After last week's dismal earnings report, JDS Uniphase (NASDAQ:JDSU) followed through with a suggestive action.

On Monday afternoon, the fiber optic components manufacturer announced that it would sell $400 million in zero-coupon convertible bonds, sending its shares over 5% lower in after-hours trading. The notes are redeemable in Nov. 2008 at $4.94 per share -- a 38% premium to Monday's close of $3.58 -- meaning buyers will pay a roughly 6% to 7% annualized premium for the convertible option, factoring in dilution.

The company plans to use the cash for general corporate purposes or even possible acquisitions. But management is really saying one of three things:

  1. It thinks its stock is expensive.

  2. A turnaround in its communications business is coming later rather than sooner.

  3. An acquisition or several acquisition targets is lined up.

First, the stock isn't particularly expensive unless a turnaround doesn't occur. Moreover, the company won't need the cash for operations unless it thinks the turnaround isn't going to happen this decade. Otherwise, one could argue that for JDS to take a potentially dilutive action while the business isn't in jeopardy, it must have acquisition targets lined up.

Let's examine the facts.

JDS Uniphase expects to burn $50 million to $60 million in cash in the current quarter with breakeven currently at $200 million in revenue. Two quarters from now, the company expects sufficient cost-cutting to lower breakeven to $170 million in revenues. With $1.16 billion in cash, JDS looks to have at least five years' worth of cash on hand, unless business deteriorates much further -- say, to under $120 million in quarterly revenues.

But as we noted last week, communications revenues have stabilized. In addition, the company's book-to-bill ratio is up over 1.0, meaning future orders are increasing, though lower average selling prices (ASPs) have dragged down revenues.

What's left is that JDS Uniphase has an acquisition target -- or, more likely, acquisition targets -- lined up. We can't offer what those might be, but it seems likely JDS Uniphase is looking at unprofitable units of larger companies, as it did earlier when it bought IBM's (NYSE:IBM) optical transceiver business.

Jeff Hwang can be reached at [email protected].