Anyone who thinks that a capital spending upsurge in telecommunications or data is nigh may want to look at JDS Uniphase's (NASDAQ:JDSU) quarterly results and consider them to be a sharp refutation of the notion.
The optical networking technology company turned in quarterly revenues at $161 million -- $4 million below last year's revenues for the same quarter, which, given the state of the economy and capital spending at the time, should not have been a difficult comparable period. Now, the news isn't all bad for JDS Uniphase, but I just look at the results and prospects and wonder how anyone could get excited.
The company's GAAP loss for the quarter narrowed to $7.3 million, or a penny per share, comparing favorably with a year-earlier net loss of $136.8 million, or $0.10 per share. JDS said its loss from operations narrowed to $36.9 million in the latest quarter from a loss of $115.2 million a year earlier. That's great, because losing $0.69 for every dollar of revenue coming in the front door is a disaster. Most of the gains came from a cut by 50% in administrative costs, from $70 million to $35 million. There's also a troubling sign in reduction of research & development expenditures, from $36 million a year ago down to $25 million in the last quarter. Actually, it's even worse than that, as I'll explain.
In the company's conference call (courtesy of CCBN), CFO Ron Foster noted that JDS Uniphase "began classifying certain engineering costs previously classified as costs of goods sold into research and development." Which means that the amount of true cuts in R&D is even larger than what is reflected in a straight comparison, as certain costs not added to last year's R&D number are reflected in the current one. It also means that gains in gross margin are overstated due to the removal of certain costs.
Why is this a big deal? Certainly JDS Uniphase, as a company that has been bleeding cash, needed to cut down expenses. But it operates in an industry extraordinarily dependent upon new product development, lest competitors in any part of its market, say, Avanex (NASDAQ:AVNX), produce a superior product. Less R&D spending is a nice way to improve current results, but it may be robbing future potential for the company.
In recent months, I've wondered why people were getting excited about any of the big companies dependent upon telecommunications capital. The double whammy at Nortel (NYSE:NT), and now JDS Uniphase, shows that this concern was not unfounded. Beware of rosy projections from any such company: Telecom is still awash in bad capital. One must only look at the struggles rebound companies like Global Crossing (NASDAQ:GLBC) and Level 3 (NASDAQ:LVLT) face in meeting (take your pick) operating capital or debt-servicing needs. A rapid rebound in equipment investments doesn't make a heck of a lot of sense if you look at it that way.
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He owns none of the companies mentioned in this article. Could you tell?
