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JDSU > SEC Filings for JDSU > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for JDS UNIPHASE CORP /CA/

Form 10-Q for JDS UNIPHASE CORP /CA/


7-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Statements contained in this Quarterly Report on Form 10-Q which are not historical facts are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. A forward-looking statement may contain words such as "anticipates," "believes," "can," "can impact," "could," "continue," "estimates," "expects," "intends," "may," "ongoing," "plans," "potential," "projects," "should," "will," "will continue to be," "would," or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. Forward-looking statements include statements such as:

† our expectations regarding demand for our products, including continued trends in end-user behavior and technological advancements that may drive such demand;

† our belief that the Company is well positioned to benefit from certain industry trends and advancements, and our expectations of the role we will play in those advancements;

† our plans for growth and innovation opportunities;

† our plans to continue to operate as a Company comprised of a portfolio of businesses with a focus on optical and broadband innovation;

† financial projections and expectations, including profitability of certain business units, plans to reduce costs and improve efficiencies, the effects of seasonality on certain business units, continued reliance on key customers for a significant portion of our revenue, future sources of revenue, competition and pricing pressures, the future impact of certain accounting pronouncements and our estimation of the potential impact and materiality of litigation;

† our plans for continued development, use and protection of our intellectual property;

† our strategies for achieving our current business objectives, including related risks and uncertainties;

† our plans or expectations relating to investments, acquisitions, partnerships and other strategic opportunities;

† our strategies for reducing our dependence on sole suppliers or otherwise mitigating the risk of supply chain interruptions;

† our research and development plans and the expected impact of such plans on our financial performance; and

† our expectations related to our products, including costs associated with the development of new products, product yields, quality and other issues.

Management cautions that forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements. These forward-looking statements are only predictions and are subject to risks and uncertainties including those set forth in Part II, Item 1A "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q and in other documents we file with the Securities and Exchange Commission. Moreover, neither we assume nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. Forward-looking statements are made only as of the date of this Report and subsequent facts or circumstances may contradict, obviate, undermine or otherwise fail to support or substantiate such statements. We are under no duty to update any of the forward-looking statements after the date of this Form 10-Q to conform such statements to actual results or to changes in our expectations.

In addition, Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended June 29, 2013.

OUR INDUSTRIES AND QUARTERLY DEVELOPMENTS

JDSU provides network and service enablement solutions and optical products for telecommunications service providers, cable operators, network equipment manufacturers, and enterprises. Our diverse technology portfolio also fights counterfeiting and enables commercial lasers for a range of applications.

In the first quarter of fiscal 2014, we changed the name of our Communication Test and Measurement segment to Network and Service Enablement ("NSE"). The name NSE more accurately reflects the value the Company brings to customers and the evolution of the Company's product portfolio, one that includes communications test instruments as well as microprobes, software and services that provide the necessary visibility throughout the network to improve service and application performance.

To serve its markets, JDSU operates the following business segments:

† Network and Service Enablement

† Communications and Commercial Optical Products ("CCOP")

† Optical Security and Performance Products ("OSP")


Network and Service Enablement

NSE provides an integrated portfolio of network and service enablement solutions that provide end-to-end visibility and intelligence necessary for consistent, high-quality network, service and application performance.

These solutions are made up of test instruments and customer experience assurance management solutions supported by microprobes, monitoring software and optimization applications. This portfolio helps network operators and service providers effectively manage the continued growth of network traffic, devices and applications.

As a result of this continued and rapid growth, operators and providers are looking for new ways to drive business agility and generate revenue with innovative services, while continuing to focus on reducing operating costs and improving network performance. To this end, NSE provides world-class network and service enablement solutions, focusing on software and solutions offerings in high-growth markets while leveraging its instruments portfolio. These strategic investments are being placed globally to meet end-customer demand.

JDSU's network enablement solutions include instruments and software to build, activate, certify, troubleshoot, monitor, and optimize networks that are differentiated through superior efficiency, higher profitability, reliable performance, and greater customer satisfaction. These products include instruments and software that access the network to perform installation and maintenance tasks. Our service enablement solutions collect and analyze complete network data to reveal the true customer experience and opportunities for new revenue streams with enhanced management, control, optimization and differentiation.

NSE solutions address lab and production environments, field deployment and service assurance for wireless and fixed communications networks, including storage networks. NSE's solutions include one of the largest test instrument portfolios in the industry, with hundreds of thousands of units in active use by major NEMs, operators and services providers worldwide. NSE is leveraging this installed base and knowledge of network management methods and procedures to develop advanced customer experience solutions. These solutions let carriers remotely monitor performance and quality of service and applications performance throughout the entire network. Remote monitoring decreases operating expenses, while early detection increases uptime, preserves revenue, and lets operators better monetize their networks.

NSE customers include wireless and fixed services providers, NEMs, government organizations and large corporate customers. These include major telecom, mobility and cable operators such as AT&T, Bell Canada, Bharti Airtel Limited, British Telecom, China Mobile, China Telecom, Chunghwa Telecom, Comcast, CSL, Deutsche Telecom, France Telecom, Reliance Communications, Softbank, Telefónica, Telmex, TimeWarner Cable, Verizon and Vodafone. NSE customers also include many of the NEMs served by our CCOP segment, including Alcatel-Lucent, Ciena, Cisco Systems, Fujitsu and Huawei. NSE customers also include chip and infrastructure vendors, storage-device manufacturers, storage-network and switch vendors, and deployed private enterprise customers. Storage-segment customers include Brocade, Cisco Systems and EMC.

On December 10, 2013, we acquired certain technology and other assets from Trendium, a provider of real-time intelligence solutions for customer experience assurance, asset optimization, and monetization of big data for 4G/Long term evolution ("LTE") mobile network operators.

On January 6, 2014, we acquired Network Instruments, a leading developer of enterprise network and application-performance management solutions for global 2000 companies. Network Instruments extended JDSU's service enablement solutions to the enterprise, data center and cloud networking markets.

We are currently evaluating the impact of recent strategic acquisitions on the reporting structure of our NSE segment.

Communications and Commercial Optical Products

CCOP is a leading provider of optical communications and commercial laser products and technologies and commercial laser components.

Serving telecommunications and enterprise data communications markets, CCOP products include components, modules, subsystems, and solutions for access
(local), metro (intracity), long-haul (city-to-city and worldwide), and submarine (undersea) networks, as well as SANs, LANs and WANs. These products enable the transmission and transport of video, audio and text data over high-capacity fiber-optic cables. CCOP maintains leading positions in the fastest-growing optical communications segments, including ROADMs and tunable XFPs and SFP+s. CCOP's growing portfolio of pluggable transceivers supports LAN/SAN needs and the cloud for customers building proprietary data center networks.


Original equipment manufacturers ("OEMs") use CCOP lasers-fiber, diode, direct-diode, diode-pumped solid-state, and gas-that offer low- to high-power output with UV, visible and IR wavelengths. This broad product portfolio addresses the needs of laser clients in applications such as micromachining, materials processing, bio-instrumentation, consumer electronics, graphics, and medical/dental. Core laser technologies include continuous-wave, q-switched and mode-locked lasers addressing application needs from continuous-wave to megahertz repetition rates. Photonic power products transport energy over optical fiber, enabling electromagnetic- and radio-interference-free power and data transmission for remote sensors such as high-voltage line current monitors.

Gesture recognition systems use both CCOP's gesture recognition light source and OSP's gesture recognition optical filters. These systems simplify the way people interact with technology by enabling the use of natural body gestures, like the wave of a hand, instead of using a device like a mouse or remote control. Emerging markets for gesture recognition include gaming platforms, home entertainment, mobile devices and personal computing.

CCOP's optical communications products customers include Adva, Alcatel-Lucent, Ciena, Cisco Systems, Ericsson, Fujitsu, Huawei, Infinera, Nokia Solutions and Networks, and Tellabs. CCOP's lasers customers include Amada, ASML, Beckman Coulter, Becton Dickinson, Disco, Electro Scientific Industries, and KLA-Tencor.

On January 27, 2014, we acquired Time-Bandwidth Products, a provider of high powered and ultrafast lasers for the industrial and scientific markets. Manufacturers use high-power, ultrafast lasers to create micro parts for consumer electronics and to process semiconductor chips. Use of ultrafast lasers for micromachining applications is being driven primarily by increasing use of consumer electronics and connected devices globally.

Optical Security and Performance Products

OSP designs, manufactures, and sells products targeting anti-counterfeiting, consumer electronics, government, healthcare, and other markets.

OSP's security offerings for the currency market include Optically Variable Pigment ("OVP®"), Optically Variable Magnetic Pigment ("OVMP®") and banknote thread substrates. OVP® enables a color-shifting effect used by banknote issuers and security printers worldwide for anti-counterfeiting applications on currency and other high-value documents and products. OVP® protects the currencies of more than 100 countries today.

Leveraging its expertise in spectral management and its unique high-precision coating capabilities, OSP improves the performance of a range of products in the consumer-electronics market. For example, gesture recognition devices designed for gaming platforms use OSP optical filters.

OSP value-added solutions meet the stringent requirements of commercial and government customers in aerospace and defense. In the aerospace industry, JDSU precision optical filters are a critical component in satellite and spacecraft power- and temperature-control systems. OSP also supplies anti-reflection coatings, beamsplitters, optical filters, laser optics, solar reflectors, and mirrors for a variety of defense and security applications including guidance systems, high-energy laser systems, battlefield eye protection, infrared night-vision systems, and secure optical communications.

During the fourth quarter of fiscal 2013, we made a decision to cease production of certain legacy custom optic products at the end of their lifecycle, including anti-reflection products, solar cell covers, and front-surface mirrors for display and office automation applications as well as certain infrared and box coater solutions. We expect to complete our phase out of these legacy products by the end of the fourth quarter of fiscal 2014.

OSP serves customers such as 3M, Barco, Kingston, Lockheed Martin, Northrup Grumman, Pan Pacific, Seiko Epson, and SICPA.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Refer to "Note 2. Recently Issued Accounting Pronouncements" regarding the effect of certain recent accounting pronouncements on our consolidated financial statements.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a description of the critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements, refer to Item 7 on Management Discussion and Analysis in our Fiscal 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC").

RESULTS OF OPERATIONS

The results of operations for the current period are not necessarily indicative of results to be expected for future periods. The following table summarizes selected Consolidated Statements of Operations items (in millions, except for percentages):

                          Three Months Ended                                     Nine Months Ended
                       March 29,      March 30,                 Percentage    March 29,     March 30,                 Percentage
                          2014          2013         Change       Change         2014          2013        Change       Change
Segment net
revenue:
NSE                    $    172.3    $     174.2    $   (1.9 )        (1.1 )% $    539.2    $    539.1    $    0.1           0.0 %
CCOP                        194.6          179.2        15.4           8.6         597.2         559.9        37.3           6.7
OSP                          51.1           51.9        (0.8 )        (1.5 )       158.2         156.6         1.6           1.0
Net revenue            $    418.0    $     405.3    $   12.7           3.1 %  $  1,294.6    $  1,255.6    $   39.0           3.1 %

Gross profit           $    184.7    $     155.3    $   29.4          18.9 %  $    574.8    $    516.9    $   57.9          11.2 %
Gross margin                 44.2 %         38.3 %                                  44.4 %        41.2 %

Amortization of
acquired
technologies                 11.0           17.0        (6.0 )       (35.3 )%       32.3          48.7       (16.4 )       (33.7 )%
Percentage of net
revenue                       2.6 %          4.2 %                                   2.5 %         3.9 %

Research and
development                  74.1           65.8         8.3          12.6 %       216.0         190.9        25.1          13.1 %
Percentage of net
revenue                      17.7 %         16.2 %                                  16.7 %        15.2 %

Selling, general
and administrative          113.4          107.3         6.1           5.7 %       329.5         317.4        12.1           3.8 %
Percentage of net
revenue                      27.1 %         26.5 %                                  25.5 %        25.3 %

Amortization of
other intangibles             5.2            3.1         2.1          67.7 %        10.7           8.8         1.9          21.6 %
Percentage of net
revenue                       1.2 %          0.8 %                                   0.8 %         0.7 %

Restructuring and
related charges               3.6            0.4         3.2         800.0 %         3.8           6.1        (2.3 )       (37.7 )%
Percentage of net
revenue                       0.9 %          0.1 %                                   0.3 %         0.5 %

Loss from
discontinued
operations, net of
tax                             -              -           -             - %           -          (1.0 )       1.0        (100.0 )%
Percentage of net
revenue                         - %            - %                                     - %         0.1 %

Net Revenue

Net revenue increased by $12.7 million, or 3.1%, during the three months ended March 29, 2014 compared to the same period a year ago. This increase was primarily due to an increase in our CCOP segment, as discussed below.


NSE net revenue decreased by $1.9 million, or 1.1%, during the three months ended March 29, 2014 compared to the same period a year ago. This decrease was driven by $11.0 million of net revenue decreases primarily from our Network Visibility and Control and Services product lines. These decreases were primarily due to the fact that the prior period reflected net revenue from a significant one-time project in our Network Visibility and Control product line, coupled with lower current period demand in our Services product line for hardware services. This was partially offset by $9.1 million of net revenue increases primarily from our Mobility, Cloud and Data Center and Fiber product lines. These increases were primarily due to increased demand from key customers in our Mobility and Fiber product lines and new products in our Cloud and Data Center product line from the acquisition of Network Instruments in the current period.

CCOP net revenue increased by $15.4 million, or 8.6%, during the three months ended March 29, 2014 compared to the same period a year ago. This increase was driven by $31.6 million of net revenue increases primarily from our Gesture Recognition Light Source, Circuit Packs and Pluggable product lines. These increases were primarily due to (i) higher demand for our Gesture Recognition Light Source product line related to our customer's next generation gaming console, (ii) higher demand from key customers in our Circuit Packs product line and (iii) higher demand for new products from key customers in our Pluggables product line. These increases were partially offset by $16.2 million of net revenue decreases primarily due to lower deployments by customers of our ROADMs product line and lower demand from key customers in our Passive Components product line.

OSP net revenue decreased by $0.8 million, or 1.5%, during the three months ended March 29, 2014 compared to the same period a year ago. This decrease was driven by $6.1 million of net revenue decreases primarily from our Anti-Counterfeiting product line driven by lower cyclical demand for our currency products. This decrease was partially offset by $5.3 million of net revenue increases primarily from our Consumer and Industrial product line driven by last-time buys of products impacted by our plan to exit certain legacy product offerings by the end of the fourth quarter of fiscal 2014 and higher demand for our Gesture Recognition Filters.

Net revenue increased by $39.0 million, or 3.1%, during the nine months ended March 29, 2014 compared to the same period a year ago. This increase was primarily due to an increase in our CCOP segment, as discussed below.

NSE net revenue remained relatively flat during the nine months ended March 29, 2014 compared to the same period a year ago, increasing by $0.1 million. This increase was driven by $29.8 million of net revenue increases primarily from our Media Access and Content and Fiber product lines. These increases were primarily due to higher demand from a key customer of our Media Access and Content product line and increased spending for the deployment of LTE networks by key customers of our Fiber product line. This was partially offset by $29.7 million of net revenue decreases primarily from our Network Visibility and Control and Ethernet product lines. These decreases were primarily due to the fact that the prior period reflected net revenue from a significant one-time project in our Network Visibility and Control product line and reduced current period spending from key customers in our Ethernet product line.

CCOP net revenue increased by $37.3 million, or 6.7%, during the nine months ended March 29, 2014 compared to the same period a year ago. This increase was driven by $102.4 million of net revenue increases primarily from our Gesture Recognition Light Source, Circuit Packs and Pluggable product lines. These increases were primarily due to (i) higher demand for our Gesture Recognition Light Source product line related to our customer's next generation gaming console, (ii) higher demand from key customers in our Circuit Packs product line and (iii) higher demand for new products from key customers in our Pluggables product line. This was partially offset by $65.1 million of net revenue decreases primarily from our ROADMs, Passive Components and Tunables product lines. These decreases were primarily due to lower deployments by customers of our ROADMs product line and lower demand from key customers in our Passive Components and Tunables product lines.

OSP net revenue increased by $1.6 million, or 1.0%, during the nine months ended March 29, 2014 compared to the same period a year ago. This increase was driven by $11.5 million of net revenue increases primarily from our Consumer and Industrial product line driven by last-time buys of products impacted by our restructuring plan to exit certain legacy product offerings by the end of the fourth quarter of fiscal 2014 and higher demand for our Gesture Recognition Filters. This was partially offset by $9.9 million of net revenue decreases primarily from our Anti-Counterfeiting product line driven by lower cyclical demand in the current period.

Going forward, we expect to continue to encounter a number of industry and market risks and uncertainties that may limit our visibility, and consequently, our ability to predict future revenue, profitability and general financial performance, and that could create quarter over quarter variability in our financial measures. For example, continued economic issues in Europe have led to uncertain demand in our NSE and optical communications product portfolios, and we cannot predict when or to what extent this uncertainty will be resolved. Our revenues, profitability, and general financial performance may also be affected by: (a) strong pricing pressures, particularly within our optical communications markets, due to, among other things, a highly concentrated customer base, increasing competition, particularly from Asia-based competitors, and a general commoditization trend for certain products; (b) high product mix variability, particularly in our CCOP and NSE markets, which affects revenue and gross margin; (c) fluctuations in customer buying patterns, which cause demand, revenue and profitability volatility; and (d) the current trend of communication industry consolidation, which is expected to continue, that directly affects our CCOP and NSE customer bases and adds additional risk and uncertainty to our financial and business projections.


We operate primarily in three geographic regions: Americas, Europe Middle East and Africa ("EMEA") and Asia-Pacific. The following table presents net revenue by geographic region (in millions):

                           Three Months Ended                     Nine Months Ended
                       March 29,         March 30,          March 29,           March 30,
Net revenue:             2014              2013               2014                2013
Americas            $ 196.5    47.0 % $ 194.1    47.9 % $   609.5    47.1 % $   618.0    49.2 %
EMEA                  102.3    24.5      95.1    23.5       311.1    24.0       294.4    23.5
Asia-Pacific          119.2    28.5     116.1    28.6       374.0    28.9       343.2    27.3
Total net revenue   $ 418.0   100.0 % $ 405.3   100.0 % $ 1,294.6   100.0 % $ 1,255.6   100.0 %

Net revenue is assigned to geographic regions based on customer shipment locations. Net revenue from customers in the Americas during the three months ended March 29, 2014 and March 30, 2013 included net revenue from the United States of $152.0 million and $144.1 million, respectively. Net revenue from customers in the Americas during the nine months ended March 29, 2014 and March 30, 2013 included net revenue from the United States of $454.6 million and $469.0 million, respectively.

Net revenue from customers outside the Americas during the three months ended March 29, 2014 and March 30, 2013 represented 53.0% and 52.1% of net revenue, respectively. Net revenue from customers outside the Americas during the nine months ended March 29, 2014 and March 30, 2013, represented 52.9% and 50.8% of net revenue, respectively. We expect revenue from customers outside of North America to continue to be an important part of our overall net revenue and an increasing focus for net revenue growth opportunities.

Gross Margin

Gross margin increased 5.9 percentage points during the three months ended March 29, 2014 from 38.3% in the same period a year ago to 44.2% in the current period. The increase was primarily due to (i) the fact that the prior period reflected inventory charges and accelerated amortization of acquired developed technology related to the strategic exit of NSE's low-speed wireline product line, (ii) improvement in NSE gross margin driven by a reduction in manufacturing variances and improved cost efficiencies realized in the current period through the consolidation of our contract manufacturing partners during the second half of fiscal 2013 and (iii) a reduction in amortization of developed technology in the current period driven by certain significant intangible assets becoming fully amortized in the first quarter of fiscal 2014. This increase was partially offset by a change in segment mix as CCOP net revenue, which generates lower gross margin generally than our other two segments, represented a higher percentage of consolidated net revenue in the current period.

Gross margin increased 3.2 percentage points during the nine months ended March 29, 2014 from 41.2% in the same period a year ago to 44.4% in the current period. The increase was primarily due to (i) a reduction in amortization of developed technology in the current period due to certain significant intangible assets becoming fully amortized in the first quarter of fiscal 2014, (ii) the absence of charges in the current period related to the strategic exit from NSE's low-speed wireline product line that were reflected in the prior period as . . .

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