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Telecom Industry in Full Retreat as JDS Uniphase Cuts Back

The optical-component maker joins the ranks of companies slashing jobs.

The telecom industry was supposed to be printing money during the Internet age. But the name of the game now is cutting back enough to stay out of the poorhouse.

JDS Uniphase



posted a steep fourth-quarter loss and laid out plans to cut its workforce by nearly two-thirds. In doing so, the maker of optical components joins


Nortel and a host of other networking gear makers struggling to bring bubble-era costs in line with plunging revenues.

Only a year ago, earnings reports from the likes of JDS highlighted dazzling sales and earnings gains and impressive growth projections. Now, these reports focus on workforce cuts, revenue break-even goals and cash on hand, better to keep the creditors at bay. And they increasingly include

multibillion-dollar writedowns of the overpriced acqusitions that bloated these companies to begin with.


Joining Corning, Nortel and others, JDS set a massive charge to write down the value of goodwill it incurred in its acquisition spree over recent years. Massive may be an understatement in this case, however: JDS recognized $45 billion in acquisition-overpayment charges, dwarfing the writedowns taken by rivals. Part of the story is an accident of geography.

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"The Canadians are getting a little bushwhacked, because they weren't allowed to do pooling-of-interest accounting," says Sanford Bernstein analyst Paul Sagawa. "Cisco and Lucent got away

scot-free by writing off the excess value of acquisitions as they made them and excluding them from pro forma results. These guys just piled up the goodwill on their balance sheets."

Pooling of interests was outlawed from U.S. accounting standards last year. Before that happened, companies were allowed to simply combine the balance sheets of acquisitions with their own, creating no additional goodwill, or difference between the purchase price and the tangible assets of the acquired company. Because Canadian accounting law has prohibited pooling accounting, companies such as Nortel and JDS have been forced to take large goodwill charges.

"But a $50 billion writedown is still a shocker," said Sagawa.


With characteristic understatement, JDS explained the writedown by noting that "downturns in telecommunications equipment and financial markets have created unique circumstances with regard to the assessment of long-lived assets." Those downturns were also readily apparent in JDS's fourth-quarter results and first-quarter outlook. JDS was expected to post a small fourth-quarter profit on revenue of $600 million. The company hit its top-line target -- but ran a loss of $477 million anyway. Meanwhile, for the first quarter, JDS was expected to break even on sales of $450 million. But the only guidance it would offer is that it won't meet even that sharply reduced sales goal.

JDS said it "does not yet see any positive signs of a reversal in the downward trend in the industry" and declined to offer any further financial projections for other periods. Sagawa called the guidance, such as it is, more troubling than the writedown.

"They were already guiding for a 25% decline in revenue in the first quarter," says Sagawa. "Now they're saying, there's no way we make that, and we can't tell you anything more."


In 1999 and 2000, of course, telecom equipment companies couldn't fill orders or hire workers fast enough. They made acquisitions by the dozen and built new plants here, there and everywhere. Their share prices rocketed as investors bet the business of building the Internet would pave streets with gold.

But since the middle of last year, business has been in decline, spurred by the failure of the upstart telecom carriers whose spending fueled the boom. Equipment companies are now massively ratcheting back their operations: Lucent has set plans to cut its workforce to around 60,000 from more than 100,000 at the end of 2000; Nortel is planning 30,000 job cuts of its own. Now JDS, which was one of the great growth stories of the Internet age, posting a 2,500%-plus gain in 1999, is preparing to cut its workforce to 9,000 from 25,000 at the beginning of the year.

Investors, who had bid JDS shares up modestly Thursday in the wake of rival Corning's solid earnings report Wednesday night, took the Canadian component maker to the woodshed after hours Thursday, knocking JDS down $1.40 to $8.07, a 52-week low.

"They're the caboose at the end of the train," said Sagawa. "They can only go where their customers take them."