JDS Uniphase Forecasts Growth Despite Telecom Ups and Downs

As I noted Wednesday evening, laser and optical fiber component maker JDS Uniphase (JDSU) beat expectations in its fourth fiscal quarter and offered a forecast for revenue and profit better than some on the Street were expecting.

On a conference call with analysts Wednesday evening, the company’s chief executive, Kevin Kennedy, focused on the fact that JDS had 16% year-over-year sales growth and four quarters in a row of positive earnings per share excluding some costs. In a phone chat afterward, Kevin reviewed some details of the quarter and his outlook.

The weakest area in the quarter was the “Optical Communications” division, which had sales growth of 9% year-over-year, compared to 25% for the company’s products that test networks and 19% for its laser sales (he fourth group, Advanced Optical Technologies, rose only 4%, but it has a higher average gross margin, which offsets the slow growth). Kennedy says the Communications business had to deal with delays in orders as some customers were merging, such as Nokia (NOK) and the networks business of Siemens AG (SI), which were solidifying their new joint venture.

But, “The part of Communications where we had the most investment, the component part, did just fine,” he says, and he feels confident Communications can grow in the double-digits going forward. There’s no slowdown, in his opinion, to the roll-out of video bandwidth that will force phone and cable operators to upgrade not only their Cisco Systems (CSCO) routers but also the basic configuration of their fiber networks.

“Today’s network is made of rings,” notes Kennedy, referring to the loops of fiber that blanket downtown metro areas. “That structure has to fundamentally change,” as people watch more Internet-based video, he opines. “JDS is the dominant share vendor for the technology to convert rings to meshes,” a more sophisticated cat’s cradle of connections, he asserts.

The company is also working to keep costs under control, and it cut its losses year-over-year for the fiscal year from 73 cents per share to a net loss of 12 cents per share. Kennedy said the operating expense ratio of 38.6% of sales in the quarter was higher than he would have liked, because the company didn’t wind down expenses fast enough to deal with the hiccups in the Communications business. He’s confident JDS can keep expenses in a range of 35% to 38% of revenue over the long term.

As for the balance sheet, the company returned to positive cash flow for the last two quarters of the year, and generated about $70 million in “adjusted” earnings before interest, taxes, depreciation and amortization, which Kennedy noted was the highest in five years. The company has about $808 million in long-term debt on the books — down from $900 million a year ago but still a high degree of leverage for that amount of EBITDA.

Kennedy sounds resolute about increasing cash flow in coming quarters, and using it to pay down that debt but also to “grow the portfolio,” meaning M&A, and to buffet any “downturn,” which I guess means he’s as realistic about the prospects of economic downturn as the rest of us are.

JDS shares were up 3% in after-hours trading at $14.79.

JDSU 1-yr chart: