JDS Warning Deepens Telecom-Industry Gloom - TheStreet

Updated from 4:31 p.m. EDT:

Plenty of investors were

betting that

JDS Uniphase


would reduce its sales targets again. But the company's Thursday afternoon profit outlook shook Wall Street anyway, by virtue of its sheer pessimism.

The maker of optical components for telecommunications networks Thursday reduced financial targets

for the fourth time this year, while noting that it still can't forecast results more than a quarter in advance. JDS also became the latest telecom gear seller to take a charge to

write down the value of equipment it can't use or sell. Its shares dropped 12% in after-hours trading, hitting a 52-week low.

The warning is the second blow to JDS Uniphase this week. On Tuesday, operating chief Charles "Jay" Abbe said he was retiring. At the time, Abbe, 60, said in an interview with


that his departure was the culmination of a 2-year-long retirement plan. Abbe said there was no correlation between his exit and the financial performance of the company.

JDS hasn't been the only networking company to take a hit in recent days. Earlier Thursday, rival


(GLW) - Get Report

was the subject of a negative brokerage report that resulted in a sectorwide rout. Meanwhile, other gear sellers have warned of weakening sales and other negative developments.

Continued Weakness

JDS cut fourth-quarter sales guidance to $600 million from $700 million, citing "continued weakness in telecommunications carrier spending and inventory reductions by the company's system provider customers." JDS Uniphase reported year-ago fourth-quarter sales of $524 million.

JDS also said it expects to book an inventory reserve of $225 million to $250 million for the fourth quarter ending June 30. JDS said it expected to be profitable for the fourth quarter, excluding inventory and acquisition-related charges, but offered no specific earnings target. Analysts expect the company to earn 5 cents a share.

Adding to the bad news, JDS projected first-quarter sales of $450 million, which is more than $200 million short of the analyst consensus estimate quoted by

Thomson Financial/First Call

and below the year-ago $787 million. Analysts expect the company to earn 5 cents a share for the first quarter, the First Call consensus shows.

Declining to provide financial guidance for periods beyond the first quarter, JDS said that "order levels clearly reflect lower carrier capital spending and the resulting desire of our customers to reduce inventories sharply."

JDS shares were halted ahead of the news release after dropping 37 cents Thursday afternoon to close at $13.81. In after-hours trading on


, JDS plunged 12% to $12.09, hitting a 52-week low.

Slowdown Continues

The JDS Uniphase warning adds a tad more gloom to the networking sector, which has provided investors mostly with

bad news this week. On Tuesday, ailing



, one of JDS' top customers, was hit with a credit downgrade as

Standard & Poor's

lowered Lucent's bond rating to junk status. The move could raise borrowing costs for Lucent, which is running short of cash; the agency cited concerns that the communications equipment industry is locked in a protracted downturn.

And last Friday,


(JNPR) - Get Report

warned of an earnings shortfall, saying its second-quarter revenue would come in around $200 million to $210 million, far short of its previous guidance of $300 million to $330 million.

Noting the long-standing trend,


predicted a JDS shortfall nearly two weeks ago. Many people on Wall Street expected JDS Uniphase to reduce sales and earnings forecasts, as a broad spending slowdown continues to ripple through the once-hot communications component business. But the depth of the company's gloom surprised even some bulls.

"The new numbers for the June quarter aren't so bad," says a hedge fund manager who is long JDS Uniphase. "But guiding to $450 million for the September quarter -- we expected they'd be flat with June. Now it means they are going to be 35% down this quarter and another 25% down next quarter." Nonetheless, the manager expects to buy some shares as JDS approaches $10.

Another observer, a New York based buy-side analyst who has no position in JDS, wasn't as sanguine.

"Would you board a plane if you knew the pilot was blind and the co-pilot had just parachuted to safety?" he asked, referring to CEO Jozef Straus and Abbe.