Optical/IP Networks

Zolo Buys Gratings Maker

What's one way to ensure supply of a key component? Buy the supplier.

That's the strategy embraced by optical subsystems startup Zolo Technologies Inc., which today is expected to announce a definitive agreement to acquire Hyperfine Inc., a Boulder, Colo.-based manufacturer of diffraction gratings.

Zolo, which recently announced its Zmux line of gratings-based mux/demux components for DWDM (dense wavelength-division multiplexing) systems (see Zolo Attacks DWDM Market), says it already has potential customers evaluating its equipment, a list that includes Cisco Systems Inc. (Nasdaq: CSCO), ONI Systems Inc. (Nasdaq: ONIS), and Zaffire Inc.. Though the just-out-of-stealth mode Zolo was coy about pricing and other product details, it does expect to begin customer shipments by sometime this summer, according to Michael Wearsch, Zolo's vice president for business development and marketing.

Wearsch says the acquisition of Hyperfine will "secure the volume we need" to produce gratings-based components, which Zolo claims offer better performance and lower cost-per-port than competing DWDM component technologies. Currently, Zolo has only announced a single-input 40-channel DWDM device, which the company says can be used in long-haul, metro core, and metro access optical communication systems.

Potential competitors include Southampton Photonics Inc. (See Fiber Bragg Gratings on Speed), Bookham Technology PLC (Nasdaq: BKHM; London: BHM), Kymata Ltd., and Lightwave Microsystems Corp..

Hyperfine was founded in 1969 by Bernhard Bach, who has more than 40 years experience in the field of diffraction-grating products and related manufacturing, according to Zolo. Hyperfine's products have been used in a wide variety of NASA and foreign space projects (including the Near Earth Asteroid Rendevous mission and the Hubble telescope), as well as telecommunication equipment, according to Hyperfine's Website.

Though Zolo's Wearsch would not reveal the acquisition price for Hyperfine, the educated guess is that the company will not come cheap. Though Hyperfine is small (Zolo's Wearsch says Hyperfine has "11 or 12" employees), its customer list and technical know-how is impressive. By comparison, photonic processor producer Avanex Corp. (Nasdaq: AVNX) paid $75 million last year for Holographix (see Avanex Reports Record Q1 Earnings), a larger gratings manufacturer.

"The filters are a key component in our package, and Hyperfine is a world-leading producer," Wearsch says. Though Wearsch would not reveal Hyperfine's current telecom customer list, he did confirm that it includes some potential Zolo competitors that may sever their contracts following the acquisition.

Wearsch claims that Zolo's Zmux components have better performance and lower cost-per-channel than competing components based on thin-film technology. He also says Zolo is in discussion with 15 companies in the metro and long-haul systems business, "including all the major incumbents."

Though Wearsch wouldn't name Zolo's potential customers in a Tuesday phone interview, another company executive revealed some details in a presentation at a venture-capital conference in Denver last week. According to that presentation, the short list of system vendors with Zolo evaluation products in hand includes Cisco, ONI, and Zaffire, while Lucent Technologies Inc. (NYSE: LU), Sycamore Networks Inc. (Nasdaq: SCMR), and Nortel Networks Corp. (NYSE/Toronto: NT) are among the other "interested" systems companies seeking more details from Zolo.

Zolo is also in the midst of securing its second round of funding, following an initial round of $18 million obtained last fall that included Crescendo Ventures, Morgenthaler Ventures, and Denver-based Telecom Partners as venture investors. Wearsch says Zolo is seeking between $30 million and $50 million for its second round, enough money to see the company through to profitability, which he says it expects to reach early next year.

The company expects to close the second round of funding by April, according to Wearsch. Though the executive at the Denver presentation said the funding was needed in part to cover the cost of the Hyperfine acquisition, Wearsch would not confirm that detail. And though the Hyperfine deal is currently called "a definitive purchase agreement," Wearsch says "it's a done deal." Officially, Zolo expects to close the Hyperfine deal sometime later this year.

Zolo, headquarted just east of Boulder in Louisville, has an impressive management team, especially on the technical side. Perhaps the most recognizable name is that of Dr. Tingye Li, whose pioneering work in amplified WDM transmission research was just part of his 40-year-plus career at AT&T Corp.'s (NYSE: T) Bell Labs. Li serves as chairman of Zolo's technical advisory board.

Ian Jenks, Zolo's chairman, is former president of the Laser and Fiber Optics Division at Uniphase Corp. (now JDS Uniphase Inc. [Nasdaq: JDSU; Toronto: JDU]), and the current chairman of Oplink Communications (Nasdaq: OPLK). Ed Barbera, whose career has been spent mostly at large product distribution firms, serves as Zolo's CEO and president. Dr. Andrew Sappey, Zolo's CTO, has an long list of academic achievements in the optical arena, including a five-year stint at the Los Alamos National Laboratory.

Though Li's contributions are mainly technical, Sappey says the optical veteran was also involved in the selection of the company's curious moniker. According to Sappey, Li was initially contacted when Barbera was looking for an independent outsider to vet Sappey's original technical plans for Zolo's products.

When Li ended up having a much bigger role with the company, the founders wanted to name the firm after him, an honor Li declined. Instead, they decided to name it after the Zolo Grill, a popular Southwestern-theme eatery located in a Boulder shopping mall, where Sappey and Barbera first met with Li. Wearsch did not know whether Zolo was granting stock options to restaurant employees in gratitude for their hospitality.

-- Paul Kapustka, Editor at Large, Light Reading http://www.lightreading.com

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