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Bookham: Is the Tide Turning?

Light Reading
News Analysis
Light Reading
2/14/2001
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There was a time when Bookham Technology PLC (Nasdaq: BKHM; London: BHM) could do no wrong. But now, it seems, it can do nothing right.

This morning the company announced its fourth-quarter results and gave preliminary figures for the year 2000 (see Bookham Reports $12.7M Q4 Loss). In general, they met or exceeded expectations, and Bookham reported progress in tackling previous investor concerns (see Bookham's Not Bookin' ). Nevertheless, its shares came close to setting a new low on Nasdaq this morning.

Here are the details. Bookham’s fourth quarter revenues were up 49 percent on the previous quarter, to £11.5 million (US$17.2 million). Overall revenues for 2000 were £26.3 million ($39.3 million), up 642 percent on 1999.

More importantly, fourth-quarter net losses were £8.5 million ($12.7 million), according to U.K. accounting rules, and £11.5 million ($17.2 million), under U.S. accounting rules -- considerably less than the £15 million to £15.5 million loss that Bookham warned about a few weeks ago (see Bookham Warns of Higher 4Q Losses). In the earnings call, Andrew Rickman, who today relinquished his position as CEO in order to take over as executive chairman, pointed to another important improvement in Bookham’s performance: "We've started to get traction in the market for high-margin DWDM components, which now account for 35 percent of sales."

Bookham has also reduced its reliance on Nortel Networks Corp. (NYSE/Toronto: NT), its largest customer. Nortel accounted for 51 percent of Bookham’s revenues in the fourth quarter, compared to 56 percent in the previous quarter.

In 2000, Bookham introduced four new product lines:

  • Electronic variable optical attenuator
  • Arrayed waveguide gratings (AWGs) -- devices that split or combine 40 DWDM (dense wavelength-division multiplexing) channels
  • Optical channel monitor -- an AWG integrated with 40 photodetectors; Marconi Communications PLC (Nasdaq/London: MONI) is a 26 percent customer
  • Multiplexer and variable optical attenuator -- an AWG integrated with 40 variable optical attenuators; Lucent Technologies Inc. (NYSE: LU) is a 10 percent customer

    Rickman said that Bookham's been ramping up production even more aggressively than planned: "We've established our volume manufacturing techniques and credibility with the access product lines and will be able to transfer this over to our DWDM products."

    In addition, the purchase of a manufacturing facility in Maryland should allow Bookham to start internal dual sourcing of its products from as early as Q3 2001. "We suddenly found a wafer fab that was for sale and that we could buy right down to the tweezers," says Rickman.

    Nevertheless, investors still appear to be worried. One concern is that gross margins are still being pushed out. Though Bookham reported a small improvement in this respect, it's still not expecting to break even until the end of 2001. And it says it will need to iron out inefficiencies throughout the business in order to do so.

    But questions in the earnings call indicate that the real problem may still stem from misconceptions about Bookham's silicon-based technology. It's regarded -- wrongly -- as having higher insertion losses compared to silica (the dominant AWG technology). Inspection of the spec sheets for Bookham's MUX VOA and a competing device that was recently announced by SDL Inc. (Nasdaq: SDLI) (see SDL Ships Integrated Mux/Attenuator) reveals that Bookham's device actually has a lower insertion loss than the competition: 8 decibels as opposed to 10.

    The reason silicon is touted as having higher losses is because its refractive index isn't the same as optical fiber, which is made of silica. However, it's easy to overcome this, according to Rickman. All that's needed is a taper, to match the size of the waveguide to the size of the fiber, and an antireflection coating on the end of the waveguide. "What Bookham did is to design a technology to overcome the problems in silica," he told Light Reading.

    An analyst note from Wit Soundview (Nasdaq: WITC) had this to say: "From today's prices we believe that Bookham, while somewhat higher risk, could end up the strongest optical component stock of 2001 because of the shift in focus of vendors from just getting systems out of the door to delivering strong price performance gains to customers." It rated Bookham as a Strong Buy.

    In morning trading, Bookham shares were still down from yesterday's close of 10.813.

    — Pauline Rigby, senior editor, Light Reading, http://www.lightreading.com

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    west270
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    west270,
    User Rank: Light Beer
    12/4/2012 | 8:53:48 PM
    re: Bookham: Is the Tide Turning?
    Does this technology do the Job? Can it keep up with the rapid growth in performance that is coming from the fiber optics systems?
    Peter Heywood
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    Peter Heywood,
    User Rank: Light Beer
    12/4/2012 | 8:53:46 PM
    re: Bookham: Is the Tide Turning?
    Sounds as though investors didn't like the news about reduced orders from Nortel.

    I read it the other way - that it was positive, on 2 counts. 1. Bookham was less reliant on Nortel. 2. It reflects increasing sales of Bookham's higher margin DWDM products, because Nortel was buying a lot of Bookham's low margin older products.
    pingu
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    pingu,
    User Rank: Light Beer
    12/4/2012 | 8:53:46 PM
    re: Bookham: Is the Tide Turning?
    Hi Peter,

    I agree that it signals an faster acceleration towards the higher-end product to a more diversified customer base, which is good. You also have a significant ramp-up in mfg capacity. But since this clearly won't be a smooth transition, the top-line effects could still hold the stock down this year.

    A good time for Bookham believers to average down perhaps? And maybe write some covered calls?

    Regards,
    pingu
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