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We reiterate our long-term Neutral recommendation on JDS Uniphase Corp. (JDSU - Analyst Report). The company reported disappointing financial results for the third quarter of fiscal 2013, missing both the top and the bottom lines of the Zacks Consensus Estimate. Lower-than-expected capital expenditure by telecom carriers was the primary reason for this poor performance. JDS Uniphase currently has a Zacks Rank #4 (Sell).

Why Kept at Neutral?

JDS Uniphase’s newly launched products coupled with the acquisition of Arieso are the long-term positives for the company. In the last quarter, the newly launched differentiated products accounted for 64% of its total revenue in the core network market. We believe that carrier expenditures for high-speed broadband network, faster mobility and 100 Gbps Ethernet network will increase in 2013, aiding JDS Uniphase’s prospects over the long haul. The company is expected to improve its cash flow, gross and operating margins and adjusted earnings before interest, depreciation and amortization.

The acquisition of Arieso will significantly enhance JDS Uniphase’s mobility software portfolio. Arieso’s technologies mainly deliver effective network design and performance by monitoring and optimizing Radio Access Network (RAN). The RAN optimization market size is expected to grow to $1 billion by 2015. Most notably, Arieso has a promising list of clientele that includes several global telecom giants, such as AT&T Inc. (T - Analyst Report), Telefonica SA (TEF - Analyst Report) and Vodafone Group plc. (VOD - Analyst Report). We believe that this deal will be incrementally positive for the company from the fourth quarter of fiscal 2013.

Nevertheless, the optical component industry is still not out of the woods. The ongoing global economic fluctuations may significantly affect the prospects of JDS Uniphase. Moreover, the consolidation trend of wireless networks and data centers will make the situation even worse. The optical component industry is highly cyclical in nature and is characterized by extreme price volatility. A weaker-than-expected market recovery will worsen the situation. Additionally, mergers among telecom carriers and equipment manufacturers may result in lower orders.

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