More Fiber Market Misery
The OFS division of Furukawa Electric Co. Ltd. announced today that it has filed suit against FiberCore Inc. (Nasdaq: FBCE) for patent infringement on a number of optical fiber technologies, including technologies relating to the reduction of polarization mode dispersion (see OFC Sues FiberCore Over Patents).
”We’re going to be aggressive about protecting what’s ours,” says Olga Schmuklyer, a spokeswoman for OFS.
FiberCore, however, claims that there is no need for the aggressive protection. “We don’t know what they’re talking about,” says Chuck DeLuca, FiberCore’s secretary and managing director for business development in Asia, claiming that the company has yet to be served with any court documents. “As far as we’re concerned, we’re not infringing on anything.”
According to counsel for OFS, the suit was filed today in the United States District Court for the Northern District of Georgia, but FiberCore won’t be served with the papers until Monday or Tuesday.
In light of Furukawa's depressing figures, some observers say that the lawsuit could be the company’s way of getting some quick cash to firm out its balance sheet. Earlier this week, Furukawa revised its earnings forecasts downward for the fiscal year ended March 2003; and it would seem that the OFS part of the business, which the company bought from Lucent Technologies Inc. (NYSE: LU) last year, is much to blame (see Lucent Cuts Deal on Fiber Unit, Did Furukawa Buy a Lucent Lemon? and OFS Drags Down Furukawa). OFS saw its quarterly revenues fall from $78.3 million in the first quarter this year to $61 million this past quarter. Worse, operating profit has dropped more than 40 percent over the last nine months.
And it doesn’t look as if things are going to get better any time soon. In a note on OFS's financials published July 30, analyst Toru Nagai of Morgan Stanley Dean Witter & Co. writes: "[W]e expect optical communications demand to remain in correction for the time being. Given this somewhat less than optimistic outlook, we suggest seeking refuge in other industries."
“This is not about grasping at straws,” Schmuklyer says, insisting that OFS is simply interested in protected what rightfully belongs to it.
Other observers agree that the suit is probably legitimate, saying that Furukawa is just trying to retain as much of OFS’s value as possible. “Furukawa clearly overpaid for OFS,” says an industry analyst who has asked to remain anonymous. “Most of the company’s value is in its patents.”
Judging by recent financial results from other major players in the market, like Corning Inc. (NYSE: GLW) and Pirelli Cables and Systems, OFS isn’t the only fiber vendor struggling.
Last week, Corning, by most accounts the market leader in manufacturing terrestrial optical fiber, reported a 17 percent sequential decline in sales of optical fiber (see Corning: 'We'll Do What It Takes'). This figure represents an ongoing downward trend for Corning: Sales of fiber and cable were $296 million in the fourth quarter of 2001, $255 million in the first quarter of 2002, and $212 million for the most recent quarter. The company has also recently seen its bond rating cut to junk status by three major rating agencies.
In preliminary half-year financial results published last week, Pirelli Cables says demand for fiber has fallen by two thirds from previous levels. "The comparison between the first half of 2001 and the first half of 2002 is between the best period in the history of Telecom Cables and Systems and what is proving to be absolutely the worst," the company's report reads. "[T]he collapse in terms of volume has been accompanied by a sharp downturn in prices." As a result, parent company Pirelli blames its cable division for cutting the overall company's operating income by 50 percent compared with the first half of 2001.
FiberCore, too, has shown poor results, seeing sales cut in half during its first quarter this year. On an interesting note, the company saw one of its board members leave at the beginning of July to become the Vice President of Afghanistan. Is the fiber market really that bad?
The companies themselves are of course trying to calm investors. “Let me emphasize that stock prices are based on short-term realities, not long-term prospects,” James R. Houghton, the chairman and CEO of Corning wrote in a letter to that company’s shareholders today. “I know it is extremely painful to watch your hard-earned investment in Corning stock drop so dramatically in value. I truly appreciate your trust in the company, and I am committed to helping our entire organization stay focused on our bright long-term prospects.”
Other companies are also saying they expect things to pick up soon. "If you step back from the correction of 'irrational exuberance,' you'll see this is a cyclical business that closely tracks the GNP CAGR of 25 to 27 percent," says Janice Haber, VP of systems engineering and marketing at OFS.
She says several factors have made the situation appear worse than it is. First, fear resulting from the overbuild in the long-haul fiber market has worsened the situation by lessening fiber makers' access to capital markets. Also, carriers' tightening finances have resulted in toleration of greater-than-normal utilization rates on networks. Where once carriers would order new fiber when saturation levels reached 70 percent, Haber says they're going to 90 percent utilization, particularly in the metro and access areas.
While most analysts disagree with the vendors, predicting no upturn in sight, some are a bit more optimistic. Although carriers worldwide continue to suffer the reprisals of putting in too much long-haul fiber when the market was flush (see Solution for the Fiber Glut: Turn It Off?), it looks as if some market sources see a growing demand for fiber in metropolitan areas and access networks as a possible revenue balancer.
"Worldwide demand for single- and multimode fiber was negative from 2001 to 2002, but we see the market flat to slightly positive going from 2002 to 2003," says Richard Mack, general manager at KMI Corp., which tracks the fiber market.
Mack says the market correction of the long-haul glut resulted in a 15 percent reduction in demand for terrestrial fiber between the peak year of 2000 and the "market correction" of 2001. Demand fell 10 percent between 2001 and 2002. Still, he says "flurries of activity" -- including installation of more fiber in metro areas, plus a range of fiber-to-the-curb projects worldwide -- could help even out those figures this year.
— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com and — Eugénie Larson, Reporter, Light Reading