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23 March 2001 - Jay Ritter
The optical component and networking industry
gathered for the Optical Fiber Communication Conference this past
week in the land of surfboards, Mickey Mouse, and rolling blackouts--Anaheim,
California. The sun was shining, the crowds were friendly, and the
place was bursting at the seams with the latest in tiny lasers, movable
mirrors, and other fiber optic gizmos designed to blast light signals
at billions of bits per second through state-of-the-art communication
pipes.
The conference bolstered our opinion that the optical industry, which
is barely out of diapers, continues to have terrific long-term growth
prospects as the role of bandwidth-boosting optical technology expands.
Though it is getting quite large already, we think it has the potential
to rival the semiconductor industry in size and importance over the
next decade. Most of the 30,000-plus attendees and 975 exhibiting
companies appeared to share our enthusiasm.
Most of the focus was on new products, and there were plenty of positive
developments on that front. On the other hand, when the discussion
got around to current business conditions, the mood was considerably
less chipper. Business has gone from white-hot to downright chilly
in the blink of an eye. While few companies were willing to guess
when things would improve, the general consensus seems to be sometime
around the end of this year or early next.
Corning GLW kicked off the conference Monday with its annual update
on the state of the industry; the optical fiber and component powerhouse
also warned that its earnings for the year would fall about 15% short
of previous expectations. The company estimates that industrywide
fiber volume will expand by 20% in 2001, atop last year's incredible
50% growth. Demand from international carriers and the emerging metropolitan
market remains strong, offsetting weakness in domestic long distance.
For the third time in less than two months, management revised the
outlook for its photonics business, and now expects full-year growth
of around 20%-25%, toward the upper end of the 10%-30% range pegged
for the industry, but a far cry from last year's triple-digit pace.
We continue to like Corning's long-term prospects and the stock looks
reasonably priced at around 20 times estimated 2001 earnings, based
on the revised forecasts. Nevertheless, the outlook for the second
half of 2001 remains uncertain and we wouldn't be surprised to see
numbers come down a bit from here, particularly if domestic capital-spending
weakness spreads to other parts of the world.
JDS Uniphase JDSU briefed analysts and investors Tuesday, focusing
on its broad technology base and impressive new product lineup, but
gave no new financial guidance. JDS introduced 70 new products at
the show, including offerings in each of the major categories it is
targeting. The company breaks its product line into four areas, each
of which focuses on a different problem: capacity (the number of bits
per second that can be crammed on a particular fiber); reach (the
distance an optical signal can be sent without having to be regenerated);
reliability (network monitoring and protection devices); and flexibility
(allowing the network to be reconfigured easily). We think JDS looks
attractive at $25 (down from more than $150 at the height of last
spring's silliness), particularly for investors with at least a one-year
time horizon. However, we wouldn't be surprised to see near-term estimates
trimmed once again.
While JDS Uniphase and Corning continue to lead the optical component
parade, we were amazed at the number of startups and divisions of
larger companies focusing on fiber-optic technology. The entry of
hundreds of new players chasing the pot of gold at the end of the
fiber-optic rainbow is likely to spur innovation, increase competition,
drive down component costs, and result in higher volume for the industry.
On the other hand, with telecom carriers unwilling or unable to purchase
as much equipment as they might like, and major systems vendors choking
on excess inventory, many of these small-fry find themselves fighting
for survival. As Dana Cooperson of market research firm RHK said in
a session dealing with optical industry trends, "Last year, if you
could spell photon, you could get $15 million in financial support."
While financing hasn't completely dried up, the IPO market is all
but closed (someone tell that to Lucent LU and Agere). As a result,
a new wave of consolidation is likely this year as companies with
promising technology and limited access to capital are gobbled up
by more-established players.
Among the areas generating the most interest were components and systems
targeting the burgeoning metropolitan fiber market. These included
specialty fibers (from Corning); low-cost lasers (from a number of
companies); and compact, easy-to-operate switches that enable phone
companies to sell individual "wavelengths" to their corporate customers
with the click of a mouse (from ONI Systems ONIS, Nortel NT, Ciena
CIEN, and Cisco CSCO).
All-optical switches were also drawing lots of interest. Most switches
on the market today require that optical signals be converted to electricity
before they can be redirected to another fiber. Optical switches eliminate
these conversions. While still not a panacea, these somewhat futuristic
boxes are getting closer to commercial deployment. Various methods
for steering light signals from one fiber to the next were demonstrated.
The most common is something called micro electro mechanical systems
(MEMS), in which a large number of tiny, tilting mirrors are fabricated
on a semiconductor substrate. Though it sounds strange, MEMS have
been widely used in automotive sensors and other applications. Companies
demonstrating MEMS components included Analog Devices ADI, JDS Uniphase,
and Corning, while Lucent, Nortel, and Calient are building complete
systems using the technology. Other promising optical switching technologies
included holograms (Trellis Photonics), and bubbles (Agilent A).
Also hot were ultra-high-speed components and systems enabling signals
to be transmitted at 40 billion bits per second, or 4 times faster
than is currently possible. JDS Uniphase, Corning, Nortel, and Agere
are developing these super-fast components and Nortel is readying
a system for deployment later this year. Last but not least, "tunable"
lasers designed to operate at multiple wavelengths for maximum flexibility
were out in force from suppliers like JDS Uniphase, Lucent, Nortel
and ADC Telecom ADCT.
While the optical networking industry continues to make huge strides
in terms of technology, the big challenge continues to be coming up
with solutions that help carriers make money. Advance gear that allows
revenue-generating services to be delivered more quickly and efficiently
appears to be part of the solution. Establishing standards that will
allow equipment from various vendors to peacefully coexist in carriers'
networks is another key. Progress on both fronts was evident at the
show. |
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