October - 1999 - issue > Cover

Uniphase had visualized the critical need for bandwidth several years back. The company spent huge amounts of R&D funds to develop products that would increase bandwidth. Although its expenditures in R&D accumulated huge net losses for the company, they are now paying off. The company has now also become profitable, and it’s using a strategy pursued by Cisco in the past 10 years: trading its expensive stock to acquire its competitors. This strategy, aimed at maintaining its industry dominance, helped grow Cisco from a market capitalization of $2 billion to $225 billion.

The Company and its Management
JDS Uniphase (JDSU), as the company is now known after a merger with JDS Fitel, makes laser subsystems and equipment for fiber-optic telecommunications, signal processing and laser-based semiconductor wafer inspection and analysis. The company’s chips are used in communications to increase the carrying capacity of optical fibers. Its dense-wavelength division multiplexers boost the capacity of networks and its test instruments monitor network performance. JDS Uniphase also makes equipment for identifying microscopic defects in semiconductor wafers.
JDSU has a good management team in place and its revenue per employee exceeds the industry average. Its calculated EVA shows that the management is dedicated to creation of shareholder value.

The Products and Market Dominance
System manufacturers worldwide develop advanced optical networks for the telecommunications and cable television industries to deploy these products. JDS is well positioned to take advantage of network build and upgrade opportunities in the telcom space as demand grows for its lasers, modulators and amplification products used in communications systems. The company’s laser division produces laser subsystems for broad range of OEM applications, including biotechnology, industrial process control and measurement, graphics and printing, and semiconductor equipment.

The Fundamentals
Taking the merger with JDS Fitel into account, JDS Uniphase reported $192 million in combined pro forma sales and $0.24 per share earnings after a stock split. JDS Uniphase Corporation reported combined pro forma sales for its fourth quarter ended June 30, 1999 of $191.6 million and pro forma net income of $41.7 million or $0.24 per diluted share after giving effect to a two-for-one stock split on July 23, 1999. The company also reported pro forma combined sales for the year ended June 30, 1999 of $587.9 million and net income of $124.9 or $0.74 per diluted share.
Analysts expect the company to earn $1.10 per share on average in the year 2000 and $1.55 in year 2001. About 40 percent of the company’s sales are outside the US.
Uniphase on its own has been growing at a rate of over 60 percent; after the merger with JDS Fitel, it is expected to continue to grow at least 45 percent annually for the next five years.
With over $250 million in cash, the company is debt-free and has over 55 percent gross margins as well as a very strong operating cash flow of over $200 million a year. JDS Fitel has been growing at almost 100 percent annual rate on its own. The combined company will have revenues of over $500 million.

The Details
JDS Uniphase has appreciated 61.4 percent in the past 3 months, 139.7 percent in the past 6 months and 454 percent in the last 12 months. It has support around $90 million and is currently at $113. The momentum should continue, provided the fundamental picture remains intact.

Risks and Rewards
JDSU is the leading merchant provider of fiber optic communications components to the telecom and cable industries, and is well positioned to take advantage of network infrastructure building opportunities coming from the needs of cable and telecom companies to push one-line audio, video and data into homes and offices. The company continues to strengthen its position through internal development and an aggressive acquisition strategy.