Buoyed by submarine market, SDL boasts 282% net income growth

SDL Inc. (San Jose, CA) is the latest optical components supplier to beat earnings expectations and to report strong growth, with fourth quarter profit more than tripling on surging market demand. This week, SDL posted fourth quarter net income of $12 million, or $0.32 per diluted share, which was $0.07 ahead of Wall Street estimates. The earnings per share marked a 220% improvement over the same period last year.

Feb 3rd, 2000

The company achieved 40% sequential growth in all three of its major markets--terrestrial, undersea, and metro/cable markets--and said that over 50% of fourth quarter communications revenues came from products first introduced in 1999. Overall product sales increased 44% over the third quarter, and by 179% over the same period last year.

About 30% of SDL's sales come from the submarine market, a fact that is important to the company's success, says J.P. Morgan Securities equity analyst Charles Willhoit. "The technical superiority of SDL's pump lasers is allowing them to win a lot of submarine business. When you think submarine markets, you have to think profits. Because every time you sell a component into the submarine market, you can sell it for two to three times the price you can sell it into the terrestrial market," Willhoit says. "So that's helping out their margins quite a bit."

The analyst notes that SDL now has agreements to supply pump lasers to all three major players in the submarine market--Tyco, KDD, and Alcatel. "Up until this quarter, SDL had signed up two of the three major players in the submarine market-Alcatel was announced, the other was not-and we do know that they have also signed up the third now, which in our opinion is Tyco, but it's not an announced customer," Willhoit says. He expects these three contracts to be critical to SDL's bottom line, at least in the short term.

In a separate release this week, SDL announced an additional contract with Alcatel Optronics to extend an existing multi-year agreement for the supply of 980-nm laser chips and fiber Bragg gratings up to the year 2003. The parts are used in pump modules manufactured by Alcatel for undersea use. The agreement will include the next generation of the SDL 980-nm chip, the 6540 Series, which will power a pump module capable of 180 mW and beyond.

Investors, as well, as analysts, have been pleased by SDL's performance; the company's stock price is up a whopping 1025% from its 52-week low. Following the earnings announcement, SDL shares have risen steadily to hover around $300.

The company said it expects sales to increase 12% to 15% in the upcoming quarter. Says J.P. Morgan's Willhoit, "We have 66% projected revenue growth for 2000, which, in my opinion, is still relatively conservative. We also raised our numbers for earnings per share in 2000 from $1.26 to $1.47." Other firms making positive comments, raising estimates, or lifting price targets on SDL include Merrill Lynch, Salomon Smith Barney, Credit Suisse First Boston, and USB Piper Jaffray.

Willhoit foresees that SDL's biggest problem will be meeting the unflagging demand of its customers. "The new players coming into the market outsource everything. And that source of demand, which will probably be coming on strong by the second half of this year, is going to continue to put pressure on all optical components makers," he predicts. SDL hopes to ward off this possibility, and has already increased capacity at plants in Canada, the United Kingdom, and the United States, says SDL chief executive Donald Scifres.