We earlier wrote about how Ciena will benefit from anticipated increased spending by telecom companies, but that does not seem to be translating into strong earnings at JDS Uniphase (JDSU.O), which provides network and service enablement solutions and optical products. In fact, management at JDSU stated that it saw a huge slowdown in spending from one of its major tier-1 customers.
JDSU is also addressing some concerns about lack of focus by approving a spinoff into two distinct companies, one with a focus on optical components and commercial lasers (new name – “Lamentum”) and the other focusing on network and service enablement (“Viavi Solutions”). That is likely to take place in this year’s third quarter. Let’s take a look now at the combined company’s Earnings Quality and we’ll check the individual companies once the spinoff is completed. Overall, based on the StarMine Earnings Quality Score of 10 (out of 100), it looks like JDSU is showing signs of poor earnings quality that a spinoff alone may not rectify.
Source: Eikon/StarMine
Treading water
The first sign of stalling earnings is lack of revenue growth. As you can see from the above chart, JDSU has failed to generate any kind of revenue growth over the past two years, which begs the question, how will the spinoff drive revenues higher? (An analyst also raised this question on a recent conference call.)
Management acknowledged the lack of growth but did not give any concrete plans to improve revenues post-spinoff, other than indicating that carrier spending is expected to pick up again towards the end of the year. Management also cited cost saving as a source of earnings, but that is not sustainable in the long term. You can only cut costs so much.
Source: Eikon/StarMine
Full storerooms
Inventory days at JDSU have also been steadily increasing over the past six quarters. In the last quarter, the company reported 72 days of inventory, the highest level in two years. The falloff in orders from their major customer could be one reason for that inventory buildup, but in this fast-paced industry, inventory faces the risk of obsolescence, so keep an eye on that.
Source: Eikon/StarMine
Pro forma up, but GAAP down
JDSU has also consistently reported pro forma earnings higher than GAAP. The company usually asks investors to exclude certain items. One of the items that comes up almost every quarter is the stock based compensation, and that will likely continue to be the case unless the compensation structure changes. Despite reporting pro forma earnings that were positive in each of the last five quarters, the company filed GAAP earnings that indicated a loss in each of those quarters. In the most recent quarters, fees associated with the spinoff also are excluded from pro forma earnings. Those fees are likely to continue to recur until well after the spinoff and detract from the quality of earnings at JDSU. In the long run, GAAP earnings tend to be more sustainable. It remains to be seen whether this network provider can connect to better results.
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