JDS Uniphase closes SDL merger; cuts Q3 estimates

Fiber-optic components giant JDS Uniphase completed its $13.5 billion merger with SDL Tuesday and then promptly warned that the combined company will miss analysts' sales and earnings targets in the third quarter.

JDS Uniphase (Nasdaq: JDSU), which announced its intention to buy rival SDL (Nasdaq: SDLI) back in July, fell $2.13 to $38.50 ahead of the warning before gaining 50 cents a share in after-hours trading.

During a conference call with analysts, company executives said the combined company would earn only 17 cents a share in the quarter on sales of $1 billion.

First Call Corp. consensus was expecting a profit of 21 cents a share on sales of $1 billion.

Jim Liang, an analyst at WR Hambrecht, said the $1 billion estimate was for JDS Uniphase as a standalone company.

"You have to factor in between $90 million and $100 million in sales for SDL in the first part of this quarter minus whatever sales would have been derived from its Zurich unit," which was sold to Nortel Networks (NYSE: NT)," he said. "So, essentially, the combined company is going to come up about $60 million short of the consensus estimate."

Despite the sales and earnings shortfall, Liang said he would reiterate his "buy" rating on the stock.

"The issue here is this is a hyper-growth company," he said. "We're seeing some inventory corrections by carriers and optical systems companies. But at this price, we think the stock is relatively attractive from a valuation standpoint."

Underscoring the valuation angle, shareholders are keenly aware this merger was valued at more than $41 billion when it was first announced.

JDS Uniphase shares peaked at $153.44 back in March before slumping to a low of $37 in January.

Company executives told analysts to expect sales of $6 billion in fiscal 2002—in line with current estimates—but warned that "continued uncertainty" in capital spending plans by major telecom carriers and customer inventory adjustments.

Chief Financial Officer Tony Miller said it was "too early" to predict earnings for fiscal 2002. Analysts are currently expecting a profit of $1.11 a share.

"At the end of our second quarter we said the near term prospects were affected by uncertain capital spending. These conditions remain as they were, or may have become somewhat less favorable," he said.

Susan Kalla, an analyst at BlueStone Capital, said she wasn't terribly fond of optical-equipment stocks at this juncture.

"These stock shouldn't be priced at such a premium when demand is going to level off," she said. "Management at all these companies is excellent, but you can't fight the forces of nature. When the tornado comes, it doesn't matter how well the nails are hammered into the boards."

Going forward, SDL will become a subsidiary of JDS. The new company will sport two business groups -- the Amplication and Transmission Business Group and the WDM, Switching and Thin Film Products Business Group.

Last quarter, JDS Uniphase beat the Street when it posted a profit of $208 million, or 21 cents, on sales of $925 million.

Twenty-nine of the 32 analysts tracking the stock maintain either a "buy" or "strong buy" recommendation.