Valley Wonk: Optical's Options
Of course, it helped that optical stocks have taken off like an F-16. (See Optical Stocks Climb Again.) The reception after the OSA was remarkable in that everybody actually stuck around, and jokes were exchanged. Components executives say customers are no longer fussing over a company's financial status, and they're even asking about fancy technologies like OC768.
"They want me to talk dirty again," says Bookham Inc. (Nasdaq: BKHM; London: BHM) CEO Giorgio Anania.
But the buzz could wear off just as fast. It's nice that things are more stable. No one spoke, as they did last year, of Avanex Corp. (Nasdaq: AVNX) or Bookham falling off the edge of the Earth. But the major questions from 2005 – and from the years before that, really – still haven't gotten answered.
The question still lingers, for example, over who can fund the R&D to create the next wave of cool stuff. Margins have stabilized, but for most folks, they still need some improvement. "Fundamentally, the state of the industry is the same as a year ago," says Enzo Signore, vice president of marketing for JDSU (Nasdaq: JDSU; Toronto: JDU).
It comes down to the same problem the industry has had for years: too many players chasing too small a market.
No one denies optics is important and will be a growing business. What's gone is the illusion of a sexy, Wired-magazine kind of bubble lifestyle, the likes of which fueled Gilderesque predictions for some of these hapless stocks. (For a year 2000 blast from the past, see this piece on Avanex.) A 95 percent drop in valuation later, photonics companies are woozily stumbling back into the sunlight.
What still needs to happen, though, is an excising of some capacity, some major player turned into a pumpkin at the wand of some twisted fairy godmother. Whenever I mention this, folks point out all the reasons it can't happen – well, yes, I know it can't happen. That doesn't change the fact that it's what needs to happen.
Consolidation, it seems, hasn't really started. OK, sure, Kodeos Communications Inc. bought out Intersymbol. (See Kodeos Acquires Intersymbol.) Nice for the people involved (one hopes), but it doesn't exactly solve world hunger. The biggest deal last year was NeoPhotonics Corp. (NYSE: NPTN) picking up Photon Technology, but given the lack of overlap between the two, there wasn't much capacity erased from the business.
Companies buying each other won't help. Someone has to exit. Everyone seems to agree on this, but as you'd expect, no one's volunteering to close up shop and go surfing. (Well, Ron Nelson is, but that's different – see OFC: Optics & IPOs.)
Hopeless? Not necessarily. Look at what the optics companies are doing. Most of the sizeable players still own wafer fabs, and companies big and small will tell you they need that control over the manufacturing process in order to keep up innovation.
But fabs are a giant cost. That's what sank startups like Bandwidth9. The building's mere existence and upkeep is what eats up the money; when it comes to the wafers, the cost of running 10,000 isn't much worse than the cost of running one, as execs said repeatedly at the show. The trick is to keep the fab full.
The bigger players are looking into non-telecom markets that keep the fabs humming and bring in the revenues that can fund the telecom R&D. JDSU is famously half non-communications, with a division I like to call "paint." (It includes pigments for the newer U.S. dollar bills and for cars, but they also sell TV-related optics.) Bookham says it's getting about 15 percent of its business from outside of communications. Opnext Inc. (Nasdaq: OPXT) has gotten into CD and DVD lasers, including the blue LED. "And if we can get green, we have displays" as a potential market, says Ed Cornejo, director of product marketing.
This is one possible exit, in which no one crashes and burns. Instead, companies find other markets for their technlogy – video, medical, whatever – and telecom becomes the sideline. In this model, you shift investments elsewhere, and possibly end up selling off non-performing telecom assets.
Some folks believe JDSU may head more dramatically in this direction, but Signore and other execs there will fervently tell you the company is committed heart and soul to telecom. (Note that "paint" can have its headaches, too – from 2003, see JDSU Revenues Still Declining.)
Depending on whether layoffs are involved, you might consider this scenario to fall in the "absorbed and gutted" category. I won't quibble there. What matters is that there's a foreseeable way for competitors to vanish from the telecom POV. There, more than in stock prices, is where the industry's best hopes lie.
— Craig Matsumoto, Senior Editor, Light Reading