4 February 2010


JDSU’s margin growth focused on new products

For its fiscal second-quarter 2010 (ended 2 January), JDSU of Milpitas, CA, USA has reported non-GAAP net revenue of $343.8m, down 2.9% on $354m a year ago but up 15% on $298.6m last quarter, and at the high end of the $320–345m guidance (despite component supply constraints thwarting a further $8–10m of shipments). The Americas represented 50% of revenue, Europe 28% and Asia-Pacific 22%, with growth in all three regions.

Advanced Optical Technologies revenue was $54.6m (16% of total revenue), up just 0.9% on last quarter’s $54m and 2.8% on $53m a year ago. Communications Test & Measurement revenue was $177m (51% of total revenue), up 23% on last quarter’s $143.4m and 2.3% on $173m a year ago.

Communications & Commercial Optical Products (CCOP) revenue was $112m (33% of total revenue), down 12% on $128m a year ago but up 11% on last quarter’s $101m. In particular, Commercial Lasers business revenue was $16.7m, down 9% on a year ago but up 10.6% on last quarter. Optical Communications revenue was $95.6m (60% from transport; 40% from transmission). This is down 12.7% on $109.5m a year ago but up 11.2% on last quarter’s $86m.

“We continue to gain market share as we see demand increasing not only for our ROADM [reconfigurable optical add-drop multiplexer] and 300-pin tunable, but also for newer products such as the Super Transport Blade, the mini 50GHz ROADM [which started to ship during the quarter] and the tunable XFP,” says president & CEO Tom Waechter about the Optical Communications segment. ROADM revenue is recovering, growing by more than 50% on last quarter to back over 20% of optical revenue, as demand increased for the third consecutive quarter. Also, record revenue in China was driven primarily by Huawei.

Trends in transmission include the disruption of the 10G market with JDSU’s tunable XFP, and more demand for 10G transceivers and VCSELs for wireless backhaul and data-center applications, says Waechter. For transport, JDSU continues to work closely with customers on 40 and 100G solutions (e.g. becoming the first vendor supplying both ROADMs [its next-generation 50GHz ROADM] and modulators carrying live 100G traffic in a deployed network).

The tunable XFP (the first tunable made available in an XFP form factor) is a new, disruptive technology to the fixed-wavelength XFPs and 300-pin 10G tunable transponder markets, continues Waechter. Since release to production in September, JDSU has engaged with 26 customers and shipped to 13.

The Super Transport Blade’s unique architecture provides substantial footprint savings, claims Waechter. “We received significant production orders to-date from two customers, with multiple designs at each customer, and we have been designed into a third customer... We are currently working with most other customers.”

Revenue for new products less than two years old has hence risen from 30% last quarter to about 40%.

Optical Communications gross margin has consequently continued to recover, from last quarter’s 19.7% to 22.5%, due to reduced manufacturing costs, higher fab utilization, and a more favorable product mix. In addition, Commercial Lasers gross margin improved by six percentage point to 32.4%.

Collectively, the improved margin in CCOP, together with favorable segment revenue mix, has contributed to JDSU’s overall non-GAAP gross margin rising from 43.5% a year ago and 44% last quarter to 44.6%.

Although cut from $134.9m a year ago, operating expenses of $125.3m are up on last quarter’s $121.2m, due mainly to higher sales compensation (as a result of the higher revenues), selective strategic R&D investments, and a partial reinstatement of employee benefits. However, due to the higher revenue and gross margin, operating income was $28.1m (an operating margin of 8.2% of revenue, above the guidance of 5–8%). This is up from $10.2m (3.4% of revenue) last quarter and back above $19.1m (5.4% of revenue) a year ago. In particular, operating income for CCOP was $3.2m, compared to last quarter’s operating loss of $1.5m.

Overall, non-GAAP net income was $26.6m, almost triple the $9m last quarter and back above $25.6m a year ago. For the quarter, free cash flow was $27.1m, raising total cash and investments from $673.1m to $698m.

“Results reflect revenue growth across all the business segments and a clear demonstration of the leverage in our operating model,” says Waechter. “Our continued focus on innovation remains a key component in driving long-term top-line growth and profitability,” he adds.

For its fiscal third-quarter 2010 (ending 3 April), as a result of rising lead times from component suppliers as well as an Optical Communications average selling price (ASP) decline above the quarterly range of 2–4% (due to just-completed pricing negotiations), JDSU expects revenue to be constrained to $325–350m. With operating expenses expected to rise by $4–5m, non-GAAP operating margin should fall to 5–7.5%.

For CCOP in particular, the business model supports operating margin of 10–15% at a quarterly revenue of $150m or greater. “With completion of the consolidation of our optical fabs, gross margin improvement initiatives are now focused on increasing factory utilization,” says chief financial officer Dave Vellequette. The target for sustainable CCOP gross margin is 25–30%. “We believe we can operate in this range by the end of fiscal 2010,” he adds.

JDSU says that it aims to continue to collaborate with its customers and invest in profitable market-based innovation to drive market share gains and revenue growth. The goal is to increase the percentage of revenue from products less than two years old to more than 50% over the next three years.

Overall, Vellequette believes that JDSU’s cost structure is such that it can sustainably realize overall operating margin of 10% when total quarterly revenue is $375–385m and gross margin is 46%.

See related items:

JDSU returns to underlying profit

JDSU sees component inventory levels burning off

JDSU consolidating VCSEL fab into San Jose to cut costs

JDSU sales decline accelerating

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