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JDS can't see bottom yet

JDS has backed away from the statement it made at the end of last month that its sales had stabilized, and now predicts a further 10-15% decline in its December quarter, as the optical components market remains in disarray.

JDS Uniphase has backed away from the statement it made at the end of last month that its sales had stabilized,...

and now predicts a further 10-15% decline in its December quarter, as the optical components market remains in disarray.

The disclosure that it may not see a turnaround until as late as March next year came after JDS posted a much wider-than-expected operating loss of $260 million for its fiscal first quarter to September, on sales of $329 million, down 58% from a year earlier. While sales this quarter will fall more than analysts had anticipated, cost-cutting measures will keep its losses in line with earlier forecasts.

"While we believe that declines of this magnitude are behind us, we have not yet turned the corner," cochairman and CEO Jozef Straus, told analysts on a conference call. "We do not believe that September was the bottom, but December or March may be," he added.

The optical components maker, which has shed 16,000 of its employees this year out of a total of 29,000, told analysts it could see sales of its components pick up before those of fiber vendors, because after a massive correction spanning several months, system vendors may start to fill holes in their inventories. Also, some of the company's components that improve utilization of fiber, such as its more finely spaced interleavers, higher-speed lasers and Raman amplifiers, could see an improvement in sales as carriers try to squeeze capacity from their existing systems.

In fact, COO Don Scifres told analysts that JDS is receiving bids for some of its optical components that underpin next-generation architecture. For instance, the company is hopeful that it may revive sales of its passive components -- mostly thin film array wave guides and other components that combine and divide light streams -- by adding more functionality or focusing its R&D on developing lower-cost architecture. While JDS clearly faces a nuclear winter in terms of sales, it does have $1.6 billion in cash to help keep its R&D efforts well funded.

Sales of JDS's passive components didn't suffer as much as sales of its active components -- lasers, amplifiers and the like -- but profitability plunged. While sales of passive components fell only 6% from a year earlier to $84 million, losses amounted to $18 million, compared with a profit of $59 million a year earlier. The situation was grimmer in active components: sales fell 65% to $243 million, and losses ballooned to $324 million, compared with a profit of $215 million last year. The losses partly reflect JDS's excess capacity, but hardly bode well for its margins. While sales could improve before the industry sees an overall recovery, JDS and its competitors would still be saddled with excess capacity, which is likely to keep pricing pressure intense.

As to when sales to system vendors will recover, analysts will have to wrestle with CFO Tony Muller's enigmatic prognostication: "Sometime in the future."

JDS has added its voice to an increasingly unclear outlook for the industry. Systems vendors like Nortel, ONI, Lucent and Tellabs have indicated that carrier spending could bottom out by the end of the year. Communications chipmakers like Vitesse and Applied Micro Circuits -- usually the first element in the food chain -- noted that their businesses are showing early signs of a recovery. However, carriers like SBC and BellSouth have given every indication that spending will fall even further next year. While that does not necessarily imply that optical equipment sales could grow even as the size of the overall pie is shrinking, apparently carriers will have little appetite until networks are running well above capacity.

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