Ever since the Lightwave editors instituted our now annual Top 5 selections of leading optical communications vendors three years ago, one of the most salient evaluation criteria has been how well companies were faring in the midst of a downturn. Now that things have leveled off-or, dare we say in some market segments, actually shown growth-our viewpoints have begun to shift. Now we’re not only looking at company revenues, but how well positioned individual companies may be to take advantage of such growing markets as fiber-to-the-home, metro networking, and Ethernet service delivery, among others.
As usual, we base our rankings on input from outside analysts that we’ve garnered throughout the past year, a look at balance sheets, and our perceptions of individual companies’ momentum and visibility. Feel free to agree or disagree; this is our story, and we’re sticking to it-at least until next year.
Having established an upbeat tone, we have to say that things still don’t look all that bright in the component/subsystems space. Yes, there’s overall improvement, and some companies have finally shown an ability to generate black ink (which has inspired a bit of mathematical sleight of hand within our list-see below). However, most of the major Western players continue to struggle toward profitability. They’re closer than they were last year; our Top 5 includes some who should break through this year.
JDS Uniphase remains at the head of our list. The 300-lb gorilla of optical components found an interesting way to hoist itself closer to profitability: It acquired Acterna, boosting its test and measurement product line. (Interestingly, Agilent jettisoned its optical component and subsystem business so it could focus exclusively on test, leaving one to wonder who knows more about the compatibility of test and component product lines.) The company also acquired tunable laser developer Agility Communications and picked up a pair of companies for its commercial activities. These actions didn’t immediately lead to profitability-first quarter 2006 showed a GAAP net loss of $67 million-but should show significant new revenue this year.
The company has had particular success with its reconfigurable optical add/drop multiplexer (ROADM) subsystem, while its BellSouth tapped JDSU’s WaveReady CWDM subsystem for its network upgrade.
Avago Technologies, the aforementioned Agilent offspring, also maintains its position from last year-right behind JDSU in the Avis spot. Avago will be trying harder as a standalone company, the result of a $2.66 billion acquisition by Kohlberg Kravis Roberts & Co. (KKR) and Silver Lake Partners of Agilent’s former Semiconductor Products Group. The company starts life with a large share of the datacom transceiver market, as well as several semiconductor products applicable to optical communications systems applications. Avago has been particularly active in the Ethernet space, with XFP transceivers among its most recent new products; the company has also taken a lead role in the development of the 10GBase-LRM standard.
Avago says it had $1.8 billion of revenue in fiscal 2005 in its former incarnation. How much of that was optical communications components the company hasn’t revealed. The industry will watch this company very closely this year to see in which direction it intends to go.
Finisar continues the state of stasis at the top of our list in the third slot. The company began 2005 by straightening out its on again/off again acquisition of Infineon’s module business, and ended the year by snapping up Big Bear Networks’ 10- and 40-Gbit/sec module lines. Like JDSU, Finisar is getting close to profitability; it reported a net loss of $15.8 million for its second quarter, ended October 31, 2005, versus a net loss of $21.2 million the previous year. However, the quarter saw total revenues set a record for the fifth consecutive quarter. Also like JDSU, Finisar has a test instrumentation division. Sales from optical components and subsystems in the quarter accounted for $77.4 million of the company’s $86.6 million total.
The company shipped its 100,000th 4-Gbit/sec Fibre Channel transceiver early in 2005 and launched an SFP CWDM device at the same data rate. The company also was one of the initial drivers of the XFP MSA.
EMCORE, Opnext, Optical Communications Products (OCP), and Fiberxon share the fourth spot in our rankings. (Technically, that makes this a Top 8 list-but it’s our list and we can cheat if we want to.) These companies earn their collective place on our list by demonstrating that if you find something you’re good at and stick with it, you can not only survive, but perhaps actually make money. EMCORE has ridden leading positions in datacom and cable-TV transceivers, among other product lines, to within range of break-even; it reported an operating loss for fiscal year 2005 of $13.1 million. The company raised revenue estimates for the first quarter of this fiscal year.
Opnext is currently a private company created in 2000 from Hitachi’s Fiber Optic Components Business Unit, with particular help from investors Clarity Partners, Marubeni Group, and Hitachi. Its revenue situation therefore remains proprietary. Nevertheless, the company receives consistently high marks from financial and market analysts, such as on the “Optical Components Vendor Scorecard” compiled by RHK (now Ovum-RHK; London) in spring of last year.
OCP, which develops subsystems and modules for MAN, LAN, and SAN applications, managed to turn a profit in fiscal 2005. The company showed net income of $941 million on revenue of $56 million. It also had $149 million in the bank as of the end of September. For the quarter ended December 31, the company had forecasted revenue of $17 million to $18 million, up from the $14.8 million it enjoyed in 4Q’05.
Fiberxon has leveraged Asian economics and know-how to success in the Ethernet transceiver field, particularly EPON and Gigabit Ethernet transceivers, as well as modules for cable TV. While it should be noted that the company no longer touts how many consecutive profitable quarters it has achieved, Fiberxon still seems well placed to thrive in 2006.
Bookham squeaks past its partner in positive product breadth but negative profit, Avanex, for the fifth spot by virtue of the fact that it rid itself of its major long-term debt source while Avanex was stubbing its toes on product delivery. The company expects to report revenue between $58 million and $61 million when it discloses second quarter 2006 results early this month, and suffered less than $1 million in GAAP net loss in the first quarter. It will be interesting to see how close the debt retirement brings Bookham to profitability; it certainly appears to be headed for a better 2006 than 2005, when it reported a GAAP net loss of $248 million.
By all accounts, the optical systems showed positive returns across nearly all regions and in all product segments. According to Michael Howard, principal analyst at Infonetics Research (San Jose, CA), the long-haul market experienced its first up year-increasing 14%-since 2000. The next-generation WDM, optical switching, and submarine line terminal segments experienced significant year-over-year growth as well, note Ovum-RHK analysts.
Alcatel (Paris) once again captures the top spot on Lightwave’s list. Dell’Oro Group (Redwood Shores, CA) analysts rank Alcatel first in DWDM long haul, while Infonetics places it second in the SDH market. Even the vendor’s submarine network equipment experienced increased traction in 2005 with the completion of FLAG Telecom’s FALCON network and the SEA-ME-WE4. Alcatel once again proved to be the worldwide networking leader, inking contracts in Austria, Russia, Estonia, Kazakhstan, Laos, China, and Mexico, among others.
Nortel (Ottawa, ON, Canada) has vaulted into the second position on the strength of its multiservice provisioning platform, the OME 6500, and increased momentum from its next-generation Common Photonic Layer (CPL) platform. Last year, Nortel registered 20 contract awards among the cable multiple systems operators, including a deal to provide a nationwide optical backbone for Comcast. In 3Q’05, Nortel registered its strongest quarter since 1Q’03.
Always a big presence in the Chinese market, Huawei (Shenzhen, China) made significant inroads into the international market this year, helping to solidify the third spot on Lightwave’s list. According to company representatives, Huawei registered $8.2 billion in international sales in 2005, including a key optical contract with British Telecom (BT). The vendor will supply its access and transmission equipment for the carrier’s 21st Century Network (21CN). However, the company must still strengthen its position in the U.S. market.
Lucent (Murray Hill, NJ) occupies the fourth spot on our list after inking several key contracts in 2005, including deals with Global Crossing, Deutsche Telecom, Telecom Italia, and COLT Telecommunications as well as a preferred supplier agreement with BT to provide equipment for the carrier’s 21CN initiative. The vendor also took steps to strengthen its presence in the access network, unveiling its Multimedia Access Platform (MAP).
There are several worthy candidates for the fifth spot on our list, including Cisco, which leads the MSPP space, and Fujitsu, which ranks first among the SONET vendors. However, the Lightwave editorial staff has selected Tellabs (Naperville, IL) on the strength of its AFC and Vinci acquisitions in the fiber-to-the-premises space. Tellabs won the contract for Verizon’s BPON equipment and no doubt is making a run at the carrier’s GPON business as well. The question now is whether Tellabs can parlay its contracts in the access space into increased traction for its long-haul transport products.