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1 November 2007


JDSU’s profit margins boosted by agile products and cost cutting

For its fiscal first-quarter 2008 (to 29 September 2007), broadband and optical communications component maker JDSU of Milpitas, CA, USA has reported revenue of $357m (up 1.8% on last quarter and 12% on $318.2m a year ago).

Gross margin has risen from 34.7% a year ago and 37.4% last quarter to 41.3%. CEO Kevin Kennedy ascribes this to slightly improved factory utilization as well as benefits from cost-reduction activity (providing quarterly savings of $6m, rising to $8m by the end of fiscal Q2). Net loss was cut from $17.4m to $6.9m. Non-GAAP net income was $18.0m (up from $15m last quarter and $6.8m a year ago). JDSU was free cash flow positive for the third consecutive quarter, generating more than $27m due to lower capital expenditures and reduced inventory.

“We saw improved margins in three out of four of our business segments due to product mix and the impact of our gross margin initiative,” says chief financial officer Dave Vellequette.

Communications Test and Measurement revenue was 47% of total revenue: $168.0m (down 1.9% on last quarter’s $171.3m but up 44% on $116.8m a year ago).

Advanced Optical Technologies revenue was 13% of total revenue: $48.0m (up 7% on last quarter’s $44.7m and up 22% on $39.3m a year ago).

Commercial Lasers revenue was 6% of total revenue: $19.9m (down 10% on last quarter and 17% on $24.1m a year ago).

Optical Communications revenue was 34% of total revenue: $121m. This is down 12% on $138.0m a year ago but up 7.6% on last quarter’s $113m, mainly due to increased shipments of agile optical network (AON) products, as well as a full quarter of revenue from pluggable optical transceiver manufacturer Picolight (acquired in late May). All three major market segment, including long haul (which includes undersea, metro and datacom), saw sequential growth. Out of 12 product lines, nine experienced sequential increases (with eight having double-digit growth). Net loss was $2.9m, compared to a profit of $2.2m a year ago. However, operating loss of $2.9m is an improvement from a loss of $9.2m last quarter, due to improved gross margins (partially offset by higher operating expenses resulting from the Picolight acquisition).

“There is a cautiously improving trend in the network equipment manufacturer market,” says Kennedy. By the end of the quarter, two of the three Optical Communications businesses rose to gross margins of 25% or more. However, customers’ lean initiative and customer consolidation activities have resulted in a delay of two to three quarters in achieving gross margins of 30-40% (which are ‘h ealthy’ levels for this industry, Kennedy adds ) .

To improve the firm’s overall gross margin, JDSU is focusing on improving factory utilization. Also, much work is underway that can be operationally classified as a lean initiative, including reductions in manufacturing overhead, head-count (from 6688 to 6459 over the quarter, mainly through cuts in Optical Communications), inventory, and procurement spending. Further improvements are expected due to contributions from VCSELs and other Picolight products. Relative to legacy products, AON products showed healthy bookings for reconfigurable optical add-drop multiplexer (ROADM) and tunables. “We are continuing to invest in pluggables, agile products such as ROADMs and tunables and products for the metro markets,” says Kennedy.

“We are focused on functional integration as service providers strive for greater efficiencies in their networks and network equipment providers look for decreases in cost, power and equipment,” says Kennedy. “This quarter, we announced a new photonic integrated circuit that combines a tunable laser and an optical modulator,” he adds. “Tunable lasers are key elements, in part for the success of the deployment of agile optical networks. This new solution may be introduced into existing network without architectural changes,” he adds.

“We continue to see favorable end market indicators for broadband services and network ROADMs and we believe broadband capacity will continue to expand as higher data rates are being delivered through the access edge accompanied by video application,” says Kennedy.

For its fiscal second-quarter 2008 (to end-December 2007), JDSU expects net revenue of $372-394m. The near-term sustainable target is a gross margin of 40%. “We believe we can achieve this model by the end of this calendar year,” says Vellequette. “Longer-term, we believe we can achieve gross margins of 43-47%.”

See related items:

JDSU invests in Mintera to partner on complete 40Gb/s solution

JDSU grows 16% year-on-year, despite transitions at optical communications customers hitting last quarter

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