18 August 2014

JDSU’s quarterly revenue grows 7.3% to $448.6m

JDSU of Milpitas, CA, USA has reported annual revenue growth of just 4%, from $1676.9m in fiscal 2013 to $1743.2m for fiscal 2014 (to 28 June) in what was a “challenging telecom spending period,” says president & CEO Tom Waechter. “JDSU does not see the robust top-line we had expected entering the year.”

Fiscal 2014 revenue from the Americas was essentially flat, as key US customers’ spending was restrained and carriers wrestle with major architectural decisions in consolidation activity. European spending has lagged for several years, but bookings recovered somewhat in fiscal 2014 as Europe, Middle East & Africa (EMEA) revenue grew 8% year-on-year. Asia-Pacific (notably China) continued to build out network infrastructure and invest in the latest technologies, as JDSU’s revenue in this region grew about 7% year-on-year. Consequently, Americas, Asia-Pacific and EMEA represented 47.4%, 29.0% and 23.6%, respectively, of total revenue for fiscal 2014, compared with 49.1%, 28.2% and 22.7% for fiscal 2013.

However, most recently, for fiscal fourth-quarter 2014 JDSU has reported revenue of $448.6m, up 7.3% on $418m last quarter and up 6.5% on $421.3m a year ago (and exceeding guidance of $425-445m). The Americas ($216.5m, up 10% on $196.5m last quarter), Asia-Pacific ($131.4m, up 10% on $119.2m) and EMEA ($100.7m, down 1.5% on $102.3m) represented 48.3%, 29.3% and 22.4%, respectively, of total revenue, compared with 47.0%, 28.5% and 24.5% last quarter.

By application sector, revenue for Network Service and Enablement (NSE) was $209.1m (46.6% of total revenue), up 21.4% on $172.3m last quarter and 10.2% on $189.8m a year ago (and exceeding guidance of $195-205m).

Revenue for Optical Security and Performance Products (OSP) was $42.6m (9.5% of total revenue), down 16.6% on $51.1m last quarter and 13.4% on $49.2m a year ago, reflecting JDSU’s exit of several lower-margin thin-film coating businesses (with last time buys in the quarter at $1m versus a historical average of $6m per quarter).

Revenue for Communications and Commercial Optical Products (CCOP) was $196.9m (43.9% of total revenue), up 1.2% on $194.6m last quarter and 8% on $182.3m a year ago (and above the midpoint of the $190-200m guidance range).

Of this, CCOP’s Commercial Laser revenue was a record $40.7m for fiscal Q4, up 31.7% on $30.9m last quarter and 44.3% on $28.2m a year ago. Growth was driven by both strength in solid-state Q-series lasers (experiencing healthy demand from the semiconductor capital equipment sector) and adoption of the Gen2 kilowatt fiber laser (as customer Amada continues to ramp up for industrial metal cutting applications as the industry accelerates its conversion from traditional CO2 lasers). In fiscal Q4, fiber laser revenue was $11m, up 86.4% on last quarter. JDSU Zurich continues to gain traction, with ultrafast lasers generating more than $2.5m.

CCOP’s Optical Communications revenue was $156.2m, down 4.6% on $163.7m last quarter but up 1.4% on $154.1m a year ago, with higher telecom and datacom revenues offsetting an expected $12m decline in 3D sensing revenue. Optical component pricing decline was about 2% quarter-on-quarter (at the lower end of JDSU’s typical 2-4% expectation). CCOP’s optical components business maintained its number-1 position in telecoms and achieved further penetration in datacoms, which was up about 28% year-on-year for fiscal 2014. Optical component demand remains healthy, with notable strength in datacoms, 100G modulators, and China’s infrastructure spending.

To better align product reporting to end-markets, going forward JDSU is grouping the Optical Communications sales mix into three end-markets: telecom, datacom, and consumer & other (including 3D sensing and industrial diodes). Fiscal Q4 sales mix was 74% telecom, 17% datacom, and 9% consumer & other, versus 70%, 16% and 14% a year ago, respectively. The telecom:datacom sales mix ratio has been about 80:20 for the past several quarters. Datacom revenue grew 9.6% year-on-year but fell 15.4% sequentially due to lumpy demand from a large Web 2.0 customer. “We expect our datacom revenue to rebound in the first half of fiscal 2015, as we recently secured a significant new share award at one of our larger customers,” notes Waechter.

“We established CCOP as the leader in the Datacom market… Commercial Lasers exceeded $40m in quarterly revenue for the first time,” says Waechter. These accomplishments “position JDSU well for sustainable revenue growth and growth in operating margin expansion over the longer term,” Waechter believes.

On a non-GAAP basis, gross margin has risen from 46.1% a year ago and 47.6% last quarter to a record 50.0%, due to strong acceptance of new products and improved operational performance, with all three business segments contributing. In particular, gross margin for NSE was a record 65.5%, while gross margin for OSP was 50.7% (up from 49.2% a year ago, despite lower revenue, due to exiting the lower-margin businesses - OSP can now achieve 50% gross margin at a quarterly revenue run rate approaching $40m rather than the historic $50m). CCOP gross margin was 33.3%, up from 30.9% a year ago, reflecting a higher mix of Commercial Lasers (for which gross margin has risen from 45.3% a year ago and 48.9% last quarter to a record 49.9%) plus a favorable product mix for Optical communications (for which gross margin of 28.9% is down from 29.4% last quarter due to lower revenue but up on 28.2% a year ago), along with operational improvements. Overall full-year gross margin has risen from 46.5% in fiscal 2013 to 48.1% for fiscal 2014.

Operating expenses were $185.1m, up 7.7% from last quarter’s $171.9m and higher than guidance, reflecting increased R&D investments in both NSE and CCOP strategic growth areas plus higher sales commissions and bonuses.

Operating margin was 8.7%, up from 6.5% last quarter (and at the high end of the 7-9% guidance range). In particular, CCOP operating margin was 10.2%, up from 10.0% a year ago (due to both higher revenue and a favorable product mix) but down on 11.5% last quarter (and at the lower end of the 10-12% guidance range) due to the higher operating expenses.

Net income was $34.2m ($0.14 per share), up on $23.4m ($0.10 per share) last quarter and up on $30.4m ($0.13 per share) a year ago. However, full-year net income grew only slightly, from fiscal 2013’s $131.8m ($0.55 per share) to $133.1m ($0.56 per share) for fiscal 2014, as incremental operating expenses from acquisitions in fiscal 2014 and higher organic R&D investments offset increases in revenue and gross margin.

“Fiscal 2014 concluded with a solid finish, with a book-to-bill ratio above 1 for the second quarter in a row, revenue and EPS exceeding guidance and a 15-year record high gross margin for JDSU at 50%,” notes Waechter.

Operating cash generation was $176.6m for fiscal 2014, including $50.2m for Q4 in particular (up on $42.5m on last quarter, and the 31st straight quarter of positive operating cash flow). Capital expenditure for Q4 was $31.7m, primarily to support manufacturing capacity investments in both CCOP and OSP. Also, from the firm’s $100m stock repurchase plan (announced on 27 May), JDSU purchased 5.25 million shares at an average price of $11.43 per share (costing $60m, with $55m settling in quarter). Repurchases during full-year fiscal 2014 totaled 12.7 million shares (costing $160m). “We completed three acquisitions as part of our continuing strategy to diversify beyond our core telecom customer base and enter new growth markets such as enterprise and applications management,” says Waechter. During the quarter, total cash and investments fell from $926.2m to $881.3m.

Non-GAAP results excluded $20m in restructuring expenses from fiscal Q4 plans adopted by NSE, CCOP and shared services to reduce operating expenses longer term. JDSU anticipates future annualized cost savings of more than $30m as a result of restructuring activities initiated in fiscal 2014.

In fiscal Q4, the book-to-bill ratio for CCOP was well above 1, including telecoms and datacoms, with Commercial Lasers posting a second consecutive record bookings quarter. However, the book-to-bill ratio was substantially below 1 for 3D sensing products.

For fiscal first-quarter 2015 (ending 27 September 2014, JDSU expects revenue of $405-425m. The mid-point of this range is down 3.3% on $429m a year ago, as year-on-year improvements from networking and laser end-markets will be more than offset by $30m of year-on-year decline from lower 3D sensing sales plus the absence of OSP revenue from product lines exited during fiscal 2014. Operating margin should be 6-8%. Earnings per share are expected to be $0.08-0.12.

In particular, JDSU expects CCOP revenue of $200-210m. The $205m midpoint is roughly flat on fiscal Q1/2014’s $204.6m, reflecting the expected $22m lower year-on-year 3D sensing revenue, offset by the better performance of other CCOP product lines (especially Commercial Laser business). CCOP operating margin should rise to 12-14%.

JDSU was an earlier enabler of gesture recognition or 3D sensing technology in 2010 (beginning with gaming consoles) through its expertise in laser diodes and optical filters). Nominal revenue in fiscal 2013 was followed by a strong fiscal 2014 for 3D sensing. Waechter says that JDSU does not expect meaningful 3D sensing revenue over the next two quarters. “However, as new applications for mobile devices, home entertainment and personal computing are adopted, JDSU is well positioned to capture high-volume opportunities,” he adds.

“Looking ahead to fiscal 2015, we believe there are strong market drivers across our three business segments, and that we are well positioned with differentiated products and solutions to support our customers as they transition to software-defined networks (SDN), network function virtualization (NFV) and more dependency on cloud infrastructure,” says Waechter. “We continue to lead in our core network and anti-counterfeiting markets and I am pleased with the momentum we are building in our Commercial Lasers business on the strength of our highly differentiated fiber laser product line.”

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Tags: JDSU Optical communications

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