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We downgrade our recommendation on JDS Uniphase Corp. to Underperform.  Recent trend of the optical component industry is indicating a glut of inventory on the part of the telecom carriers. Major telecom carriers are making inventory correction and this scenario may continue till the end of 2011. Several industry players estimated that demand from the largest emerging market of China will not meet expectations. JDS Uniphase is highly dependent on China since the developed western world is yet to fully recover from recession. Furthermore, severe natural calamities in Japan may significantly disrupt the supply chain management system.

In the near future, we believe JDS Uniphase may face severe competitive pressure in some of its core growth areas. For the past one year, XFP tunable and the Super Transport blade were the two segments exclusive to JDS Uniphase. However, Oclaro Inc. (OCLR - Free Report) and Finisar Corp. (FNSR - Free Report) will launch XFP within next 6 months, while Oclaro and Sumitomo may become competitors for the Super Transport blade. Increasing competition may take a toll on the overall growth prospects of JDS Uniphase since these two businesses were driving revenue in the previous year. High-margin Test and Measurement division may also face growing competitive pressure.

The market for optical networking and test measurement is emerging rapidly in terms of technological innovation and demand. JDS uniphase’s product sales depend to a large degree on the market dynamics of the metropolitan and enterprise markets as well as on the long-haul fiber component market. Many of the company’s competitors have greater financial, technical and marketing capabilities, which may enable them to respond more effectively to the emerging technologies and changes in customer requirements.

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