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Optical components

Smiles Abound at OFC/NFOEC

ANAHEIM, Calif. — There's no question OFC/NFOEC is off to its happiest start in years. Years of wrist-slashing panels about low revenues, vanishing buyers, and crippling oversupply have finally given way to talk of future profits and even IPOs.

But the industry hasn't chased away all the dark clouds, as serious questions remain about how the industry can consolidate and stabilize. Panelists at the The Optical Society (OSA) (OSA) Executive Forum 2006 explored the good and bad of the state of the industry yesterday.

Let's start with the good news. Persistent talk of fiber-to-the-home and new broadband services is stirring up demand in the optical sector at long last. Carriers are buying into the idea of flexibility in optics, meaning tunable lasers and reconfigurable optical add/drop multiplexers (ROADMs) are in vogue, panelists agreed.

And investors are starting to believe again. They've poured back into optical stocks during the past week on signs such as a surprisingly good earnings call from Finisar Corp. (Nasdaq: FNSR). (See Optical Stocks Climb Again, Finisar Ignites Optics Explosion, and What the Heck's With Avanex?) Private companies are claiming massive earnings growth, and at least two are hoping to go public by early next year, said Richard Craig, CEO of tunable-laser vendor (and privately held company) Santur Corp.

But it's not party time yet. Margins remain too low for most companies -- which is important because much of the innovation in optical networks must occur at the component level, and weak margins mean those component players can't invest in R&D.

That's one reason why private companies including Fiberxon Inc. , NeoPhotonics Corp. (NYSE: NPTN), and Optium Corp. (Nasdaq: OPTM) are the first to emerge with strong tales of revenue growth and even profitability. "There were some advantages in the last three to four years to being private, Craig said. "We could keep our investment in technology relatively high." He added, half joking, that there wasn't anything else to do anyway: "There wasn't anything being sold."

Most panelists agreed that oversupply is hobbling the industry's efforts to stabilize. Bookham Inc. (Nasdaq: BKHM; London: BHM) CEO Georgio Anania screamed for consolidation at last year's OSA gathering, and his tune was no different this year. (See Components Competition Is Killing.)

"Our industry needs to consolidate," Anania said. "What I don't want to see in three years is the same seven of us here trying to battle with 10 percent less operating margins."

The conference's moderators and organizers convened for the day's final panel, and mostly agreed that the industry needs consolidation of 25 to 30 percent. Bill Diamond, CEO of Xradia Inc. , outbid the others by saying 40 percent is required -- but greed and ego will probably keep the consolidation tally closer to 25 percent, he said.

One factor to watch is the recent runup in optical components stocks. That's giving some companies the extra valuation to stay alive -- but it might also help fuel consolidation by giving bigger companies the capital to acquire smaller ones.

More likely, some panelists said, the small private companies will continue buying each other, trying to gain the critical mass to be noticed against the likes of JDSU (Nasdaq: JDSU; Toronto: JDU).

Acquisitions will have limits, though. Most panelists didn't think a massive "one-stop shop" would make for a successful optics company.

"I think every one of our customers wants us to [acquire] everything," said Harry Bosco, CEO of Opnext Inc. (Nasdaq: OPXT) "No one company can invest enough R&D in it, and no one can get enough business to feed it."

That last point underscores the problem that communications optics have had all along: No high-volume product has emerged. Telecom, in particular, remains a market splintered into speeds and reaches. "There's so much mix in the product lines that it makes it difficult to efficiently use the fab," said Jane Li, a senior vice president with Eudyna Devices Inc. , formerly Fujitsu Compound Semiconductor.

Many companies are compensating by pushing their optics into other areas -- lasers for CD and DVD players being one example Opnext pursued. Likewise, the compound-semiconductor arms of California Eastern Laboratories (CEL) and Mitsubishi Electric & Electronics USA Inc. don't rely just on optics; they've got wireless business to help bring in revenues.

"You're seeing a lot of interest in trying to increase [their] markets," said Michael Lebby, president of the Optoelectronics Industry Development Association (OIDA) . Many of the association's members have asked for more information on markets such as medical devices, he said.

— Craig Matsumoto, Senior Editor, Light Reading

cw.774 12/5/2012 | 4:03:21 AM
re: Smiles Abound at OFC/NFOEC I see Pharmeceutical researchers completely uninformed about fiber optics. BUT it annoys me there appears to be open questions from folks at OFC regarding what other opportunities..perhaps medical.. can keep their fabs running. (Am I reading this right? Could they really not know this market?)

Medical/Analytical Instruments: And you think the mix in telecom is high? Applications and technology across Vision systems, sensors, spectroscopy, NIR, UV, in-situ/in-process - it's the same paradime everyone faced flocking to the government and military for business only to find everything is fragmented and specialized. There are a ton of med-equp. shops on the web using specialty sources and detectors now. COTS inititives became customized OTS(don't tell MRV).
If your just getting started, you'll feel the old "shoul'd have started 2 years ago" (bought IP, acquired, etc...) for next year's orders.

Although something tells me the chip fabs already know this and just looking for excuses to stupidly flog their marketing and sales teams publically and keep the beer tabs down in Anaheim.
DCITDave 12/5/2012 | 4:03:20 AM
re: Smiles Abound at OFC/NFOEC er: "Although something tells me the chip fabs already know this and just looking for excuses to stupidly flog their marketing and sales teams publically and keep the beer tabs down in Anaheim."

Don't underestimate the ability of companies to become so inwardly focused that they're clueless about alternative markets for their technology.

MRV, as you mentioned, is just waking up to several areas -- including the federal market (only the largest IT spender in the free world).

ph
Pete Baldwin 12/5/2012 | 4:03:15 AM
re: Smiles Abound at OFC/NFOEC BUT it annoys me there appears to be open questions from folks at OFC regarding what other opportunities..perhaps medical.. can keep their fabs running. (Am I reading this right? Could they really not know this market?)

Following Phil's point -- it's highly possible they don't know the market thoroughly. I didn't mean to paint them all as clueless though -- the point is that they're looking for ways to fill their fabs, because the extra production would come at little cost. They're all hammering on that -- if you have a fab, you gotta keep it full.

I'm still wondering if the optics market can move more completely toward the fabless model. The seeds are there; Fabrinet seems to be doing a nice chunk of business.
cw.774 12/5/2012 | 4:03:00 AM
re: Smiles Abound at OFC/NFOEC just sounds like too many fabs.

Fabless opto is a way off. Avo Photonics described the problem of having to keep vertical mfring. processes in-house aptly somewhere on optics.org (grant it, - they are tackling medical w/more focus at the moment).

Photonic Transistors (ref. U of I Urbana) seam to be forging the most direct path - even combining devices to replace current e/o-o/e components. It all just seams so far off and involve the complex processes still complained about from the lost bubble cap investments of 2000/2001.

Fabrinet is vertical integrated technologies like current/recently-formered crop of fab+"Mfrs"(JDS, FNSR, AVGO, SUMI etc.) - who traditionally just trying to keep their fabs running too from the beginning (if you got a hold of opeartions folks). These more reknown opto component "Mfrs" are filling out the low end product line with stuff from ShenZen, Tiawan... whatever). Some keep things in house (through near-virtual management of CHinese counterparts... yikes), but it doesn't make sense for fabs.+Mfrs to sell other guys chips in their components and stinks of deep changes still coming to the OFC crowed.

The functionally integrated Photonic devices are not coming from the Asian innovation deserts no matter how many American trained PhD's they pick up along the way.

And how much cheaper can fiber deployment be? OSP and CO, as well as SAN IT networks, physical installation commmonized on technologies and brought the market down near copper price points. The bottom of the food chain is tapping out (success?).

btw- government is spending less this year, C4ISR development grinding to a hault - Many military communications guys will enter the civilian job market this year.

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