Troubles Linger for Optical Components
Last year's session saw a flash of optimism from the then-recent IPOs of Opnext Inc. (Nasdaq: OPXT) and Optium Corp. (Nasdaq: OPTM). But components vendors surveying their own industry still saw a need for consolidation, and they were worried about how they could generate the R&D money for new generations of products.
This year? More of the same, and some of the frustration began to show.
"I'm very pessimistic. I myself have been struggling for seven or eight years now. I'm not seeing any fundamental change in the market," said Joseph Liu, CEO of Oplink Communications Inc. (Nasdaq: OPLK).
It's a bit ironic, considering business conditions for optical components have improved. Jo Major, CEO of Avanex Corp. (Nasdaq: AVNX), held up a chart summarizing his company's tough climb back to profitability. He said his daughter, upon seeing the charts, said, "Your investors must love you!"
But investors are down on optical components. JDSU (Nasdaq: JDSU; Toronto: JDU) shares, even after a recent run-up, are down about 20 percent from a year ago; Oplink and Opnext are down more than 70 percent. (See OFC: Ray of Hope and JDSU Surges After Q2.)
"A lot of these guys have really done a lot of work to get this thing turned around. We really do need to talk about how we take the next steps, what technologies do we invest in, so when investors look at us, they don't see all this tech and get depressed," Major said.
Consolidation is one issue that's been on executives' minds since 2001, but none of the big companies seem willing to start acquiring competitors. Still, panelists throughout the day noted a need for culling the number of vendors out there.
"I think the issue is, there are still too many suppliers in the industry," said Adam Carter, marketing manager for Cisco Systems Inc. (Nasdaq: CSCO)'s transceiver module group.
But the public components firms are either still losing money or are barely profitable. That's kept them skittish about making big deals such as the combination of Avanex and Bookham Inc. (Nasdaq: BKHM; London: BHM), an idea that never came to fruition. (See Will Avanex Hook Bookham?)
"Consolidation is good in theory, but we have overlapping product lines, and many of the companies aren't healthy enough that you could consolidate with them," said Tony Musto, vice president of marketing for Optium. "I don't need companies that have low-end product lines adding to my hardships."
In the absence of big mergers -- or big companies somehow volunteering to drop out of the business -- optical components remains a fragmented world.
"If you look at how many of us it takes to make up 80 percent of the revenues in this industry, it takes like 21 of us," Major said, noting that a more ideal situation would have three or four players holding 20 percent shares each. "It may take a little while to get there, but those are the kinds of endpoints you need to see before the industry's going to get fixed."
Follow the money
Separately, it's still unclear where the industry will get its R&D funds for fancy projects like serial 100 Gbit/s transmission. The public companies, as a whole, don't have the margins to sustain that kind of research.
Apparently, that means startups will get a starring role. "The innovation for 100 Gbit/s will come from companies like ours," said Shri Dodani, CEO of StrataLight Communications .
But multiple panelists noted that no one startup is likely to touch all the issues that come up with 100 Gbit/s physics. Partnerships are going to be necessary. "Trying to do this all in one company will be impossible," Dodani said.
But will venture capitalists fund that kind of R&D in private companies? One problem is that the telecom life cycle is long; panelists noted a couple of times that VCs still haven't recouped the money they put into the 10 Gbit/s generation. And despite the cry for 100 Gbit/s in telecom, the money could be slow in coming.
"It's going to be trial mode for a while, said Raj Shanmugaraj, vice president of optical networks for Alcatel-Lucent (NYSE: ALU). "We will be buying it from you guys for next year, but the volume is not going to be as smooth. It could be a couple or three years before you see the volumes go up."
What's the answer? Opening keynoter Robert Flanagan, managing director of technology investment banking at Oppenheimer & Co. Inc. , noted that public and private companies would benefit if investors looked on optical components more favorably. Public companies' stocks would rise, which might make mergers more feasible, and the private companies would have a better shot at going public.
Not all of the negative sentiment is necessarily rational, he added. Part of the problem is that fewer investors are watching optics these days. Many large firms are shunning small-cap stocks, which takes them out of the sector entirely; others see optical as too small a market compared with other technologies like PCs.
But it's clear that to get more Wall Street love, the optical components business has to stabilize. "As long as the industry continues to have sporadic results and continues to have a 'hits' business, we're probably going to continue to see volatile investor sentiment," Flanagan said.
— Craig Matsumoto, West Coast Editor, Light Reading