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JDS Uniphase Comes Through Loud And Clear
Tech investors have not been too forgiving to companies through this earnings cycle, but JDS Uniphase (Nasdaq:JDSU) largely took matters into its own hands with a stellar result. While there is still plenty of room to debate JDSU's long-term future, the near-term outlook for optoelectronics seems to be pretty strong.
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A Blowout in the Fiscal Second Quarter
JDS Uniphase delivered everything investors wanted in its fiscal second quarter and then some. Revenue jumped 16% from the first quarter (and 39% from the year-ago level) and handily smote even the high estimate on the Street. Revenue growth was definitely fueled by test and measurement business (up 27% sequentially), but the optical products business was no slouch at 14% sequential growth. While the Advanced Optical Technologies unit saw a 10% sequential revenue decline, analysts did not expect a lot from this business.
As revenue jumped ahead of plan, the company was able to leverage better profitability. Gross margin increased 140 basis points on a sequential basis, while the operating margin expanded 450 basis points to over 15%. (For more, see The Bottom Line On Margins.)
The Road Ahead
If management is right, this was not a one-quarter recovery in JDS Uniphase's business. The company guided for a level of March quarter revenue that looks to be about 7% higher than where estimates had been, and while there could be some sequential pullback in profitability, it would seem that numbers should be going up overall.
While JDSU shares jumped more than 20% following this earnings report, JDS Uniphase may not be the only beneficiary of this good news. Strong performance in optical components for the communications market should be good news for Finisar (Nadsaq:FNSR) and Oclaro (Nasdaq:OCLR) as well.
Although Danaher (NYSE:DHR) had talked about better conditions in the test market during its earnings call, JDS Uniphase is clearly doing quite a bit better than average. It will remain to be seen, then, if that is a positive for EXFO (Nasdaq:EXFO) and Spirent, or whether JDSU has simply raised the bar on these rivals. Looking further out, strength in the 40G/100G test market could also be a positive sign for Ciena (Nasdaq:CIEN) as test and measurement sales often precede higher OEM order rates.
Of course, JDSU veterans know that nothing lasts forever, and this has been a classic boom/bust story before. Still, phone and cable companies like Verizon (NYSE:VZ) and Time Warner (NYSE:TWC) have high ongoing network spending needs and even companies like AT&T (NYSE:T) need JDSU gear for their ethernet backhaul. On top of that, there are little side businesses that JDSU can exploit, as the company found a market for its components with Microsoft's (Nasdaq:MSFT) Kinect gesture recognition product.
The Bottom Line
JDSU's past is almost worthless when it comes to trying to suss out an appropriate target price. The company has logged three fiscal years of positive free cash flow, but that really is not enough to come up with a "steady state" free cash flow margin. Likewise, JDS Uniphase's direct comparables (Finisar, et al) have a similar problem and are little help to a value analyst.
All that said, it may be possible to figure this out by going through the back door, so to speak. To have a LACFY on par with Treasurys, JDSU would need about $175 in free cash flow. Assuming that analysts bump up the fiscal 2011 revenue estimate to about $1,800 million, that would mean a free cash flow margin of about 10% - not a wholly unreasonable level, and still well shy of tech leaders like Cisco (Nasdaq:CSCO) or F5 (Nasdaq:FFIV). If investors believe JDSU can do better than that, these shares may yet still be interesting for risky accounts. (For more insight, read Understanding Liability-Adjusted Cash Flow Yield.)
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IN PICTURES: 9 Simple Investing Ratios You Need To Know
A Blowout in the Fiscal Second Quarter
JDS Uniphase delivered everything investors wanted in its fiscal second quarter and then some. Revenue jumped 16% from the first quarter (and 39% from the year-ago level) and handily smote even the high estimate on the Street. Revenue growth was definitely fueled by test and measurement business (up 27% sequentially), but the optical products business was no slouch at 14% sequential growth. While the Advanced Optical Technologies unit saw a 10% sequential revenue decline, analysts did not expect a lot from this business.
As revenue jumped ahead of plan, the company was able to leverage better profitability. Gross margin increased 140 basis points on a sequential basis, while the operating margin expanded 450 basis points to over 15%. (For more, see The Bottom Line On Margins.)
The Road Ahead
If management is right, this was not a one-quarter recovery in JDS Uniphase's business. The company guided for a level of March quarter revenue that looks to be about 7% higher than where estimates had been, and while there could be some sequential pullback in profitability, it would seem that numbers should be going up overall.
While JDSU shares jumped more than 20% following this earnings report, JDS Uniphase may not be the only beneficiary of this good news. Strong performance in optical components for the communications market should be good news for Finisar (Nadsaq:FNSR) and Oclaro (Nasdaq:OCLR) as well.
Although Danaher (NYSE:DHR) had talked about better conditions in the test market during its earnings call, JDS Uniphase is clearly doing quite a bit better than average. It will remain to be seen, then, if that is a positive for EXFO (Nasdaq:EXFO) and Spirent, or whether JDSU has simply raised the bar on these rivals. Looking further out, strength in the 40G/100G test market could also be a positive sign for Ciena (Nasdaq:CIEN) as test and measurement sales often precede higher OEM order rates.
Of course, JDSU veterans know that nothing lasts forever, and this has been a classic boom/bust story before. Still, phone and cable companies like Verizon (NYSE:VZ) and Time Warner (NYSE:TWC) have high ongoing network spending needs and even companies like AT&T (NYSE:T) need JDSU gear for their ethernet backhaul. On top of that, there are little side businesses that JDSU can exploit, as the company found a market for its components with Microsoft's (Nasdaq:MSFT) Kinect gesture recognition product.
The Bottom Line
JDSU's past is almost worthless when it comes to trying to suss out an appropriate target price. The company has logged three fiscal years of positive free cash flow, but that really is not enough to come up with a "steady state" free cash flow margin. Likewise, JDS Uniphase's direct comparables (Finisar, et al) have a similar problem and are little help to a value analyst.
All that said, it may be possible to figure this out by going through the back door, so to speak. To have a LACFY on par with Treasurys, JDSU would need about $175 in free cash flow. Assuming that analysts bump up the fiscal 2011 revenue estimate to about $1,800 million, that would mean a free cash flow margin of about 10% - not a wholly unreasonable level, and still well shy of tech leaders like Cisco (Nasdaq:CSCO) or F5 (Nasdaq:FFIV). If investors believe JDSU can do better than that, these shares may yet still be interesting for risky accounts. (For more insight, read Understanding Liability-Adjusted Cash Flow Yield.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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