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Optical components

Optical Components: Still Too Crowded

SAN DIEGO -- OFC/NFOEC 2009 -- "Consolidation" is finally coming to the optical components sector, yet many people doubt it's going to heal the industry's crippling ills.

While the industry has experienced some big mergers lately -- something most observers have long awaited -- the deals aren't eradicating any of the oversupply that's been keeping optical prices down.

That realization prompted panelists and attendees at yesterday's The Optical Society (OSA) Executive Forum to ask: What's it going to take to truly turn around the fortunes of this sector?

Bookham Inc. (Nasdaq: BKHM; London: BHM) and Avanex Corp. (Nasdaq: AVNX), for instance, are priding themselves on a merger that has little product overlap -- as did Finisar Corp. (Nasdaq: FNSR) and Optium Corp. (Nasdaq: OPTM) earlier. (See Bookham, Avanex Defend Their Deal and Finisar & Optium Challenge JDSU.) That means neither deal will do much to trim the amount of product that's out on the market.

Even as that question arose, panelists throughout the day-long forum tended to be optimistic about the potential impact of these mergers.

"If you can eliminate overhead and consolidate some of the redundancies of the companies that don't have the scale, and it creates one healthier company, then it's good news for the industry," said Alan Lowe, president of Communications and Commercial Optical Products at JDSU (Nasdaq: JDSU; Toronto: JDU).

But optical components remains a crowded market. Source Photonics Inc. CEO Near Margalit noted that 30 companies are making optical transceivers, for instance. And that level of overcapacity has kept prices and margins down for years.

Without mentioning Cisco Systems Inc. (Nasdaq: CSCO) by name, Avanex CEO Giovanni Barbarossa noted that IP routing commands huge premiums partly because it's sold by one dominant vendor. Optical switching, meanwhile, ends up selling for low prices because it's offered by many vendors.

"Unless we consolidate, we will never reach the type of market that IP routing enjoys," he said.

So, how does the optical components industry get down to fewer competitors? Some think natural selection will start to take effect, spurred by the recession.

"The customers will make it happen," said Harry Bosco, outgoing CEO of Opnext Inc. (Nasdaq: OPXT), during an afternoon panel. (Bosco steps down April 1; see Opnext Completes StrataLight Buy.) "They're sorting down to a few suppliers."

Add to that a point that came up a few times in private conversations after the event: Money is harder to come by. When Avanex and Bookham had cash troubles circa 2005, they managed to find new financing vehicles to keep alive. (See Bookham, Avanex Shore Up.) But the current credit crunch will erase those options for many companies, which could kill off some of the weaker competitors, industry sources speculate.

More generally, a lack of financing might finally make it tougher for even more players to join the optics market, Margalit said.

"One of the fundamental problems why that number [of components firms] doesn't shrink is that, really, we haven't established any clear barriers to entry for new players," he said, speaking particularly about the transceiver market. "We still see new companies getting funded."

"I actually love this market. This is the best market you can have to drive rational behavior," Barbarossa said.

On a more optimistic note, Fariba Danesh, senior vice president of fiber optic products for Avago Technologies Pte. , suggested the possibility that certain high-end parts could be sheltered from the margin-crushing that other products endure. "I actually think 10-Gbit/s and above can be a different supply and demand equation," she said.

— Craig Matsumoto, West Coast Editor, Light Reading

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deauxfaux 12/5/2012 | 4:08:25 PM
re: Optical Components: Still Too Crowded


BKHM was originally going to put all the legacy suppliers out of business with ASOC.-áUnfortunately, the yield on ASOC was so bad that IndyMac junk mortgages look profitable by comparison.-áAvanex never had a product all by itself that was worth more than the cost of its shipping carton (at least the shipping box-ácould-áwithstand the return trip for warranty replacement). Both were going down the tubes after the bubble burst, and would have gone under, except for the-áhoards of-ácash that enabled them to buy the failing components businesses of the old old guard; Nortel and Alcatel.




I talked to an old friend yesterday who pointed out that years and $100,000,000's later, BookAnex is now hoping to take advantage of a strategy so clever and rooted in the core incompetence of their organizations that it is truly breathtaking.




"Never get into a starvation contest with a guy that is fatter than you"




So who will be the "Biggest Loser"...the skinny little startups that already look like they are straight from an article about starvation in National Geographic....or the well fed mismagement team from BookAnex?




Zut Alors!


Steve0616 12/5/2012 | 4:08:24 PM
re: Optical Components: Still Too Crowded


Finisar has already written off 88% of the Optium acquisition as goodwill. It is still saddled with-áthe costly two-jacks-in-a-box management team. The shareholders are the loser.


steady 12/5/2012 | 4:08:23 PM
re: Optical Components: Still Too Crowded


"Bookham Inc. and Avanex Corp.-á, for instance, are priding themselves on a merger that has little product overlap -- as did Finisar Corp. and Optium Corp. earlier. That means neither deal will do much to trim the amount of product that's out on the market"




Is that a point? Maybe. Nonetheless how can I imagine two companies mergered just for-áeliminating the overlapped portfolio? Is this goodwill just for a better market environment benefiting competitors? It doesn't make sense. I think the mergered companies didn't choose the most overlapped partner, only because they-árealize in this industry bulk manufacturing doesn't lead to reasonable cost down. So obtaining a same-áproduction line doesn't help the margin and competence.-á


HomerJ 12/5/2012 | 4:08:23 PM
re: Optical Components: Still Too Crowded To the subject of your "article", I say: duh.
HomerJ 12/5/2012 | 4:08:22 PM
re: Optical Components: Still Too Crowded oh crap. you mean we're stuck with the bookanex turd sandwich for at least another year?!?!?
Steve0616 12/5/2012 | 4:08:22 PM
re: Optical Components: Still Too Crowded All good guesses, but #2 fits the bill.-á A clown-like, wasteful management compromise necessary to-áconsumate the-ámerger.-á And it was not about consolidation but-áa-ádesparate scheme-á-áto-áobtain the cash to-ápay off the convert debt due last Oct. Unfortunately another $142M are payable in Oct 2010. I can only imagine what is-ágoing to-ácost the shareholders the next time the box flies open.
Stevery 12/5/2012 | 4:08:22 PM
re: Optical Components: Still Too Crowded


It is still saddled with-áthe costly two-jacks-in-a-box management team.




I'm trying to figure out what your metaphor means.-á My three guesses:




1.-á The management of both companies can't think outside the box.




2.-á They pop-out clownlike and scare the children every time you open the box.




3.-á Two folks from Jack-in-the-Box jumped ship and are now working on transceivers.




Help me out Steve.


^Eagle^ 12/5/2012 | 4:08:19 PM
re: Optical Components: Still Too Crowded

Steve,

-áFinisar has already written off 88% of the Optium merger?? -áI did not see that in any of the press, nor did I catch it on the quarterly call (although I must admit to multi-tasking and was not listening intently to all parts of the call). -áCan you point me to a link or press release or analyst statement supporting this assertion? -á

-áI agree the merger has it's issues, but I had not heard this one. -áMore information would be helpful.

Thanks,-á

sailboat-á

Steve0616 12/5/2012 | 4:08:18 PM
re: Optical Components: Still Too Crowded


The-áassertion is-ámine, taken from the transcripts of the previous two cc's, and it is based on assumptions as given below:






Value of Optium from newly issued Finisar shares = $211.7M




Amount of writeoffs since merger:




F2Q09: $178M writeoff ($151M or 84% directly for Optium merger) in goodwill plus an additional $10.5M directly-árelated R&D.




F3Q09: Another goodwill writeoff of $46.5M. Since 84% of the goodwill writeoff in Q2 were attributed to Optium, I assumed it was reasonably safe to estimate-ároughly half of Q3's writeoffs-áwere likely-áOptium related.




So, depending on how much of Q3 goodwill is attributed to OPTM,-á another $23M-ábrings the total to-á$185M, which would account for at least 87% of 211.7M.-á




If it were $0 then the percentage of writeoffs ($161.5/$211.7) stands at 76%; if it-áapproximates another 84% ($39M), then the writeoffs would-ácome in at ($200.5/$211.7) or approx. 95%.


Foxter 12/5/2012 | 4:08:18 PM
re: Optical Components: Still Too Crowded nice )
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