Optical/IP Networks

Components Companies Chill Out

ANAHEIM, Calif. - OFC2001 - Despite the seemingly neverending stream of new startups that have launched in the last couple of months, the first half of 2001 is shaping up to be difficult for many optical components companies.

Just yesterday at the OFC trade show in Anaheim, Calif., Corning Inc. (NYSE: GLW) announced that it had lowered its earnings estimates for 2001 as a result of the softening market (see Corning Reduces Guidance).

And the Lucent Technologies Inc. (NYSE: LU) component spinoff Agere Systems, which is expected to go public late this week or early next week, will likely be forced to reprice its shares this week, the third time in the last few months. The company’s underwriter Morgan Stanley Dean Witter had set the range for $12 to $14 (see Agere Sets Pricing Date and Range).

“Visibility isn’t great for anybody in the components industry right now,” says Rick Schafer, research analyst with CIBC World Markets. “Two things are happening here. Excess inventory is still being worked down, and, on the demand side, companies like Nortel Networks Corp. (NYSE/Toronto: NT) and Lucent are seeing a slowdown. The result is a double whammy in the near term.”

The slowdown in the market, coupled with Nasdaq's plummet, has also caused several optical components companies to withdraw IPOs (see IPO Window Shuts Tighter and Chorum Pulls IPO ).

"Even if the IPO window opens, it could shut again real quick, and your stock goes down," says Bill Diamond, president and CEO of Wavesplitter Technologies Inc., a components company that recently pulled its registration for an IPO. "We're going to wait for a sustainable healthy environment."

How long until that environment arrives? That's anybody's guess. According to most sources in the industry, it will be at least six months until the current inventory glut gets worked out.

"We've seen an inventory adjustment, but our customers feel confident about the back end of this year," says Jay Abbe, president and COO of JDS Uniphase Inc. (Nasdaq: JDSU; Toronto: JDU).

Corning yesterday told investors that it expects the worldwide optical fiber market to grow approximately 20 percent and the worldwide photonics market to grow approximately 10 percent to 30 percent this year, down from an expected 50 percent.

As a result, the company reduced its 2001 financial guidance to a range of $1.20 to $1.30 per share and revenues to a range of $8.2 billion to $8.5 billion. But the company did not change guidance for the first quarter ending March 31, 2001, which projects earnings per share (EPS) of $0.28 to $0.31.

“We’re still positive that things will be fine,” comments a company spokesperson. “This is a little bump in the road. But we aren’t the only ones feeling it. It’s the whole industry.”

Tim Anderson of Salomon Smith Barney, trimmed his estimates and released a note to investors. “Customer inventory corrections and uncertain carrier spending levels continue to deteriorate visibility," writes Anderson. "As a large supplier of optical components into the industry, we think Corning photonics business may also be at risk. Although we believe some of this negative news is already priced into these shares, we think shares of Corning are likely to remain volatile for a number of weeks to come."

Corning is being hit on two fronts. It is suffering from a slowdown in its photonics business as well as in its fiber business. Nortel, one of Corning’s largest customers of EDFA amplifiers, is now buying these components from JDS Uniphase Inc. (Nasdaq: JDSU; Toronto: JDU).

But Corning’s photonics business only comprises about 15 percent of the company's sales. The area where it has been hit the hardest is in its fiber business, which makes up about 45 percent of its sales, says Schafer. The main problem is that demand for new fiber has decreased dramatically over last year. The vast majority of fiber that has been layed is still unlit, which means that laying new fiber is not likely.

“If there's a glut of anything in the network,” says Schafer, “it’s dark fiber.”

Corning isn’t the only company being affected by the slowdown. Agere Systems, Lucent’s component spinoff, is also struggling as it prepares to go public. Despite the uncertainty in the market, Lucent continues to push for the initial public offering -- a clear indication that the company is desperate for cash, say some in the industry. Even if the deal is priced at $7 a share, the 500 million shares the company plans to sell will generate $3.5 billion for cash-strapped Lucent.

“It’s tough to sell a deal into this kind of market right now,” says Schafer. “But Agere is a good company, and at the right price it’s a good deal. They have the size and volume to be one of the top two or three comp players out there.”

Lucent was trading this morning at $12.36, up 3 percent from yesterday. Corning was down slightly, trading at $25.10, less than half a percent off yesterday.

-- Marguerite Reardon, senior editor, Light Reading http://www.lightreading.com

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