Agere Systems (NYSE: AGR) is shutting the door on its optoelectronics business to focus exclusively on electronic integrated circuits (see Agere Quits Optoelectronics Biz).

This is big news, considering that at one time the optoelectronics business was the "hot" sector on which Agere was focusing. It also scotches the idea of putting both optoelectronics and electronics expertise under one roof. This is a rare combination, one that Agere claimed gave it a special advantage in dealing with OEM needs. Now Agere's ditched that pitch.

Analysts say the recent slump took its toll. "Theproblem is that integration is not enough to save Agere's opto-electronics business in the short term, since the benefits of integration are likely to take two years or so before they start generating significant revenues," writes Lawrence Gasman, president of Communications Industry Researchers Inc.

The best thing about the move is that it is another step toward restructuring the industry and eliminating a competitor. Agere's the latest in a string of players that are rushing to exit optical components, as demand continues to erode, particularly for long-haul parts (see Components Overboard!).

Most analysts agree that chief competitors JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) and Alcatel Optronics (Nasdaq: ALAO; Paris: CGO.PA) stand to gain -- along with an array of other players that remain on the scene, such as Bookham Technology plc (Nasdaq: BKHM; London: BHM), Optical Communication Products Inc. (OCPI) (Nasdaq: OCPI), and Stratos Lightwave Inc. (Nasdaq: STLW), to name a few.

Players like Intel Corp. (Nasdaq: INTC) that have got an eye on both optical and IC markets, may stand to gain as well.

Agere says weakness in long-haul equipment is the key culprit in crippling demand for components used to transport light directly, such as lasers, modulators, and optical transceivers. In contrast, the company sees its future in electronics-based chips such as framers, network processors, and mappers that are used in metro and access gear to process and manipulate information rather than simply transport it.

And Wall Street seems to agree. At press time, Agere shares had climbed out of a hole to trade at $1.70, up $0.13 (8.28%). What's more, leading IC suppliers Applied Micro Circuits Corp. (AMCC) (Nasdaq: AMCC), PMC-Sierra Inc. (Nasdaq: PMCS), and Vitesse Semiconductor Corp. (Nasdaq: VTSS) were up as well, validating Agere's choice of market.

The company itself hopes to save hundreds of millions of dollars by closing all plants associated with optical component manufacturing by June 2003. It's reducing its workforce by roughly 36 percent to about 7,200 employees by December 2003. Agere says it hopes as a result to reach profitability at a breakeven rate of $500 million in quarterly revenues by the second half of 2003.

None of this is based on the possibility of Agere’s selling its optoelectronics assets, including intellectual property or plants. Indeed, the market is so bad that the company anticipates it may have to write off its optical components business.

The company is consolidating all of its remaining stateside fabrication in an IC plant in Orlando, Fla. Agere has had the plant on the block for awhile, but nothing's happened so far. By tossing some optical assets in, Agere hopes to sell the Orlando facility, and then rely on the buyer as an outsource supplier.

Timing will be key to getting it all to work. The faster the changes can be made, the better, execs told analysts on a conference call this morning.

The analysts seem to love it. "This is the most effective and realistic restructuring plan we’ve seen," coos Max Schuetz of Credit Suisse First Boston Corp. in a note to investors today. "We expect an improved profitability outlook."

But not everyone’s pleased. Lucent Technologies Inc. (NYSE: LU) has a substantial supply agreement with Agere, the terms of which were renegotiated as recently as July 17. Lucent has agreed to buy 90 percent of any components it needs from Agere, or $250 million worth, whichever is greater. After this year, Lucent’s agreed to buy 60 percent of needed components from Agere through September 30, 2006. The two were also slated to do R&D together for new products.

Now, it looks as though Agere’s move could force another revision, if not altogether squash the deal. “We’re in the process of determining the impact of Agere’s announcement on that agreement,” says Lucent spokesperson Mary Ward. And if another company buys part of Agere on the assumption of ongoing Lucent business, she's clear that won't be guaranteed. “That would need to be negotiated."

Still, it may be a calculated loss from a buyer's perspective. Lucent sales have slipped along with the rest of the market. For the nine months ended June 30, Lucent accounted for roughly 9 percent of Agere's revenues. In the same period of 2001, it represented 14 percent.

While Agere irons out its deal with Lucent, the industry's pondering the potential market impact of Agere’s move. The optoelectronic segment Agere is leaving has seen Agere's position weakening steadily in recent months. For the nine months ended June 30, 2002, optoelectronics accounted for about 13 percent of total revenues, with the rest coming from integrated circuits. In 2001, optoelectronics accounted for about 30 percent of revenues in the same time frame -- revenues that had fallen more than 50 percent overall.

Agere's market share has drifted accordingly. Research from Gartner/Dataquest indicates that, while Agere enjoyed a number-one market share position in optical communications modules in calendar 2001, it dropped below 10 percent during the second quarter of 2002.

Despite these figures, analysts say Agere's exit will have some impact, particularly in optical transponders, where Agere staffers claimed to have a winning position as recently as last week on Light Reading's Webinar on 10-Gbit/s Ethernet transponders (click http://www.e-conference.com/lightreading/archives/10gige1/ to review).

JDSU declined to comment for this story. But its shares rose on the news. At press time, they were trading at $2.28, up $0.08 (3.64%). Alcatel Optronics was reserved as well: "In today's environment, one less player is good,” says Charlotte Laurent-Ottomane, VP of investor relations and communications. But Agere’s optoelectronics business, she says, was primarily focused on long haul, where the action has been absent for awhile.

When asked if her company would consider acquiring Agere’s leftover assets, Laurent-Ottomane said, "We're actively analyzing all possibilities. The market is consolidating, and we're going to be part of that consolidation." She said it was most likely Alcatel Optronics would buy technology it doesn’t already have -- probably disqualifying much of what Agere has on offer.

Today's move is the latest in a series of actions Agere's taken to jettison extra baggage: On June 24, it sold its analog line card business to Legerity Inc. for $70 million in cash; on August 5, it sold its wireless LAN division to Proxim Corp. (Nasdaq: PROX) for $65 million in cash.

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com