JDS Adds Its Voice to Telecom's Slowdown Din

Updated from 4:43 p.m. EST:

Earnings Scorecard
Actual	Estimated*	Year-Ago
$0.21	$0.19	$0.09
*By First Call/Thomson Financial

Things get a little dicey when the suppliers can't quite figure out what demanders want.

JDS Uniphase (JDSU Quote - Cramer on JDSU - Stock Picks) nailed its sales number and beat second-quarter profit estimates Thursday. But like several of its networking relatives, the company warned that growth was hitting the skids. The stock, after suffering a 12% downturn during regular trading, dropped an added $1.87, or 3.3%, to $53.50 after hours on Island.

Echoing what Corning (GLW Quote - Cramer on GLW - Stock Picks) said earlier Thursday, JDS said high customer inventory levels and weak customer spending prospects will dampen sales in the current quarter. Many phone and Net service providers large and small have run low on cash and have begun to pull back on network equipment spending, leading to an emerging industrywide slowdown.

The JDS report comes after a selloff in optical stocks that took Corning down 19%, networking giant Cisco (CSCO Quote - Cramer on CSCO - Stock Picks) down 8% and former investor favorite Ciena (CIEN Quote - Cramer on CIEN - Stock Picks) down 12%.

I Can't See for Miles

Notably, JDS says visibility, its ability to see what and how much its customers will be buying in the future, is lower than it has been in the past.

The company said fiscal third-quarter sales will rise 7% to 10% sequentially, a decrease from previous guidance and below the 11% gain expected by Wall Street analysts. For the fiscal year ending June 30, 2001, the company forecast sales growth of 115% to 120%, at the low end of the previous range. Despite slightly lower sales, the company reaffirmed earnings projections for the fiscal year of 82 cents a share, a penny above estimates.

On a conference call with analysts after the markets' close Thursday, JDS executives said that customers were sorting out their inventory levels, a process that they thought would take a quarter to a quarter-and-a-half to resolve.

In addition to inventory concerns, the company addressed its ongoing efforts to quadruple its manufacturing capacity. Analysts on the call were curious whether the company was still expanding even as demand seemed to be waning. Executives said demand was unabating and that there was no threat of having idle capacity for the "indefinite future."

On the delays in its proposed merger with component maker SDL (SDLI Quote - Cramer on SDLI - Stock Picks), JDS said investors could interpret the antitrust remedy the company proposed to the federal antitrust regulators Wednesday as a "strong indication" that the merger would go through.

What Next?

Still, the question that looms over the entire networking sector is, Can the carriers find the money to build the new Internet with the equipment these folks are selling?

JDS Chief Financial Officer Anthony Muller gave his version of the answer.

"I can assure you of one thing: If carriers don't invest in adding capacity and adding bandwidth, the whole Internet is going to look like the California electrical market," Muller said, referring to the electricity shortage snarling business across much of that state. "This money is going to get spent. The precise timing over the next quarter or one-and-a-half quarters is uncertain."

Suppliers demand it, and where there is a will, there must be a way.