Carrier spending lulls are creating headwinds for JDSU

By Brad Reese on Thu, 08/21/08 - 11:11am.

According to RBC Capital Markets, carrier spending lulls are creating some headwinds for JDSU.

RBC Capital Markets Managing Director - Mark Sue commented to yours truly:

"Forward earnings variability remains high for JDSU as evidenced by yesterday's results."

"Revenues of $391M were near the midpoint of the company's guidance range yet the mix of business was not what was expected creating a drop in margins and a subsequent EPS miss: $0.07 vs. the consensus of $0.10."

"Guidance despite a book to bill greater than 1.0 is not too inspiring either with revenues of $378M to $394M vs. the consensus of $400M."

"Including optical component deferrals (supply constraints) into the December quarter, guidance would've been $10M higher."

"At the moment, the stock is trading at 15X our adjusted CY09 earnings of $0.80."

"Considering the lumpiness of the business and some near term wireline capex pauses, we're maintaining our Sector Perform rating."

"JDSU is aiming to streamline its operations to help the company achieve its longer term operating margin targets."

"CommTest revenues were $171M growing just 1% sequentially with some spending caution expressed by tier two carriers."

"JDSU is also expecting flattish cable carrier spending this year offset by growth in the fiber segment."

"Optical Communications at $145M grew 7% sequentially with strong demand for the company's ROADMs, tunable lasers, submarine and 10G transceivers."

"Advanced Optical Technologies declined -5% sequentially reflecting the lumpiness of the business as well as some near term weakness in commercial lasers by credit card companies."

"Overall gross margins declined from 42.6% last quarter to 40.9% due to the lack of CommTest revenue mix."

"Pricing overall doesn't seem irrational and several things are in the works to include increased outsourcing and a lean initiative providing JDSU with some confidence to reiterate its long term gross margin targets of 43-47%."

"Operating margins were reiterated longer term at 10% from current levels of just
2.2%."

"Operating margins near term is expected between 3-6%."

"When things line up, the model can work well as evidenced in 2Q07."

"Nevertheless, some macro concerns and some carrier spending lulls are creating some headwinds for JDSU near term as the company strives to combine its disparate business segments and yield meaningful operating margin leverage."

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