JDS Clips its Wings

Amplifying the dramatic reversals of fortune in the optical-networking segment of the telecommunications industry, JDS Uniphase today said it would reduce some of its global business operations.

The realignment of the company, which is designed to reduce product overlap and improve manufacturing efficiency, is expected to result in the elimination of about 5,000 jobs and the closing of about 25 buildings. For JDS Uniphase, the optical-component maker that emerged as the emblem of runaway growth of the optical-networking industry in the past couple of years, the contraction, which was accompanied by dismal third-quarter earnings, marks an abrupt halt to its rapid expansion.

"We believed we have served our customers well during prior periods of exploding demand," said Jozef Straus, co-chairman and chief executive at JDS. "Our industry is in a near-term downturn, and we must act decisively and rapidly."

"Rapidly" is almost an understatement. The change in corporate culture from rapid expansion, marked by about a dozen acquisitions of startups and competitors over the past 18 months, to one of contraction has taken place virtually overnight. In fact, JDS is barely two months removed from closing its acquisition of SDL, a transaction originally valued at over $40 billion.

JDS's troubles, however, are also representative of an industry that is in a rapid downward spiral. Less than a year ago, the optical-networking industry was marked by the inability of component makers, such as JDS, to meet the demand of equipment makers for the parts to build optical-networking gear, such as DWDM systems. It was that supply problem which prompted JDS and others to go on massive shopping sprees to bulk up manufacturing capabilities.

At around the same time component makers starting catching up with demand, however, carriers and service providers began to cut back on purchases of next-generation optical-networking gear. System providers, such as Lucent and Nortel, which announced similar revenue shortfalls and staff cutbacks earlier this year, first felt the effects of the slowdown. The final link in the supply chain, component makers, are now beginning to feel the pain from the reduction in capital spending from their customers' customers.

While some smaller component makers that focus on one or two products are protected from the spending cutbacks, component suppliers such as JDS, with hundreds of products that stretch across passive and active technologies, are hardest hit. Suddenly, JDS has to adjust its corporate strategy from one of managing growth and expansion to dealing with reduction and contraction.

That task is likely to be all the more difficult without the assistance of M. Zita Cobb, executive vice president of strategy and business development. Strauss announced that Cobb was taking a leave of absence. He expressed optimism that Cobb would rejoin the company afterward.

The cost-cutting measures don't come as a great surprise to most analysts. Although JDS's earnings were down, they were in line with recent adjustments delivered by the company. While the $920 million in sales was about the same as the previous quarter, the company suffered losses of more than $1 billion when charges such as stock compensation fees are factored in. The company lost about $3.2 billion for the year, according to a company-issued press release.

Although officials were optimistic that the market would turn around, they declined to put a timeframe on any recovery and declined to provide guidance for 2002.

"Is this the bottom of the downturn?" said Stauss. "We're not sure."

For the next quarter, the company is expecting sales of about $700 million.

On the bright side, officials said the company was decreasing its dependence on a small group of customers. Its 10 biggest customers now represent about 70 percent of sales, and only one customer, Alcatel, accounts for more than 10 percent of sales.

Copyright © 2004 Ziff Davis Media Inc. All Rights Reserved. Originally appearing in The Net Economy.