Fiber optics component supplier JDS Uniphase's (NASDAQ: JDSU) year went from bad to worse in October. Uniphase reported impressive first-quarter results, but weak guidance led to a massive drop in the share price. Uniphase hasn't recovered from that drop yet, as it is down more than 20% since the end of October. Moreover, with rival Finisar (NASDAQ: FNSR) seeing a rebound in demand for its telecom products, Uniphase investors might worry that it might be losing market share to peers.
Uniphase cited weak orders from North America for its test and measurement solutions that serve the telecom industry. As a result, Uniphase saw a 9% drop in revenue from its network and service-enablement business, which accounts for 40% of overall revenue.
These test and measurement solutions are primarily used by telecom carriers. This is why a drop in demand in this segment isn't an encouraging sign, since telecoms in North America are deploying LTE networks, apart from spending money to make their existing networks more efficient. Moreover, Uniphase's overall book-to-bill ratio in the previous quarter remained below 1, indicating that the company isn't seeing much demand for its products.
At the same time, rival Finisar is seeing good traction in its telecom business. When Finisar reported its first-quarter results, it saw a 2.7% increase in revenue from telecom products. Considering that its telecom business had dropped 12% on a sequential basis in the fourth quarter, this increase is commendable.
Finisar rounded off its robust quarterly report with an outstanding outlook. It guided for revenue between $277 million-$292 million, ahead of the $273 million Street estimate. Also, its earnings guidance of $0.37-$0.41 per share convincingly exceeded consensus expectations of $0.31 per share. Finisar expects its telecom business to get better in the future on the back of clients such as Ciena and demand from China, where China Mobile is about to introduce the nation's first LTE network this month.
Uniphase isn't doing as well as Finisar, and has been under pressure since its latest report. However, it expects things to get better in the long run. Uniphase is counting on an increase in demand for network bandwidth. It believes that the deployment of small cells by telecom carriers and the rollout of LTE will eventually lead to greater demand for its products.
Uniphase is correct in its assessment of what could drive demand for its products. For example, Verizon (NYSE: VZ), which operates the largest 4G network in the U.S., covering 500 markets and 301 million customers, is still working to make its network more efficient. Earlier this year, Verizon management stated that the company will begin deploying small cells in the second half of the year as it looks to boost capacity and coverage of its LTE network.
This initiative should help Verizon improve network speeds and catch AT&T, which is deploying its own small cells. AT&T is in the process of deploying 40,000 small cells over the next three years. Thus, component suppliers such as Uniphase stand to gain from the telecom wars in North America. But sadly, Uniphase doesn't currently have a strong order book to benefit from these deployments.
Uniphase is also optimistic about its data communications business. The growth in data centers is leading to strong demand for Uniphase's optical communication products. The company expects this segment to grow further as data centers become more complex and the need for connectivity and capacity within and between data centers increases.
Not good enough
Despite this optimism, Uniphase doesn't look like a convincing investment right now. The stock is expensive at 42 times earnings, its revenue growth slowed to just 1.9% year-over-year in the previous quarter, and the order book doesn't paint a pretty picture with a book-to-bill ratio less than 1.
As such, it would be prudent for investors to turn away from Uniphase and instead consider a a better optical networking play like Finisar.
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