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Optical components

JDSU, Emcore Sue Optium

Optium is getting a little cold water sprayed on its pre-IPO party, as Emcore Corp. (Nasdaq: EMKR) and JDSU (Nasdaq: JDSU; Toronto: JDU) have hit the optical transceiver vendor with a patent infringement lawsuit.

The suit was filed Sept. 11 in U.S. District Court for the Western District of Pennsylvania. It concerns U.S. patents 6,282,003 and 6,490,071, both mellifluously titled: "Method and Apparatus for Optimizing SBS [Stimulated Brillouin Scattering] Performance in an Optical Communication System Using at Least Two Phase Modulation Tones."

In a brief court complaint, free of the hyperbole and grandstanding often found in lawsuits (darn!), Emcore and JDSU accuse Optium of violating both patents with its Prisma II 1550nm transmitters.

That Emcore and JDSU are teaming up would suggest Prisma sells primarily into the cable TV industry, as Emcore acquired JDSU's cable business in 2005. (See Emcore Buys JDSU's Cable Biz.)

The timing is interesting, given that Optium is on the verge of going public, having filed its initial S-1 form with the SEC on June 29. (See Optium Files for $100M IPO.)

Adding some intrigue to the case is the fact that several Optium executives came from JDSU. That includes CEO Eitan Gertel and senior VP of engineering Mark Colyar, both hailing from JDSU's transmission subsystems division.

Emcore and JDSU are jointly represented by the law firm of Jones Day. The lead attorney on the case did not return a call for comment.

Optium VP of marketing Tony Musto says the company has filed a response but declined to provide details about the products in question, although he did give the usual comment about the suit being without merit.

The '003 patent was granted to Uniphase Corp. on Aug. 28, 2001; Uniphase had filed for the patent in 1998, a year before its merger with JDS Fitel to form the JDSU we know and love today. The '071 patent was granted to JDSU on Dec. 3, 2002.

Optium is a notoriously quiet company. Its Web page doesn't even list products by name. But in the wake of the telecom crash, Optium managed to build a decent business out of 10-Gbit/s transceivers conforming to the 300-pin multisource agreement (MSA), the mainstream format for such devices until recently.

For its fiscal year ended July 29, Optium reported losses of $8.1 million on revenues of $69.5 million -- representing an 87.4 percent increase in revenues from the previous year. Gross margins were just 25.2 percent, though.

— Craig Matsumoto, Senior Editor, Light Reading

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Stevery 12/5/2012 | 3:38:58 AM
re: JDSU, Emcore Sue Optium I'm amazed that there's been no comments on what I thought would be the bigger issue:

Who would buy the IPO? 10G MSAs are perceived as high-growth low-competition high-margin?

Huh?

I would've guessed that they would have tried to go the M&A exit, and the IPO was a threat to increase the price of the deal. If so, the threat backfired.

^Eagle^ 12/5/2012 | 3:38:53 AM
re: JDSU, Emcore Sue Optium deauxfaux,

I agree with your overall post, with one exception. Emcore has a LOT of business with SA.

Prior to the buyout of JDSU CATV business by Emcore, SA had two primary suppliers of certain key optical line cards: Emcore and JDSU. the business was a sideline for JDSU while at Emcore it was core to their business. Emcore did a nice job of consolidation by buying the division from JDSU. Eliminated a key competitor and aggregated share.

However, while they were busy buying division from JDSU, Optium was working on closing business with SA. Optium offered some good value to SA with next generation cards / modules and addressed some issues that Emcore was slow to deal with (Emcore did not feel they had to as they were lead supplier and felt they had time). Optium stepped in and offered both a solution and a good price point.

This indeed hurt Emcore by any measurement... especially as the SA account was a big cash cow for them.

It will be interesting if Cisco wants two suppliers (Optium and Emcore) or if Cisco is willing to let Emcore pound Optium and hence eventually cause Cisco to pay more for the modules they need.

I don't think Emcore wants to play nice on this one.

Cisco however has strong reasons to try to get this to go away. If Emcore wins and Optium drops out of this business, Cisco is who gets nailed as Emcore will have significant pricing power once again.

It is good for cisco to have two suppliers and one of them being aggressive like Optium. Keeps price pressure on and also helps drive both companies to keep innovating.

Cisco also needs Optium in the game for non SA business. Optium's aggression has kept price pressure on other suppliers of 300 pin telecom transponders. Lower prices for 300pin modules is critical to Cisco as Cisco does not roll any of it's own line cards using discretes. Other telecom companies have a mix of off the shelf 300 pin modules and home grown line cards. Cisco is vulnerable here as all they do is 300 pin.

Finally, this is not only about the CATV stuff (although the lawsuit is abotu the CATV portion). If JDSU can put the squeeze on Optium, they have a better chance of winning generic 300pin business with their newly acquired Agility txponder. So far JDSU has suprisingly not been a leader in 300pin MSA modules. They have been getting bested by Optium, Opnext, Intel, and several others. IF they can hurt Optium via the CATV lawsuit, then they can create some FUD regards Optium, that might give them a chance to win some 300 pin deals.

It will be an interesting dog fight.

sailboat
Stevery 12/5/2012 | 3:38:53 AM
re: JDSU, Emcore Sue Optium Cisco is on slippery ground.

??

They probably are trying to force a sale, the lawsuit lowers the price. Then the question is then quid pro quo for the lowered sale price.



whyiswhy 12/5/2012 | 3:38:53 AM
re: JDSU, Emcore Sue Optium Cisco is on slippery ground. They dealt with Optium knowing full well they were likely violating the patent. They are damned lucky they are not named in the suit...yet. Although its a stretch, Cisco could be forced to replace fielded Optium hardware with either JDSU or Emcore hardware.

JMHO

-Why
whyiswhy 12/5/2012 | 3:38:51 AM
re: JDSU, Emcore Sue Optium I was trying to counter the idea that somehow Cisco would come in and save Optiums butt. Ain't gonna happen. If they did, they would just get sued, then where would they be?

JDSU or Emcore might buy them, but as you point out, at a very low price. It's not as if they need the capacity or the technology or the customer.

Optium is finished. Not gonna IPO, that's for sure.

JMHO

-Why
happy_go_lucky 12/5/2012 | 3:38:50 AM
re: JDSU, Emcore Sue Optium The way I see this is that the profitable business is the SA business for Optium, if and how the lawsuit proceeds, Optium will either be worth significantly less or slightly more then expected.

Furthermore, considering that they are price leaders, the impact of losing the SA business will really be felt in their evaluation.

IMO, On the otherhand, Cisco will be standing and waiting either it will re-negotiate with Emcore or offer more business to JDSU to ensure that they are not named in the lawsuit..

Regarding JDSU's 300 PIN business, well one word sums it up ------- who -----. The Agility buy was an oversell with regards to the transponder business, and the best folks have been let go from FL (shut down) facility...
deauxfaux 12/5/2012 | 3:38:45 AM
re: JDSU, Emcore Sue Optium Perhaps I wasn't clear, as I did know that JDSU had the lions share of the SA forward path business. I wasn't sure about the timing of SA's switch to Optium. around the time of the JDSU Chalfont deal.

I also agree that EMKR will not "play nice" on this one. They've decided that they have more to win than to lose. I would also bet that the 1550 Ex-Mod patent issues are the tip of the iceberg

From what I can gather, it appears that Optium has said "damn the torpedos" and is moving forward toward their road show. While the bankers might be relenting at this point, it is hard to say whether potential investors will be willing to buy the story. At Optium's current margins, royalties and licensing fees could really affect the business.

This of course, is to say nothing of potential damages in arrears.
realoptics 12/5/2012 | 3:38:37 AM
re: JDSU, Emcore Sue Optium On the other hand, Cisco could be coming in as the mediator, to help on negotiating a settlement; Not because Cisco is afraid of being sued, but to keep their vendor choice to be as many as possible. They could bridge a deal, Optium pays some $$, buy a licence, then Cisco share the purchase to both sides, 50%-50 or 30%-70% whatever. That is all JDSU-Emcore wanted anyway.

JDSU- Emcore must listen to their customers, otherwsie it will backfire on other and all other productline purchases.

As a typical American saying: nobody kill the goose that laying the golden egg. Question is: Is Optium laying the golden eggs, or juts another hype?

RO
realoptics 12/5/2012 | 3:38:37 AM
re: JDSU, Emcore Sue Optium Don't be naive, JDSU would never sue Cisco, due to:

1)Suppliers never sue their customers

2)Kevin Kennedy was was from Cisco

Which world you live in?
deauxfaux 12/5/2012 | 3:38:32 AM
re: JDSU, Emcore Sue Optium No one is going to sue Cisco/SA. Optium is merely going to get sued for enough of a royalty to make them uncompetitive, and for all of the damages they've caused to JDSU/Emcore.

In practical terms this is nothing but a win-win for JDSU/Emcore. Cisco can choose to give back the business to them and they win. Cisco can decide not to award them business and they take the profits out of Optium's hide.

This of course, all depends on whether or not Optium was/is infringing. But actions like this are almost never taken lightly and I've heard that JDSU/Emcore has asked for an injunction to force Optium to stop shipment. No one would take that to court without some pretty strong evidence.
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