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At JDS, More Mixed Signals

By Olga Kharif For a long time, the crummy economy provided cover for JDS Uniphase's (JDSU) lousy performance. As telecommunications players cut their spending, demand for JDS's flagship products, optical components used in devices that route data in telecom networks, fell by double digits. Revenues dropped with them, from $3.2 billion in fiscal 2001 to $635.9 million in the fiscal year that ended in June -- an 80% decline. In just the past year, JDS has lost $118 million.

On Oct. 27, it announced sales for the quarter ended Sept. 30, of $194.5 million -- up 11% over the previous quarter and 32% above the year-ago figure. Yet JDS still lost $36 million, and execs said sales in the next quarter will be down 8% sequentially because of price pressure from competitors and customers' demands for cheaper products.

READY TO BUY? Nonetheless, Wall Street analysts see potential in JDS -- if management can get its act together. Here's why: About 55% of sales come from telecom-equipment components. That market has been down 20% to 30% per year since 2001. Now it's slowly bouncing back, with analysts expecting it to grow at least 5% this year.

As telco outfits get busy with new services, such as connecting optic fibers to homes, equipment spending should follow, says Lawrence Gasman, an analyst with tech market consultancy CIR in Charlottesville, Va. "The market is healing," JDS CEO Kevin Kennedy said during the company's earnings call.

JDS could benefit from this expansion because it's the leader in optical components, with more than 20% of the market. Hundreds of startups that once vied with JDS are long gone, and many of the survivors remain in tough financial straits. On Oct. 2, Bookham (BKHM) reported that it had burned through $24.3 million in cash in its latest quarter. It has only $83.4 million in cash and short-term investments left. "In about four quarters, something has to happen," says Tom Hausken, an analyst with tech consultancy Strategies Unlimited in Mountain View, Calif.

HUNGRY RIVALS. Enter JDS. The San Jose (Calif.) company had $1.46 billion in cash and short-term investments as of Sept. 30. Over the past year it has been on an acquisition binge, one that could accelerate in the coming quarters, Hausken says. "There's little doubt that JDS is in an excellent position to dominate the market," says Gasman.

And lots of good technology and little companies can't survive on their own. "You can be sure that every company in trouble and looking for a buyer has knocked on JDS's door," says Hausken. "They have no shortage of ideas."

The other side of JDS could be even stronger. Nontelco sales, which account for 45% of total revenues, could hit double-digit growth in 2005, say analysts. JDS builds digital signal processors (DSPs) that are used by customers like Texas Instruments (TXN) in digital TVs. And JDS has the knowhow to make a dent in huge potential markets such as plastic electronics, which could allow TV sets of the future to be rolled up like a window shade, says Abdul Saleh, an analyst with investment bank EKN in New York.

All of the above depends on stellar execution at a company undergoing major management changes. That's the hard part. Long-time CEO Josef Straus retired last year, and the president and chief operating officer left at the same time. And the new management team has stumbled. In TV components, it has had trouble with manufacturing in the last few quarters. As a result, TI went to another vendor. Indeed, in many of the most promising markets, huge competitors like Philips (PHG) are ramping up to tackle JDS head-on.

"FLYING BLIND." What's more, after more than a year of cost-cutting, it's unclear just how much progress JDS has made in its quest for a return to profitability, even as it further reduces its North American workforce and consolidates contract manufacturers. JDS management says the budget-trimming should yield results in mid-2005. Still, the exact magnitude of these changes is unclear. "I have no idea what they are doing, I'm flying blind," says John Harmon, an analyst with Needham & Co. in New York. JDS declined to comment for this story.

Perhaps Wall Street won't be kept in the dark much longer. If the cost cutting works and if production glitches are worked out, JDS could reach break-even within a quarter. "We are now more focused and better prepared for our multiquarter journey to profitability," Kennedy said during the call.

But most analysts aren't counting on it. Some analysts polled by Thomson One expect JDS to break even in its fiscal 2005, which ends in June, but many believe it will lose money until 2006. With that uncertainty in mind, the shares, currently trading at $3.12, might be overvalued and would be more attractive below $3, say analysts.

Indeed, the days of hiding behind a bad economy appear over. The next few months will show whether JDS is a high-flyer or your garden-variety duck. Kharif is a reporter for BusinessWeek Online in Portland, Ore.

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