This Stock Has Kicked off 2013 in Style

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In the first week of January, I had written about two stocks that I believed were nicely positioned to benefit from higher telco spending this year. I was quite confident about their prospects, given their solid products and the industry in which they ply their trade. But I’d never thought that one of them would shoot through the roof after a solid earnings report.

A perfect report

Optical networker JDS Uniphase (NASDAQ: JDSU) gained 17% in a single day, after the company comfortably topped estimates in its just-reported second-quarter and issued a decent outlook. The company’s top line grew almost 5% from the year-ago period to $429 million while adjusted earnings grew almost 17% to $42.3 million or $0.18 per share.

Also, JDS Uniphase’s non-GAAP gross margin came in at a record 48%, which is the highest in the past two years. Moreover, outlook for the current quarter calls for revenue between $405 million to $425 million, at par with the consensus estimate at the mid-point.

Carriers to open their wallets

And this is just the beginning. Management is upbeat about the company’s prospects, and this optimism is driven by an expectation of increased investment in network infrastructure this year. Gartner expects a jump in global IT spending this year, driven by investments in data centers and telecom. Also, late last year, AT&T (NYSE: T) signaled its intention of stepping on the gas for boosting its networks.

The carrier intends to spend $14 billion over the next three years in a bid to enhance its wireless and wireline broadband network, and expand its 4G LTE coverage to 300 million customers by the end of 2014. Such investments by Ma Bell could spur other carriers into action as well, and this would in-turn translate into better revenues for companies such as JDS Uniphase.

Solid products mean more customers

JDS Uniphase has prepared a lineup of strong and innovative products to cash in on the build out of faster networks. Its new products, which are less than two years old, have been bringing in more than 50% of its core network-related revenue over the past seven quarters. Uniphase’s PacketPortal solution is finding great adoption and currently sports 11 customers, apart from 23 completed trials.

The company’s industry leading 4G LTE test solution should find more takers as roll out of 4G gathers steam. In addition, JDS Uniphase also seems well-positioned to benefit from growth in cloud computing and data centers. The company is preparing itself to launch products that satisfy cloud customers, and is in the last stage of winning several new contracts for this business.

Cloud and more

Management expects this foray into data centers to yield strong results, and might even become the fastest growing of all of Uniphase’s businesses. Moreover, the presence of Cisco (NASDAQ: CSCO) as a customer is another advantage for Uniphase’s data center business. Cisco’s data center segment is on a roll and witnessed an impressive sales growth of 61% in the previous quarter. And given Cisco’s aggressive investments into its data center strategy through its Unified Computing System platform, one can expect Uniphase to gain some goodies from its client.

JDS Uniphase is also looking to diversify in other areas, such as gesture recognition. The company brought on board its fourth customer for this technology in the previous quarter        , and would ramp up production for an upcoming gaming platform later this year. Apart from this, Uniphase also began shipments of 100G line cards in the previous quarter and is ramping up production of 40G and 100G coherent components.

Top class cost control

It’s clear that there is a lot of opportunity lying ahead for JDS Uniphase and the company has prepared itself well to benefit from the build out of faster networks and data centers. But another important aspect about it is the way it manages its costs.

As mentioned earlier, the company turned in a record non-GAAP gross margin of 48% in the previous quarter along with an adjusted operating margin of 11.3%. These metrics were better on both a year-over-year basis and a sequential basis, even though Uniphase brought in more revenue.

The company’s strategy of outsourcing its repair services apart from consolidation of contract manufacturing, proper supply chain management, and reduction of design costs have enabled it to improve margins.

The bottom line

I have always maintained that JDS Uniphase is one of the best optical networking stocks that one can buy and its recent quarterly report proves why. Uniphase combines solid cost management with cutting-edge technology, and its bright prospects make it a compelling investment option. What do you think?


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