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Coherent's Strategy Shift Explained

Light Reading
News Analysis
Light Reading
5/23/2001

NEW YORK -- This morning, top executives from Coherent Inc. (Nasdaq: COHR) rang the bell to open trading at Nasdaq's marketsite in Times Square.

The aim of this little publicity stunt was to draw attention to the company's shift in direction -- towards telecommunications components.

Coherent was formed in 1966, based around a core competency in lasers. It currently pulls in $500 million per year in sales of its lasers to the scientific manufacturing and medical markets. About two years ago, it decided to refocus. Bernard Couillaud, Coherent's CEO explains why.

"We started out in business more than 30 years ago and grew the company by grabbing small markets." That started to change in the 1990s, when some big markets emerged: laser surgery to remove wrinkles, deep ultraviolet lithography for semiconductors, and -- later on -- the telecom equipment market, which is worth billions. "We saw two distinct types of business. So we decided to invest in the photonics side and divest in the medical side."

This plan called for internal reorganization. Three of Coherent's business divisions -- the Auburn, Calif.-based electro-optics group, which deals with optics and coatings; the laser group; and the semiconductor group -- were consolidated into a photonics group. Together the combined unit accounts for about half of company revenues.

Execution of this plan was complete when the sale of Coherent's medical division to ESC Medical Systems was finalized on April 30, 2001. The slimmed-down company has a mixed bag of telecom-related products. It's leveraging some existing profitable product lines, such as ultraviolet lasers used in the manufacture of fiber Bragg gratings, as well as manufacturing services in optics and coatings. It is also developing new products, both passive and active optical components.

The first of its active components, a high-power 980-nanometer laser for pumping erbium-doped fiber amplifiers (EDFAs) was announced in March, and as yet there are no orders, says Couillaud (see Coherent Intros EDFA Pump Laser).

"The good news is that we have a product that's unique. It's an optically pumped VCSEL with more than 500 milliwatts of output power," he says. "The bad news is that EDFA manufacturers have shifted their interest in the way they pump devices." In a nutshell, EDFA manufacturers are turning to 1480nm pumps for high-power booster pumps, because they are more efficient, he explains. The answer: Develop 1480nm devices.

More progress has been made in passive components. Coherent received $10 million in new orders for these products in Q1 2001, it claims. Right now the company is selling thin-film-based wavelength lockers using an existing facility and is developing its own equipment for making DWDM (dense wavelength-division multiplexing) filters.

The bad news here is that there's plenty of competition in passives and an industry-wide slowdown in demand for these components. But Couillaud still thinks Coherent could come out on top. "The survivors [in this business] will be the ones who develop low cost at high yield," he says. "At the time we started developing [thin film filters], supply was larger than demand. People were only concerned about production capacity; they weren't concentrating on yield. We've been developing our own machinery to increase the number of wafers per run, in order to address that problem."

Coherent shares were trading up 0.59 (1.50%) to 39.89 by mid-afternoon today (Wednesday).

— Pauline Rigby, Senior Editor, Light Reading, http://www.lightreading.com

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