Optical technology and testing giant JDS Uniphase (JDSU) has split into two companies — Lumentum and Viavi — and new stock ticker symbols start trading on August 4 — which the company sees as an opportunity to create more value out of its technology portfolio and pursue opportunities in software-defined networking (SDN).
Lumentum will be spun-off as the new “clean” company carrying JDSU’s optical components division, while Viavi will hold what was left of JDSU, including its convertible debt. Viavi will focus on networking testing and service enablement.
The spin-off will enable Viavi combine its software products with its service enablement and testing business to provide a broad portfolio of measurement, enablement, and analytics capabilities, according to Tom Waechter, the current JDSU CEO who will become Viavi’s boss.
Waechter says the JSDU has been preparing for this move by acquiring measurement and software companies, especially in the mobile space. These acquisitions include Network Instruments, which collects data from enterprise networks, and Trendium, a mobile analytics companies.
“We have ways to collect the data in the network and transform it into a meaningful format so they can optimize the network, improve quality of service and improve capex and opex,” said Waechter in phone interview.
Look for the newly created Viavi to brand itself more as a software company over time. Waechter says the strategy is to move into SDN and Network Functions Virtualization (NFV) technologies. He said this will be important as the telecommunications and enterprise networking are rationalizing their networking spending and trending toward more efficiency and less capital spending (capex).
“We definitely see a move to SDN and NFV and part of that has ended up in a downturn in legacy products in 2G and 3G. The [service providers] have cut spending on legacy and increased spending on SDN and NFV. They are still evolving some of that technology. We want to be on the front end of that wave with some unique solutions and catch up with the larger initial deployments.”
Expect Viavi to focus more heavily on network monitoring and analytics, where companies such as Gigamon (GIMO), Anue, and VSS Monitoring play.
The move looks like a good one for JSDU shareholders. JSDU was created by a $41B industry mega-merger of JDS and Uniphase during the optical networking bubble in 2000. Its share price has never again seen the heights it reached before the collapse of the optical market, even though now it is a much larger company with a wider technology portfolio and optical networking has rebounded and become much more stable. The split will enable its product portfolios to be put in more natural areas of focus.
A series of transactions will create two tracking stocks on Monday, August 3, JDSUV and LITEV, to enable distributions of shares to share holders, while the original symbol, JDSU stock still trades. On Tuesday, August 4, the transaction will be completed with the creation of two new companies and stock-trading symbols: Lumentum (LITE) and Viavi Solutions Inc. (VIAV).
For every five shares of JDSU common stock held, shareholders will receive one share of Lumentum common stock, and cash in lieu of fractional shares.
Some analysts think the split sets the stage for Lumentun, the optical components company that will be cleared of debt and separated from JSDU’s other product groups, to be acquired.
“We see the separation as a positive catalyst for several reasons,” wrote MKM analyst Michael Genovese in a research note on July 21. “First, Lumentum is a potential M&A target for competitor Finisar and should trade to the price Finisar could pay, which is premium to industry comps due to projected synergies. Second, there are sources of value at Viavi that are masked in the JDSU conglomerate.”
Genovese also mentions that attraction of Viavi’s “massive stash of NOLs [Net Operating Losses]” NOLs can be used as tax credits going forward, making them an asset.
Genovese expects Viavi to have low single-digit revenue growth in fiscal years 2016 and 2017, with solid projected growth in its software-based Service Enablement category. He also sees Lumentum with mid single-digit revenue growth in fiscal year 2016 and 2017. 100G Metro market demand could be a positive driver. Genovese thinks that Lumentum will eventually be targeted for acquisition by Finisar (FNSR), as the optical components business continues to consolidate.