Bookham's Not Bookin'

Despite high growth, the third-quarter earnings report from Bookham Technology PLC (London: BHM; Nasdaq: BKHM) failed to inspire investors this morning. And early trading in Europe and the U.S. indicated the stock is set to take the same hammering given other component stocks this week.

"There's a climate of worry in the wake of the Cisco, Lucent, and Nortel earnings," said one investment banker, who asked for anonymity. "Components are taking a beating all round. It's an overreaction, but that's the way it is." (See Cisco: Boom or Bust? .)

Bookham's results did nothing to assuage this feeling, even if it is extreme. On the one hand, the news was glowing: The company reported 83 percent quarterly growth in overall revenues, which totaled 7.7 million pounds sterling, or US$11.3 million. Revenues were up 1,027 percent, Bookham said, from the same time last year.

"We're very pleased with our results," said chairman and CEO Andrew Rickman on a conference call with analysts this morning. Bookham, he says, is well on track to become a key provider of integrated optical components -- ones that put multiple DWDM functions onto a single chip. To speed this goal, the company's ramped up manufacturing capacity from 20,000 to 120,000 square feet since January 2000 and increased headcount 33 percent to over 800 employees. A somewhat lackluster follow-on share offering this summer (see Bookham Readies New Round) contributed about $143 million to this growth.

But Bookham had bad news too: It reported net loss of 6.3 million pounds ($9.2 million) compared to 4.6 million pounds ($6.7 million) the quarter before. That tallies to $0.05 net loss per ordinary share.

Investors are concerned about these good-and-bad results, which seem to be hindering the company's ability to encourage heavy investing. On this morning's conference call, their concerns focused on several areas:

  • Current product line: Although Bookham has big plans for integrated DWDM modules, it still makes most of its money from selling so-called Mini-DIL transmitters and receivers for low-speed access devices, such as digital loop carriers. Bookham now ships about 10,000 of these units per quarter to a growing range of customers, including Nortel Networks Corp. (NYSE/Toronto: NT), which accounted for 56 percent of Bookham's sales this quarter; Marconi Communications PLC (London: MNI), accounting for about 20 percent of quarterly sales; and a group of 30 to 40 other customers, including Fujitsu Ltd. (KLS: FUJI.KL).

  • Delays in DWDM: Meanwhile, Bookham has few commitments for its advanced DWDM modules, which are based on arrayed waveguides made of silicon. Its optical channel monitor has sold to just one customer, Marconi. Analysts pressed Bookham this morning to admit that this particular sale accounted for the 45 percent growth in DWDM Bookham logged this quarter. Meantime, a strategic multiplexer/demultiplexer for DWDM channels still hasn't shipped, although Bookham had said earlier it would be available this summer. Lucent Technologies Inc. (NYSE: LU) reportedly is sampling this product, but no final confirmation of sale has been made.

  • Poor gross margins: The high growth in Bookham's Mini-DIL product line has forced the average selling price of its products down, and that's combined badly with expensive ramp-ups in preparation for integrated DWDM modules. According to Bookham, its gross margins are minus 18 percent and won't break even until DWDM products start selling, sometime during the second half of 2001.

  • Packaging concerns: Right now, Bookham relies on E-tek Dynamics, now a division of JDS Uniphase Inc. (Nasdaq: JDSU), to package its Mini-DIL access products. Although that's changing (Bookham says it's all set to package its upcoming DWDM kit alone), most analysts don't like the fact that Bookham has been lacking in getting its modules into saleable condition.

  • Other worries: Some analysts seem concerned about the fact that Bookham is using silicon, not silica, to create its arrayed waveguides -- raising issues about how to compensate for some performance drawbacks associated with that substance.

    Bottom line? Bookham is getting mixed reviews. As one report from Salomon Smith Barney notes: "... the risks of execution outweigh the potential rewards going forward for Bookham. Their technology has no track record; they have not yet started high volume manufacture; the average selling price of their products is declining; and they have only a few large customers."

    But contrast that comment with another take from Wit Soundview (Nasdaq: WITC): "... Bookham is among a short list of companies doing truly innovative things in the optical component segment that by their nature are risky, but in the end create the potential for it to become one of the most outstanding stories in the sector over the next 5 years."

    Bookham's shares were trading at $30.31 midday, about 1.62 percent lower than yesterday.

    -- Mary Jander, senior editor, Light Reading http://www.lightreading.com

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