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Looking Beyond JDS Uniphase's Earnings

Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

2012 hasn’t been a very good year for optical networkers as telecom companies have kept their wallets on a tight leash owing to economic headwinds. Stocks of fiber optics companies such as Finisar (NASDAQ: FNSR) and Oclaro (NASDAQ: OCLR) are down in the red so far. Oclaro’s recently reported quarter missed the Street’s bottom line expectations while revenue contracted.

The light in the tunnel

Under such conditions, a positive report from JDS Uniphase (NASDAQ: JDSU) certainly comes as a breather. Although the company’s revenue (non-GAAP) declined 7% from last year to $439 million and non-GAAP earnings narrowed to 15 cents a share from 23 cents last year, the results were good enough to trump the consensus estimates by some distance.

As a result, the stock soared sky-high after posting results. JDS Uniphase is the best year-to-date performer when compared to the other two mentioned above, and it seems that the company has more room to run. But before jumping into the micro-prospects of JDS, we should remember that telcos would eventually spend more on infrastructure as 4G networks are built.

Potential ahead

The telecom industry is a cyclical one, and investments in infrastructure are quite large and take some time to come back to those who are doing the spending. Hence, telcos are being judicious on the capital they commit to these projects in times of economic uncertainty, and this is taking a toll on equipment makers. But this won’t last forever, of course.

For example, AT&T (NYSE: T) plans to eliminate its 2G network in the next four years and shift its customers to faster 3G and 4G networks. This essentially means that the company would have to spend on building those networks. And AT&T isn’t alone in this race as other telecom players are also gearing up for the 4G boom.

Leadership and innovation

So, if you are ready to invest across economic cycles, JDS Uniphase might not be a bad bet. Its book-to-bill ratio was above 1 in the previous quarter, indicating decent demand going forward. Moreover, management is of the opinion that JDS is capturing market share from others in the industry, which might be a reason behind Oclaro’s sluggish performance and Finisar’s weak outlook that it gave last quarter. Finisar is slated to report next toward the end of the month and market share gains by JDS might hurt it further, but let’s wait on that till the end of August.

Again, JDS’ innovation is another area of strength and it showed in the previous quarter. The company’s new products made up for almost 60% of its core network revenue. JDS’ focus on both hardware and software is driving customer orders as evidenced by three new orders for its PacketPortal solution. In addition, JDS has completed 15 trials for the solution and six are in progress, which means that its top line has the potential to climb going forward.

Inorganic drivers

Also, JDS also said that it has penned a definitive agreement to acquire GenComm, a South Korean company that provides wireless test and measurement solutions. JDS is already a distributor of GenComm's products and it contributed $7.5 million to JDS’ top line in FY12. Hence, JDS won’t have much trouble integrating GenComm into its business and would also help the company improve its standing in the Asia-Pacific.

JDS has a good track record of growing inorganically and had acquired Dyaptive earlier this year. JDS says that it has successfully integrated Dyaptive and it is already reaping results. With the latest acquisition, I expect JDS to build upon its technological advantage and win over more business.

Cutting down the excesses

JDS lays great stress on managing costs and doing better on the bottom line. That might be one of the reasons it has beaten bottom line estimates convincingly over the last few quarters including this one. It is focusing on making its supply chain better and consolidated its Communications Test operations in the just-concluded fiscal year. Apart from these, JDS outsourced its repair services and increased bill sourcing in Communications and Commercial Optical Products to drive down costs.

The takeaway

JDS has been making the right moves and has done pretty decently in a sluggish telecom market. It’s focusing on winning market share, driving innovation and growing inorganically. Even though spending by telcos is expected to be cautious going forward, JDS expects its methodical approach to help it post better results in the long term. Its leading position in the industry, huge potential in telecom infrastructure in the long term and other positives mentioned earlier would probably help investors reap rich rewards. 


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