and Asia-Pacific 24% (up slightly from 23%).

Communications Test & Measurement segment revenue has fallen 26.7% from $176.2m last quarter to $129.2m (46% of total revenue, versus 49% last quarter).

Communication & Commercial Optical Products (CCOP) revenue has fallen 36.9% from $159.1m a year ago and 21.4% from $127.9m last quarter to $100.5m (36% of total revenue, level with last quarter). 

Specifically, including recovering $3.4m out of $10m in deferred revenue after Nortel’s bankruptcy, Optical Communications revenue was $89m, down 18.7% on $109.5m last quarter and 34.6% on $136.1m a year ago. Nevertheless, CCOP gross margin still improved (from 17.4% to 20.7%, boosted by the Nortel revenue recovery).

Overall non-GAAP gross margin has fallen from 43.5% last quarter to 41.8% due to lower factory absorption, an unfavorable product mix in Test & Measurement, and costs associated with transferring production to contract manufacturers.

JDSU’s operating expenses have been reduced for the third quarter in a row, by nearly $12m from last quarter to $125.2m. This reflects continued company-wide efforts to lower the cost structure (discretionary spending, office consolidation, workweek shutdowns, and reductions in headcount from 6714 to 4244 as of 25 April, including 2272 through transfer to contract manufacturers).

Excluding a $45m goodwill impairment charge (following a charge of $699.6m last quarter) due to the impact of the macro-economic environment on JDSU’s market capitalization, non-GAAP basis net loss was $6.9m, compared with net income of $24.8m last quarter and $31.2m a year ago.

Nevertheless, after being free cash flow negative by $4.6m last quarter, JDSU was free cash flow positive by $15.3m in fiscal Q3. Cash balance rose by $34.5m to $673.5m after reducing inventory by $40.4m and reducing outstanding debt by $50m (resulting in a gain of $20m from the repurchase of convertible debt). “We fortified our balance sheet during these challenging economic times,” comments president & CEO Tom Waechter. 

JDSU’s initiatives to improve gross margins include moving to a more variable cost model, pruning products that don't meet profitability targets, and executing against lean initiatives, with which the firm has already made progress, says chief financial officer Dave Vellequette.

The transfer of ownership of JDSU’s Optical Communications assembly & test plant in Shenzhen, China to contract manufacturer Sanmina-SCI Corp (announced in early February) was completed in early April. “We were able to maintain the skilled workforce and expertise in manufacturing our product, lower our fixed-cost structures, and leverage Sanmina’s strength and operational expertise in raw material sourcing, all without re-qualifying our product,” says Waechter.

Also in April, JDSU decided to close its fab in Louisville, CO (acquired with Picolight in mid-2007) by the end of September, consolidating its GaAs chip manufacturing - including its vertical-cavity surface-emitting lasers (VCSELs) - under one roof in JDSU’s Rose Orchard GaAs and InP fab in San Jose, CA. JDSU also has two other Optical Communications manufacturing facilities: a silicon oxide fab in San Jose and a lithium niobate fab in Bloomfield, CT.

Compared to previous estimates, this latest action should boost JDSU’s savings in manufacturing overhead from $28m to more than $35m per year and savings in operating expenses from $110m to more than $120m per year (relative to fiscal Q4/2008 levels). The quarterly revenue rate for free cash flow breakeven has hence now been lowered from $290-295m to $275-285m for fiscal fourth-quarter 2009 (ending 27 June).

After bookings in March and April rose across all business segments (significantly in the case of test & measurement and optical communications), for fiscal Q4 JDSU expects revenue of $265-285m (down only slightly on fiscal Q3 at the mid-point of this guidance). Test & Measurement should rebound slightly better than Optical Communications, says Waechter. Nevertheless, for Optical Communications, the goal is for a sustainable gross margin of 25-30% near term (compared to 20.7% in fiscal Q3) and in excess of 30% longer term.

“We remain confident in our long-term market opportunities and will continue to focus on innovation and our lean initiative activities to position JDSU for future growth,” says Waechter. The firm remains committed to its sustainable model of overall gross margin of 43-47%, he adds.

See related items:

JDSU sales decline accelerating

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

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