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We upgraded our recommendation on JDS Uniphase Corp. (JDSU - Analyst Report) to Outperform based on the company’s second quarter of fiscal 2013 financial results, which outpaced the Zacks Consensus Estimates.

Why the Upgrade?

In the reported quarter, JDS Uniphase improved with respect to several operating metrics. These include adjusted gross and operating margins, adjusted EBITDA and cash flow. The company’s newly launched differentiated products are gaining solid market traction. We believe carrier expenditure for broadband network buildout, mobility and 100 Gbps Ethernet will increase in 2013, aiding JDS Uniphase’s prospects over the long haul. Management provided an optimistic outlook for the rest of fiscal 2013.

Other Positives

We believe Communications and Test Measurement division of JDS Unipahse will be immensely benefited from massive growth of wireless backhaul and DOCSIS 3.0 networks. As the wireless carriers are gradually increasing their backhaul capacity due to significant growth of mobile Internet traffic and multimedia applications, the cable operators are quickly deploying DOCSIS 3.0 networks to compete by providing faster data access speed.

Next-generation 4G Long-Term Evolution (LTE) networks became another major growth driver for JDS Uniphase. The company offers an innovative LTE test solution, which encompasses end-to-end, real-time tracing, data assurance, and OSS to derive the performance and revenue potential of LTE.

Management stated that the company is witnessing growing carrier spending in those areas where it has strong presence with industry leading products. Several original equipment manufacturers and telecom service providers will ramp up spending in the second quarter of CY 2013 (the fourth quarter of fiscal 2013 for JDS Uniphase). The initial demand for the ensuing third quarter is very encouraging. Additionally, China has taken a massive project to upgrade the country’s wireline networks to 100 Gbps Ethernet.  

Other Stocks to Consider

JDS Uniphase currently has a Zacks Rank #4 (Sell). Other stocks to consider in the optical networking industry are Finisar Corp. (FNSR - Snapshot Report), Ciena Corp. (CIEN - Analyst Report) and Oclaro Inc. (OCLR - Snapshot Report). While Finisar currently has a Zacks Rank #3 (Hold), both Ciena and Oclaro have a Zacks Rank #4 (Sell).

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