JDS completes merger, issues sales warning

The fiber-optic giant completes its $13.5 billion merger with SDL and then promptly warns that the combined company will miss analysts' earnings targets.

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

Shares of JDS Uniphase, which announced its intention to buy rival SDL last July, fell $2.13 to $38.50 ahead of the warning and gained 50 cents a share in after-hours trading.

During a conference call with analysts, company executives said the combined company would earn 17 cents a share in the quarter on sales of $1 billion. According to First Call, analysts expected the company to earn 21 cents a share.

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, 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."

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 fond of optical-equipment stocks.

"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."

As a result of the merger, SDL will become a subsidiary of JDS. The new company will include two business groups: the Amplication and Transmission Business Group and the WDM, Switching and Thin Film Products Business Group.

Last quarter, JDS Uniphase beat expectations 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.