The measure of great management is how they handle a downturn. Using that proxy, I think that communications test and measurement specialist JDS Uniphase (Nasdaq: JDSU ) is doing OK.
Let's start with the tale of the tape: Second-quarter non-GAAP earnings came in at $0.11 per share on $357 million in sales. That's a 10.6% revenue shrink, year over year, and non-GAAP earnings were cut neatly in half. While those numbers aren't exactly awesome, they can stand shoulder-to-shoulder with the networking giant Alcatel-Lucent (NYSE: ALU ) , and even the stalwart industry leader Cisco Systems (Nasdaq: CSCO ) stumbled with its latest earnings report. Put in another perspective, it's a lot better than the out-and-out financial disaster that's happening over at Nortel Networks (NYSE: NT ) .
Like everyone else and their dog, JDS took a machete to its goodwill balance, leaving only $56 million of goodwill where there was $796 million a year ago. At this rate, the whole accounting concept of goodwill may be forgotten in a couple of years.
But despite a drop in orders, JDS' operating cash flow is still positive, and there's a cash cushion of $689 million on the books. If not for a $14 million inventory write-off in preparation for a lighter manufacturing model, free cash flow would have come up roses again, but that streak had to stop at seven quarters.
That's OK, because the new manufacturing plan looks good. Following in the footsteps of asset-light pioneers like Texas Instruments (NYSE: TXN ) and Advanced Micro Devices (NYSE: AMD ) , JDS is closing or selling some of its own factories and sending orders over to manufacturing experts like Sanmina-SCI (Nasdaq: SANM ) . By the end of the year, management expects to have cut payroll by roughly one-third, lightening operating costs and making for a more flexible business that can roll with the punches.
JDS's stock price has been hit harder than Cisco's and just as hard as Alcatel-Lucent over the past year. But thanks to management's willingness to make hard decisions and big changes when needed, I believe that the company's chances for recovery are much better than Alcatel's. And if Cisco bounces back -- as I fully expect it to -- then JDS will surely follow. Cisco is one of its biggest customers, after all.
Measure twice and cut once. That goes for business model changes as well as for investing.
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